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

2080 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

SECURITIES AND EXCHANGE SUMMARY: We are adopting amendments DATES: COMMISSION to modernize, simplify, and enhance Effective date: The final rules are certain financial disclosure effective February 10, 2021. 17 CFR Parts 210, 229, 230, 239, 240, requirements in Regulation S–K. Compliance date: See Section II.F for and 249 Specifically, we are eliminating the further information on transitioning to requirement for Selected Financial Data, the final rules. [Release No. 33–10890; 34–90459; IC– 34100; File No. S7–01–20] streamlining the requirement to disclose FOR FURTHER INFORMATION CONTACT: Supplementary Financial Information, Angie Kim, Special Counsel, Office of RIN 3235–AM48 and amending Management’s Rulemaking, at (202) 551–3430, or Ryan Discussion & Analysis of Financial Milne, Associate Chief Accountant, Management’s Discussion and Condition and Results of Operations Office of the Chief Accountant, at (202) Analysis, Selected Financial Data, and (‘‘MD&A’’). These amendments are 551–3400 in the Division of Corporation Supplementary Financial Information intended to eliminate duplicative Finance, U.S. Securities and Exchange Commission, 100 F Street NE, AGENCY: Securities and Exchange disclosures and modernize and enhance Washington, DC 20549. Commission. MD&A disclosures for the benefit of investors, while simplifying compliance SUPPLEMENTARY INFORMATION: We are ACTION: Final rule. efforts for registrants. adopting amendments to:

Commission reference CFR citation (17 CFR)

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

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

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2081

3. Summary Prospectus in Forms S–1 and proposals.8 We also received B. Overview of the Final Amendments F–1 suggestions to modify or further We are adopting changes to Items 301, 4. Business Combinations—Form S–4, consider aspects of the proposed Form F–4, and Schedule 14A 302, and 303 of Regulation S–K that 5. Form S–20 amendments that commenters believed would reduce duplicative disclosure 9 F. Compliance Date could be clarified or improved. After and focus on material information. Our III. Other Matters reviewing and considering the public amendments: IV. Economic Analysis comments, we are adopting the majority • Eliminate Item 301 (Selected A. Introduction of the amendments as proposed. As Financial Data); and B. Baseline and Affected Parties discussed further below, in certain • Modernize, simplify, and C. Potential Benefits and Costs of the cases, we are adopting the proposed streamline Item 302(a) (Supplementary Amendments 1. Overall Potential Benefits and Costs rules with modifications that are Financial Information) and Item 303 2. Benefits and Costs of Specific intended to address comments received. (MD&A). Specifically, these Amendments amendments will: D. Anticipated Effects on Efficiency, 8 Comment letters for the Proposing Release are Æ Revise Item 302(a) to replace the Competition, and Capital Formation available at https://www.sec.gov/comments/s7-01- current requirement for quarterly E. Alternatives 20/s70120.htm. Unless otherwise indicated, tabular disclosure with a principles- V. Paperwork Reduction Act comment letters cited in this release are to the based requirement for material A. Summary of the Collections of Proposing Release. In addition, the SEC’s Investor Advisory Committee adopted recommendations retrospective changes; Information Æ Add a new Item 303(a), Objective, B. Summary of Comment Letters and (‘‘IAC Recommendation’’) with respect to the Revisions to PRA Estimates proposal and other disclosure matters, asking the to state the principal objectives of Commission and staff to: Reconsider whether to C. Effects of the Amendments on the MD&A; permit all companies to omit fourth quarter Æ Amend Item 303(a), Full fiscal Collections of Information information from annual reports; closely monitor D. Incremental and Aggregate Burden and accounting developments relating to reverse years (amended Item 303(b)) and Item Cost Estimates for the Final factoring; continue to monitor the use of non-GAAP 303(b), Interim periods (amended Item Amendments measures by reporting companies; and reconsider 303(c)) to modernize, clarify, and VII. Final Regulatory Flexibility Act whether to permit omission of the tabular streamline the items; Certification contractual obligations information in annual Æ Replace Item 303(a)(4), Off-balance VIII. Statutory Authority reports. See U.S. Securities & Exchange Commission Investor Advisory Committee, sheet arrangements, with an instruction I. Introduction Recommendation of the SEC Investor Advisory to discuss such obligations in the Committee Relating to Accounting and Financial broader context of MD&A; A. Background Disclosure (May 21, 2020), available at https:// Æ Eliminate Item 303(a)(5), Tabular On January 30, 2020, the Commission www.sec.gov/spotlight/investor-advisory- disclosure of contractual obligations, proposed amendments to Regulation committee-2012/accounting-and-financial- disclosure.pdf. See also letter from the Investor-as- and amend Item 303(b)(1), Liquidity and 4 S–K, and related rules and forms to: (1) Owner Subcommittee of the SEC Investor Advisory Capital Resources, to specifically Eliminate Item 301, Selected Financial Committee dated April 27, 2020. require disclosure of material cash Data and Item 302, Supplementary 9 In addition, some commenters provided input requirements from known contractual Financial Information; and (2) addressing whether there is a need for additional and other obligations as part of an modernize, simplify, and enhance the disclosure requirements relating to environmental, social, or governance issues (‘‘ESG’’) and enhanced liquidity and capital disclosure requirements in Item 303, sustainability matters. See letters from RSM US LLP resources discussion; and MD&A.5 The Commission also proposed dated April 20, 2020 (‘‘RSM’’); Edison Electric Æ Add a new Item 303(b)(3), Critical certain parallel amendments to financial Institute and American Gas Association dated April accounting estimates, to clarify and disclosure requirements applicable to 28, 2020 (‘‘EEI & AGA’’); U.S. Chamber of codify Commission guidance on critical 6 Commerce’s Center for Capital Markets 10 foreign private issuers (‘‘FPIs’’). The Competitiveness dated May 4, 2020 (‘‘Chamber’’); accounting estimates. proposed amendments were part of an Principles for Responsible Investment dated April We are also adopting certain parallel ongoing, comprehensive evaluation of 28, 2020; Institute for Policy Integrity, New York amendments to Forms 20–F and 40–F, our disclosure requirements 7 and University School of Law dated April 28, 2020; E. including Item 3.A of Form 20–F focused on modernizing and improving Warren, United States Senator dated April 28, 2020; Center for Audit Quality dated April 28, 2020 (Selected Financial Data), Item 5 of disclosure by reducing costs and (‘‘CAQ’’); Ernst & Young, LLP dated April 28, 2020 Form 20–F (Operating and Financial burdens while continuing to provide (‘‘E&Y’’); The Forum for Sustainable and Review and Prospects), General investors with all material information. Responsible Investment dated June 17, 2020. These Instruction B.(11) of Form 40–F (Off- Many commenters supported the commenters reflected a range of views. For Balance Sheet Arrangements), and objectives of the proposed amendments example, some commenters broadly supported the establishment of comprehensive ESG disclosure General Instruction B.(12) of Form or were generally in favor of the requirements, while others recommended 40–F (Tabular Disclosure of Contractual prescriptive line-item requirements specifically Obligations).11 The following table 4 17 CFR 229.10 through 229.1406. addressing climate risk disclosures. Other summarizes some of the changes we are 5 See Management’s Discussion and Analysis, commenters asserted that the existing disclosure adopting, as described more fully in principles in Regulation S–K are sufficient to elicit Selected Financial Data, and Supplementary 12 Financial Information, Release No. 33–10750 (Jan. disclosure of material information and objected to Section II (Final Amendments): 30, 2020) [85 FR 12068 (Feb. 28, 2020)] (the new rules that would require all registrants to ‘‘Proposing Release’’). include topic-specific disclosure on ESG and 10 See Commission Guidance Regarding 6 An FPI is any foreign issuer other than a foreign sustainability matters irrespective of the Management’s Discussion and Analysis of Financial government, except for an issuer that (1) has more applicability to registrants’ particular operations Condition and Results of Operation, Release No. than 50% of its outstanding voting securities held and finances. In keeping with the Commission’s 33–8350 (Dec. 19, 2003) [68 FR 75056 (Dec. 29, of record by U.S. residents; and (2) any of the principles-based approach to MD&A, we are not 2003)] (the ‘‘2003 MD&A Interpretive Release’’). following: (i) A majority of its executive officers or adding any new requirements to Item 303 with 11 We discuss the amendments that affect FPIs in directors are citizens or residents of the United respect to ESG or sustainability matters, and Section II.D infra. We are adopting corresponding States; (ii) more than 50% of its assets are located continue to emphasize the Commission’s existing changes for FPIs to all items, except for Items 302(a) in the United States; or (iii) its business is guidance on these topics. See Commission and 303(b). principally administered in the United States. See Guidance Regarding Disclosure Related to Climate 12 The information in this table is not 17 CFR 230.405. See also 17 CFR 240.3b–4(c). Change, Release No. 33–9106 (Feb. 8, 2010) [75 FR comprehensive and is intended only to highlight 7 See Proposing Release at Section I.A. 6290 (Feb. 8, 2010)]. Continued

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2082 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

Current item Summary description Discussed or issue of amended rules Principal objective(s) below in section

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

some of the more significant aspects of the final amendments. It does not reflect all of the amendments or all of the rules and forms that are affected. All changes are discussed in their entirety below. As such, this table should be read together with the referenced sections and the complete text of this release.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2083

Current item Summary description Discussed or issue of amended rules Principal objective(s) below in section

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

We discuss the final amendments Smaller reporting companies 15 are in connection with its first registration below in the order that each Item not required to provide Item 301 statement that became effective under appears in Regulation S–K. information.16 Emerging growth the Exchange Act or Securities Act.19 companies (‘‘EGCs’’) 17 that are The Commission proposed to II. Description of the Final providing the information called for by eliminate Item 301 in part because of Amendments Item 301 in a Securities Act registration advances in technology since the item’s A. Selected Financial Data (Item 301) statement need not present selected adoption in 1970 that allow for easy financial data for any period prior to the access to the information required by 1. Proposed Amendments earliest audited financial statements this item on the Commission’s Current Item 301 13 requires presented in connection with the EGC’s Electronic Data Gathering, Analysis, and registrants to furnish selected financial initial public offering (‘‘IPO’’) of its Retrieval system (‘‘EDGAR’’).20 The data in comparative tabular form for common equity securities.18 In addition, Commission also noted that Item 301 each of the registrant’s last five fiscal an EGC that is providing the was originally intended to elicit years and any additional fiscal years information called for by Item 301 in a disclosure of material trends and that necessary to keep the information from registration statement, periodic report, requiring five years of selected financial being misleading. Instruction 1 to Item or other report filed under the Exchange data is not necessary to achieve this 301 states that the purpose of the item Act need not present selected financial because of the requirement for is to supply in a convenient and data for any period prior to the earliest discussion and analysis of trends in readable format selected financial data audited financial statements presented Item 303.21 that highlights certain significant trends 2. Comments in the registrant’s financial condition 15 Item 10(f)(1) of Regulation S–K defines a and results of operations. Instruction 2 smaller reporting company (‘‘SRC’’) as a registrant Commenters broadly supported the that is not an investment company, an asset-backed proposals.22 A few commenters stated to Item 301 lists specific items that must issuer, or a majority-owned subsidiary of a parent be included, subject to appropriate that is not an SRC that: Had a public float of less that Item 301 creates additional variation to conform to the nature of the than $250 million; or had annual revenues of less complexity or costs when evaluating registrant’s business, and provides that than $100 million, and had either no public float whether to recast earlier years or when or a public float of less than $700 million. Business registrants may include additional items development companies (‘‘BDCs’’) do not fall 19 Item 301(d)(2) of Regulation S–K [17 CFR they believe would enhance an within the SRC definition and are a type of closed- 229.301(d)(2)]. end investment company that is not registered understanding of, and highlight, other 20 See Proposing Release at Section II.A. under the Investment Company Act. 21 trends in their financial condition and 16 See Proposing Release at Section II.A. 14 Item 301(c) of Regulation S–K [17 CFR 22 results of operations. 229.301(c)]. See, e.g., letters from PriceWaterhouseCoopers 17 LLP dated April 23, 2020 (‘‘PWC’’); Pfizer, Inc. An EGC is defined as a company that has total dated April 24, 2020 (‘‘Pfizer’’); Eli Lilly and 13 See also infra Section II.D for a discussion of annual gross revenues of less than $1.07 billion Company dated April 24, 2020 (‘‘Eli Lilly’’); EEI and related amendments to Form 20–F. during its most recently completed fiscal year and, AGA; KPMG LLP dated April 28, 2020 (‘‘KPMG’’); 14 Instruction 2 to Item 301 of Regulation S–K as of December 8, 2011, had not sold common CAQ; FedEx dated April 28, 2020 (‘‘FedEx’’); states that, subject to appropriate variation to equity securities under a registration statement. A Nasdaq, Inc. dated April 28, 2020 (‘‘Nasdaq’’); conform to the nature of the registrant’s business, company continues to be an EGC for the first five Nareit dated April 28, 2020 (‘‘Nareit’’); Financial the following items shall be included in the table fiscal years after it completes an IPO, unless one of Executives International dated April 28, 2020 of financial data: Net sales or operating revenues; the following occurs: Its total annual gross revenues (‘‘FEI’’); SIFMA dated April 28, 2020 (‘‘SIFMA’’); income (loss) from continuing operations; income are $1.07 billion or more; it has issued more than Institute of Management Accountants dated April (loss) from continuing operations per common $1 billion in non-convertible debt in the past three 28, 2020 (‘‘IMA’’); E&Y; UnitedHealth Group dated share; total assets; long-term obligations and years; or it becomes a ‘‘large accelerated filer,’’ as April 28, 2020 (‘‘UnitedHealth’’); Medtronic dated redeemable preferred stock (including long-term defined in Exchange Act Rule 12b–2. See Securities April 29, 2020 (‘‘Medtronic’’); Chamber; ABA debt, capital leases, and redeemable preferred Act Rule 405 and Exchange Act Rule 12b–2. Business Law Section dated June 5, 2020 (‘‘ABA’’); stock); and cash dividends declared per common 18 Item 301(d)(1) of Regulation S–K [17 CFR Society for Corporate Governance dated June 22, share. 229.301(d)(1)]. 2020 (‘‘Society’’).

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2084 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

recasting earlier years, such as when overall utility of Item 301.31 One of Notwithstanding the amendments to there is a new accounting standard or these commenters stated that many eliminate Item 301, we encourage change in business.23 For example, one registrants disclose trends for the registrants to consider whether trend commenter stated that the costs of periods covered by the financial information for periods earlier than providing the earlier two years can be statements, and if Item 303 is intended those presented in the financial significant and elaborated that these to elicit five-year trend disclosure, Item statements may be necessary as part of costs include: Internal costs to prepare 303 should be clarified to make this MD&A’s objective to ‘‘provide material any restatement and disclosures; objective clear.32 information relevant to an assessment of the financial condition and results of implementation of internal controls; and 3. Final Amendments external costs such as legal and audit operations.’’ 38 We also encourage We are adopting the amendments to fees.24 Another commenter stated that it registrants to consider whether a tabular eliminate Item 301 as proposed. We recently disposed of a portion of its presentation of relevant financial or agree with commenters that the earlier business and revising the full five years other information, as part of an two years required by Item 301 can under Item 301 was difficult and time introductory section or overview, create additional costs and complexity. including to demonstrate material consuming, and it believed that the We acknowledge the input of some disclosure was not useful to investors.25 trends, may help a reader’s commenters that the earlier two years understanding of MD&A.39 Some commenters opposed the required by Item 301 can help illustrate This Commission guidance also states proposal and recommended retaining material trends. However, this that registrants could benefit from this item.26 These commenters disclosure is typically available in prior adding an introductory section or suggested that eliminating the item filings on EDGAR.33 We also continue to overview. 40 Notwithstanding the would increase the time and costs for believe that the disclosures required by amendments to eliminate Item 301, investors to obtain the same disclosure Item 303 should continue to elicit registrants should continue to consider through other means.27 Some of these material trend disclosure. Item 303 whether such tabular disclosure as part commenters also stated that eliminating currently requires disclosure of trend of an introductory section or overview, Item 301 would result in the loss of data,34 and will continue to require this including to demonstrate material disclosure, noting specifically the loss information under the amendments,35 trends, would be appropriate. of the earlier two years where a and we reiterate Commission guidance B. Supplementary Financial Information corporation discontinues its operations, that has emphasized the importance of (Item 302) changes its accounting standards, or this disclosure in MD&A.36 In light of otherwise materially restates prior these requirements, we do not anticipate 1. Proposed Amendments period results.28 A few commenters also that eliminating Item 301 will Current Item 302(a)(1) requires expressed the view that the proposal discourage trend disclosure or otherwise disclosure of selected quarterly financial would negatively impact trend reduce disclosure of material trends. We data of specified operating results,41 and disclosure, especially for the full five acknowledge commenters that stated current Item 302(a)(2) requires years, because, in their observation, that our amendments may increase the disclosure of variances in these results registrants do not typically provide this time and costs to investors to obtain from amounts previously reported on a disclosure despite requirements in Item historical disclosures elsewhere. Form 10–Q.42 Item 302(a) does not 303 and Commission guidance calling However, we expect that these search apply to SRCs or FPIs and, because it for it.29 These commenters stated that costs are likely to decrease over time as only applies to companies that already they ‘‘have not noted [trend] disclosure investors adjust to new disclosure have a class of securities registered being provided by registrants in MD&A formats.37 under Section 12 of the Exchange Act at to any significant extent, and have the time of filing, it does not apply to certainly not seen evidence of this type 31 See letters from Grant Thornton dated April 28, first-time registrants conducting an IPO 2020 (‘‘Grant Thornton’’) (encouraging ‘‘the SEC to of disclosure encompassing a full five- continue outreach to investors on the overall utility and registrants that are only required to year trend analysis.’’ 30 of selected financial data and supplementary file reports pursuant to Section 15(d) of 43 A few commenters, while not financial information prior to finalizing rulemaking the Exchange Act. When Item 302(a) in this area’’); BDO USA, LLP dated April 28, 2020 applies, it requires certain information objecting to the proposed elimination of (‘‘BDO’’) (stating its belief that ‘‘investors are best the item, recommended continued positioned to provide feedback about whether the 38 consideration of investor input as to the Selected Financial Data . . . should be eliminated See amended Item 303(b). or retained’’). 39 See 2003 MD&A Interpretive Release at Section 32 See letter from BDO. III.A. 23 40 See, e.g., letters from Eli Lilly; EEI & AGA; FEI. 33 In addition, filings are generally available on See id. 41 24 See letter from FEI. registrants’ websites and other third-party websites. Item 302(a)(1) of Regulation S–K [17 CFR 25 See letter from Eli Lilly. We note that the elimination of Item 301 includes 229.302(a)(1)]. Item 302(a)(1) specifies disclosure of: 26 See, e.g., letters from NASAA dated April 28, the exchange rate disclosure requirements for FPI’s Net sales; gross profit (net sales less costs and 2020 (‘‘NASAA’’); California Public Employees’ in Instruction 5 of Item 301. This is consistent with expenses associated directly with or allocated to Retirement Systems dated April 28, 2020 the Commission’s prior removal of exchange rate products sold or services rendered); income (loss) from continuing operations; per share data based (‘‘CalPERS’’); CFA Institute and Council of data disclosure requirements in former Item 3.A.3 upon income (loss) from continuing operations; net Institutional Investors dated April 28, 2020 (‘‘CFA of Form 20–F, in which the Commission similarly income (loss); and net income (loss) attributable to & CII’’); Dan Jamieson dated May 1, 2020 (‘‘D. cited the ready availability of exchange rate the registrant. Jamieson’’). disclosure information on a number of websites as 42 Item 302(a)(2) of Regulation S–K [17 CFR 27 a basis for eliminating that requirement. See See id. 229.302(a)(2)]. When the data supplied pursuant to 28 Disclosure Update and Simplification, Release No. See letters from NASAA (observing loss of Item 302(a) varies from amounts previously 33–10532 (Aug. 17, 2018) [83 FR 38768 (Aug. 7, information where there is a change in accounting reported on the Form 10–Q filed for any quarter, 2018)]. Id. at 107. standard or restatement, noting that in both such as when a combination between entities under 34 scenarios the lost disclosure would be particularly See, e.g., Item 303(a)(1) and (a)(2)(ii). common control occurs or where an error is significant); CFA & CII (observing loss of 35 See, e.g., amended Item 303(a), Item corrected, the registrant must reconcile the amounts information where there are discontinued 303(b)(1)(i), Item 303(b)(1)(ii)(B), and Item given with those previously reported and describe operations or restatements); D. Jamieson. 303(b)(2)(ii). the reason for the difference. 29 See letters from CFA & CII; D. Jamieson. 36 See, e.g., 2003 MD&A Interpretive Release. 43 Item 302(a)(5) and (c) of Regulation S–K [17 30 See id. 37 See infra Section IV.C.2.a. CFR 229.302(a)(5) and (c)].

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2085

for each full quarter within the two most Accepted Accounting Principles (‘‘U.S. the two years for such revisions.59 Some recent fiscal years and any subsequent GAAP’’) requirement.49 of these commenters questioned period for which financial statements whether the loss of the fourth quarter 2. Comments are included or required by Article 3 of data may be mitigated by disclosure Regulation S–X.44 Item 302(a)(3) The proposal generated a wide range elicited under Item 303 60 and/or requires a description of the effect of of responses. Many commenters Accounting Standards Codification 270 any discontinued operations and supported the proposal.50 A number of (Interim Reporting).61 One of these unusual or infrequently occurring items these commenters suggested that fourth commenters expressed the view that recognized in each quarter, as well as quarter information is easily derived, registrants would voluntarily report the aggregate effect and the nature of such as by subtracting the third quarter fourth quarter data, but noted that year-end or other adjustments that are from year-to-date amounts 51 or is eliminating Item 302(a) would result in material to the results of that quarter.45 otherwise frequently disclosed in investors losing the benefit of having an If a registrant’s financial statements registrants’ earnings releases.52 Other auditor review of the fourth quarter.62 have been reported on by an accountant, commenters expressed the view that One of these commenters recommended Item 302(a)(4) requires that accountant registrants would voluntarily present that, if Item 302(a) were retained, the to follow appropriate professional Item 302(a) disclosure absent a line items required for presentation be standards and procedures regarding the requirement.53 One of these conformed to key subtotals in the data required by Item 302(a).46 commenters, while supportive of the registrant’s interim statement of The Commission proposed to proposal, expressed concern about the comprehensive income in order to eliminate Item 302(a), intending to loss of certain fourth quarter eliminate the potential for address the largely duplicative information and the effects of material inconsistencies between the item disclosures that result from this retrospective changes.54 This requirements and the registrant’s prescriptive requirement. However, the commenter recommended revising the financial statements.63 Commission recognized that, while instructions to Item 303 to require (i) a A few commenters, while not most of the financial data required by discussion of the fourth quarter in objecting to the proposed elimination of Item 302(a) can be found in prior MD&A but only when this quarter Item 302(a), recommended continued quarterly reports on EDGAR, the item differs materially from previously consideration of investor input on the requires separate disclosure of certain reported quarterly information and (ii) utility of Item 302(a) before finalizing 64 fourth quarter information, which is not disclosure of material retrospective any rulemaking. All of these otherwise required to be disclosed. The changes. commenters suggested revisions to Commission also recognized that the A number of commenters, however, provide for disclosure of material proposal may result in the loss of the opposed the proposal to eliminate Item retrospective changes, either by revising 302(a).55 All of these commenters Item 302(a),65 or through revisions to effect of a retrospective change in the 66 earliest of the two years.47 In the suggested that a separate presentation of Item 303. Some commenters also Proposing Release, the Commission fourth quarter data is useful to recommended revising Item 302(a) to stated that, where fourth quarter results investors,56 with one of these allow newly reporting registrants to are material or there is a material commenters stating that for ‘‘a exclude this data for interim periods significant number of companies, fourth prior to those presented in its IPO retrospective change, existing 67 requirements, such as those in Item 303 quarter results cannot be derived from registration statement. Several commenters recommended would still elicit this disclosure.48 annual results.’’ 57 A few of these coordinating with the Public Company The Commission also proposed to commenters also questioned the cost savings, if any, to registrants if Item Accounting Oversight Board (PCAOB) to eliminate Item 302(b) (Supplementary clarify the requirement in Accounting Financial Information—Information 302(a) were eliminated, stating that registrants already have the procedures Standard (AS) 4105.06, which requires about Oil and Gas Producing Activities) auditors to review fourth quarter data due to overlap with a U.S. Generally in place to disclose this information.58 Several commenters opposing the where an annual report includes Item 302(a) disclosure.68 44 proposal stated that eliminating Item Item 302(a)(1) and (a)(3) [17 CFR 229.302(a)(1) With respect to the proposal to and (a)(3)]. 302(a) would result in either delays in 45 Item 302(a)(3) of Regulation S–K [17 CFR the disclosure of retrospective revisions eliminate Item 302(b), one commenter 229.302(a)(3)]. The requirement applies to items until the following Form 10–Q or a loss specified that it supported the recognized in each full quarter within the two most of disclosure on the effect of a recent fiscal years and any subsequent interim 59 See, e.g., letters from E&Y; CFA & CII; D. period for which financial statements are included retrospective change on the earliest of Jamieson. See supra footnote 47. or are required to be included. 60 See letters from E&Y; NASAA. 46 Item 302(a)(4) of Regulation S–K [17 CFR 49 See ASC 932–235–50. See also Proposing 61 See letter from E&Y. 229.302(a)(4)]. Release at Section II.B.2. 62 See id. 47 Because Item 302(a)(2) requires disclosure of 50 See, e.g., letters from PWC; Pfizer; Eli Lilly; EEI 63 See letter from E&Y. variances in results from amounts previously & AGA; KPMG; CAQ; FedEx; Nasdaq; Nareit; FEI; 64 See, e.g., letters from RSM; Grant Thornton; reported for the two most recent fiscal years, the SIFMA; IMA; UnitedHealth; Medtronic; Chamber; BDO. effect of a retrospective change in any quarter for ABA; Society. 65 See letter from RSM. which a Form 10–Q is filed in the more recent of 51 See, e.g., letters from Eli Lilly; FEI; SIFMA; 66 the two fiscal years will be disclosed in the selected IMA; UnitedHealth; Medtronic; Society. See letters from Grant Thornton (questioning whether current Item 303 would elicit this quarterly data. However, absent Item 302(a)(2), this 52 See letter from UnitedHealth. variance would not be specifically required to be disclosure); BDO (stating that, if Item 303 is 53 See letters from KPMG; CAQ. disclosed until the following year in the expected to elicit disclosure of material 54 corresponding fiscal quarter in which the See letter from ABA. retrospective changes, this should be clarified in the retrospective change occurred. Additionally, 55 See, e.g., letters from E&Y; NASAA; CalPERS; item). disclosure in the Form 10–Q for this corresponding CFA & CII; D. Jamieson. See also IAC 67 See letters from Grant Thornton; E&Y. fiscal quarter would not include the effects of this Recommendation. 68 See, e.g., letters from PWC; KPMG; CAQ; RSM; change in the earliest of the two years presented in 56 See id. Grant Thornton; BDO; Deloitte & Touche, LLP dated the Form 10–K, as this Form 10–Q would be limited 57 See IAC Recommendation. April 28, 2020 (‘‘Deloitte’’). The text of AS 4105.06 to the current and prior-year interim periods. 58 See, e.g., letters from NASAA; CalPERS. See is available at https://pcaobus.org/Standards/ 48 See Proposing Release at Section II.B.1. also IAC Recommendation. Auditing/Pages/AS4105.aspx.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2086 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

proposal,69 and no commenters of Regulation S–X).71 Consistent with a retrospective changes, as disclosure will specifically opposed the proposal. commenter’s suggestion,72 we are only be required where there are such amending Item 302(a) to refer to changes, which may be important to 3. Final Amendments amended Rule 1–02(bb)(ii). This will investors. For this reason, we believe We are adopting amendments to Item link amended Item 302(a) to the amended Item 302(a) may be important 302(a), with modifications from what summarized financial information in the context of both Exchange Act and was proposed in response to comments related to the statements of Securities Act forms and accordingly, are retaining requirements to provide received. Specifically, we are retaining comprehensive income specified in amended Rule 1–02(bb)(1)(ii) of disclosure pursuant to this item in these the item and streamlining its Regulation S–X,73 thereby providing forms.77 Further, by limiting the requirements to require disclosure only registrants flexibility in the line items disclosure only to affected quarters, we when there are one or more presented. We are also adopting believe the final amendments will retrospective changes that pertain to the amendments to Rule 1–02(bb), as balance the costs to registrants of statements of comprehensive income for proposed, to clarify that the disclosure preparing such disclosures, while any of the quarters within the two most of summary financial information may providing investors with material recent fiscal years and any subsequent vary, as appropriate, to conform to the information regarding the impact of interim period for which financial nature of the entity’s business.74 Lastly, material changes. statements are included or required to our amendments retain all Item 302(a) We acknowledge commenters who be included by Article 3 of Regulation references in our rules and forms.75 stated that, absent Item 302(a), fourth S–X and that, individually or in the The final amendments do not revise quarter results may not always be aggregate, are material.70 Our the population of registrants that are not available or readily derived from annual amendments will require registrants to required to provide disclosure pursuant results. We continue to believe that, in provide an explanation of the reasons to Item 302(a),76 including, but not most instances, fourth quarter for such material changes and to limited to, first time registrants information can be readily derived from disclose, for each affected quarterly conducting an IPO or registrants that are annual results, and as such, amended period and the fourth quarter in the only required to file reports pursuant to Item 302(a) does not generally require affected year, summarized financial Section 15(d). fourth quarter disclosure on a information related to the statements of We continue to believe that requiring standalone basis.78 Our amendments are comprehensive income (as specified in quarterly financial data when there have intended to address the most common Rule 1–02(bb)(ii) of Regulation S–X) and not been one or more retrospective reason why fourth quarter data would earnings per share reflecting such changes that are material, either not be easily calculable. changes. The affected quarters may individually or in the aggregate, would Additionally, and as some include, depending on the facts and duplicate disclosures provided commenters stated, we expect that some circumstances, a single quarter in which elsewhere, such as in Forms 10–Q or, in registrants will voluntarily provide the material retrospective change the case of fourth quarter results, can be fourth quarter disclosure or disclosure applies, or it may flow through to derived from annual results disclosed in of selected quarterly financial subsequent quarters during the relevant the Form 10–K. Our amendments look-back period (i.e., the quarters eliminate these duplicative disclosures. 77 See discussion in Section II.E. infra. within the two most recent fiscal years We do, however, agree with commenters 78 We acknowledge the view expressed in the IAC that timely disclosure of the effects of Recommendation regarding the ability to derive and any subsequent interim period for fourth quarter results based on the assessment which financial statements are included material retrospective changes may be described in their letter of selected net income data or required to be included by Article 3 important to investors, and lack of such from the years 2010 through 2019. See IAC disclosure could impact the ability to Recommendation. The information provided in the derive fourth quarter information when IAC Recommendation was not sufficient for us to 69 See letter from Chamber. replicate the referenced study, and the data and 70 Some examples of a retrospective change that there have been such changes. As methodology were not otherwise in a publicly may trigger Item 302(a) disclosure include: discussed in the Proposing Release, Item available source. Nevertheless, it appears that the Correction of an error; disposition of a business that 303 should elicit some disclosure where data provided in the IAC Recommendation is not is accounted for as discontinued operations; a there has been a material retrospective inconsistent with the staff’s observations and reorganization of entities under common control; or conclusions regarding the ability to calculate fourth a change in an accounting principle. These change. However, we believe that the quarter data in most instances. Based on the examples are not intended to be an exhaustive list, amended Item 302(a) disclosures will information provided in the IAC Recommendation, and may not always be material such that further aid investors’ understanding of assuming that the fewest number of companies disclosure would be required under amended Item the reasons for the material studied (3,000) and the largest incidents of 302(a). Further, not all changes in accounting difference reported (300) occurred in the same year, principles would result in a retrospective change. retrospective change and the related it follows that there would have been no difference For example, certain calendar year-end EGCs that quantitative effect on the quarterly between reported and derived fourth quarter results elected to take advantage of the extended transition periods affected. Accordingly, our for 90% of companies in such year. The data period for new or revised financial accounting amendments are intended to address presented further suggests that, in the year where standards in their initial public offerings, will adopt the greatest number of differences were observed in accordance with U.S. GAAP ASC 842, Leases for this discrete area. between reported and derived fourth quarter the full fiscal year in their 2022 Form 10–K filed We also believe amended Item 302(a) results, 100 companies had less than a 1% in 2023 and will not adopt ASC 842 in interim will better highlight material difference and only 30 companies had a greater periods until the Forms 10–Q filed in 2023. We do than 10% difference. We believe these findings are not view the adoption of ASC 842 in the 2022 Form 71 In the previous example of a registrant that consistent with our view that in the substantial 10–K, in this scenario, to constitute a retrospective loses EGC status, the affected quarters would majority of cases, fourth quarter data is readily change that should trigger disclosure under Item include all four since the material retrospective derivable. Based on our own observations and 302(a) in the registrant’s 2022 Form 10–K. By change was as of January 1st. calculations, in most if not all instances, any contrast, a registrant that loses EGC status as of differences that would cause fourth quarter data to 72 See letter from E&Y. December 31, 2022, would have a retrospective not be derivable from year-end and third-quarter 73 change that would require evaluation of materiality Rule 1–02(bb)(1)(ii) generally refers to the same year-to-date results would be due to a retrospective under Item 302(a) because the registrant would be line items required by current Item 302(a). change or changes. Under the final amendments, required to adopt ASC 842 in the 2022 Form 10– 74 See Proposing Release at footnote 337. when there is a material retrospective change or K for both the full fiscal year and interim periods 75 See discussion in Section II.E. infra. changes, fourth quarter financial data would be within that fiscal year. 76 See amended Rule 302(a)(2). required.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2087

information. In such instances, that Finally, we proposed to eliminate Instructions 1, 2, and 3 to current Item information would be subject to the Item 302(b), disclosure of oil and gas 303(a). PCAOB AS 2710 requirements for producing activities, on the condition • Amended Item 303(b) provides the auditors to read and consider such that the FASB finalize amendments to requirements for full fiscal year information for material inconsistencies U.S. GAAP that would require disclosure and comprises three main with the audited financial statements. incremental disclosure called for by requirements: These procedures are lesser in scope as Item 302(b). The FASB has not yet Æ Item 303(b)(1) provides the compared to the review procedures finalized the amendments, so we are overarching requirements for liquidity required by AS 4105.06 that are to be retaining Item 302(b) and may and capital resources disclosures, and performed on fourth quarter data when reconsider the proposal in the future. reflects an enhanced principles-based presented in an annual report pursuant requirement focused on material short- to Item 302(a).79 C. Management’s Discussion and and long-term cash requirements, In a change from current Item 302(a), Analysis of Financial Condition and including those from known contractual amended Item 302(a) will apply Results of Operations (Item 303) and other obligations. Items 303(b)(1)(i) beginning with the first filing on Form Item 303 of Regulation S–K requires and (ii) provide the specific disclosure 10–K after the registrant’s initial disclosure of information relevant to requirements for liquidity and capital registration of securities under sections assessing a registrant’s financial resources, respectively. 80 Æ 12(b) or 12(g) of the Exchange Act. We condition, changes in financial Item 303(b)(2) provides the are making this change because we condition, and results of operations. The requirements for results of operations agree with commenters that it would be disclosure requirements for full fiscal disclosures, and includes minor unnecessarily burdensome for years in Item 303(a) include five amendments such as eliminating the registrants to provide disclosure for components: Liquidity, capital current requirement to discuss the interim periods prior to those presented resources, results of operations, off- impact of inflation and changing prices in an IPO registration statement.81 where material; and balance sheet arrangements, and Æ Although some commenters suggested contractual obligations.84 Item 303(b) Item 303(b)(3), requires disclosure that disclosure should not be required covers interim period disclosures and of critical accounting estimates, and for any quarterly periods not previously requires registrants to discuss material largely clarifies and codifies presented on a standalone basis, such as changes in the items listed in Item Commission guidance in this area. 82 • in a Form 10–Q, we believe that such 303(a), other than the impact of inflation The instructions to amended Item an approach would unduly delay and changing prices on operations.85 303(b) have been streamlined, such as disclosure of the impact of material Item 303(c) acknowledges the by eliminating unnecessary cross- retrospective changes. For this reason, application of a statutory safe harbor for references to industry guides, and and because the commenters’ forward-looking information provided replace the requirement for off-balance suggestions related primarily to current in off-balance sheet arrangements and sheet arrangement disclosures (current Item 302(a), which requires disclosure contractual obligations disclosures. Item Item 303(a)(4)) with an instruction to in every annual report, while amended 303(d) provides certain discuss these obligations in the broader Item 302(a) will require disclosure in accommodations for SRCs. context of MD&A disclosure. more limited circumstances, we believe • Amended Item 303(c) provides for that it is appropriate to require newly The Commission proposed interim disclosure requirements, and reporting registrants to provide Item amendments to Item 303 of Regulation will allow for more flexibility in the 302(a) disclosure, if applicable, S–K that were intended to modernize, interim periods compared. The item’s beginning in their first Form 10–K. simplify, and enhance the MD&A instructions have also been streamlined Nonetheless, when a new registrant has disclosures for investors while reducing by eliminating certain instructions and 86 a material retrospective change to its compliance burdens for registrants. providing cross-references to similar year-to-date interim period information After consideration of the comments instructions to Item 303(b); and in its most recent registration statement, received, and as discussed in more • Current Item 303(a)(5) will be but has not yet disclosed that interim detail below, amended Item 303 will eliminated, and current Items 303(c) period information in quarterly provide the following: and (d) will be eliminated as increments, we would not object if Item • New Item 303(a) states the conforming changes. 302(a) disclosures are presented for the objectives of MD&A that will apply The following table outlines the new affected year-to-date interim period and throughout amended Item 303. It also structure of Item 303 as a result of these the fourth quarter in the affected year.83 incorporates much of the substance of amendments: 87

79 The text of AS 4105.06 is available at https:// to be presented for interim periods not previously 85 See Item 303(b) and Instruction 7 to Item 303(b) pcaobus.org/Standards/Auditing/Pages/ presented in any periodic quarterly reports.’’). of Regulation S–K [17 CFR 229.303(b)]. AS4105.aspx. The final amendments update the 83 For example, after conducting an IPO, a 86 We discuss infra in Section II.D our outdated reference in current Item 302(a)(4) from registrant files its first Form 10–K in which Item amendments that will make certain parallel changes the Statements of Auditing Standards issued by the 302(a) information would be required. The Item to Item 5 of Form 20–F (Operating and Financial Auditing Standards Board of the American Institute 302(a)-triggering material retrospective change Review and Prospects), General Instruction B.(11) of of Certified Public Accountants to the current occurred during a quarter that has only been Form 40–F (Off-Balance Sheet Arrangements), and reference of the Auditing Standards issued by the presented as a part of the year-to-date interim General Instruction B.(12) of Form 40–F (Tabular Public Company Accounting Oversight Board. period statement of comprehensive income filed in Disclosure of Contractual Obligations). the IPO registration statement. In this circumstance, 87 80 See amended Item 302(a)(2). See also footnote The information in this table is not we would not object if the quantitative Item 302(a) 70 supra. comprehensive and is intended only to highlight disclosure in the Form 10–K comprised information the general structure of the current rules and final 81 See, e.g., letters from Grant Thornton and E&Y. for the same interim period previously presented in amendments. It does not reflect all of the 82 See, e.g., letters from Grant Thornton; E&Y the registration statement (rather than for each amendments or all of the rules and forms that are (recommending that ‘‘new registrants be exempted affected quarter during that time), along with the affected. All changes are discussed in their entirety from providing the disclosure until their second fourth quarter, in the affected year. throughout this release. As such, this table should annual report, and in registration statements 84 Item 303(a)(1)–(5) of Regulation S–K [17 CFR be read together with the referenced sections and thereafter, to avoid requiring selected quarterly data 229.303(a)(1)–(5)]. the complete text of this release.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2088 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

Current structure Amended structure Discussed in section(s)

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

1. Restructuring and Streamlining must be included in this discussion, Instruction 1, and much of the a. Objective of MD&A (New Item 303(a)) including liquidity, capital resources, substance of current Instructions 2 and results of operations, off-balance sheet 3 into the item.89 As part of new Item i. Proposed Amendments arrangements, contractual obligations, 303(a), the Commission also proposed and any other information a registrant The first paragraph of current Item codifying guidance that states that a believes would be necessary to 303(a) instructs registrants to discuss registrant should provide a narrative understand its financial condition, their financial condition, changes in explanation of its financial statements changes in financial condition, and financial condition, and results of results of operations. 89 operations for full fiscal years.88 The See Proposing Release at Section II.C.1. As a paragraph then sets forth the items that The Commission proposed adding a result of this proposed amendment, the remainder of Item 303 was proposed to be renumbered. Herein new Item 303(a) to succinctly state the we distinguish the rule numbering prior to these 88 Item 303(a) of Regulation S–K [17 CFR objectives of MD&A by incorporating a amendments from the amended rule numbering by 229.303(a)]. portion of the substance of current reference to ‘‘current’’ and ‘‘amended.’’

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2089

that enables investors to see a registrant iii. Final Amendments include matters that are reasonably 90 ‘‘through the eyes of management.’’ We are adopting the amendments likely, based on ‘‘management’s By emphasizing the purpose of MD&A largely as proposed. Amended Item assessment’’ to have a material impact at the outset of Item 303, the proposal 303(a) calls for the following disclosure, on future operations.100 was intended to provide clarity and which is expected to better allow Consistent with this approach, our focus to registrants as they consider investors to view the registrant from amendments also incorporate current what information to discuss and management’s perspective: guidance that MD&A is intended to analyze. The proposal was also intended • Material information relevant to an to facilitate a thoughtful discussion and provide disclosures from assessment of the financial condition ‘‘management’s perspective.’’ In analysis, and encourage management to and results of operations of the response to the input of one commenter, disclose factors specific to the registrant, including an evaluation of we have slightly reframed the reference registrant’s business, which the amounts and certainty of cash flows management is in the best position to from operations and from outside to ‘‘management’s perspective’’ to make know, and underscore materiality as the sources. clear that disclosure that meets the overarching principle of MD&A.91 • Material events and uncertainties requirements of the item generally is expected to better allow an investor to ii. Comments known to management that are reasonably likely to cause reported view the registrant from management’s Most commenters supported the financial information not to be perspective. proposal to add new Item 303(a) to state indicative of future operating results or 92 In response to one commenter’s the purposes of MD&A at the forefront. of future financial condition. This One of these commenters nonetheless suggestion, we are slightly revising our includes descriptions and amounts of proposals to explicitly incorporate cash expressed concern with incorporating, matters that have had a material impact as part of new Item 303(a), guidance that flows as part of MD&A’s objective.101 on reported operations as well as Amended Item 303(a) specifies that MD&A is ‘‘from management’s matters that are reasonably likely based MD&A must include financial and other perspective,’’ stating that this is such a on management’s assessment to have a statistical data that will enhance a broad statement that compliance could material impact on future operations. be difficult and it could be interpreted • The material financial and reader’s understanding of the to mandate disclosure of otherwise statistical data that the registrant registrant’s financial condition, ‘‘cash confidential information (e.g., believes will enhance a reader’s flows,’’ and other changes in financial competitive advantages, target understanding of the registrant’s condition and results of operations. In markets).93 A few commenters financial condition, cash flows and light of this amendment and existing questioned the proposal.94 Some of other changes in financial condition, references to cash flows, we do not these commenters, while not opposed to and results of operations. believe it is necessary to replace every the proposal, did not believe it would Registrants should regularly revisit reference to ‘‘changes in financial 95 improve MD&A. Instead, these these objectives in Item 303(a) as they condition’’ with ‘‘cash flows,’’ as commenters suggested more explicit prepare their MD&A and consider ways suggested by this commenter. Given the and prescriptive requirements, such as to enhance the quality of the analysis historical and continued importance of providing examples of the types of items provided. These objectives provide the materiality in MD&A, we are not, as to be discussed. overarching requirements of MD&A and suggested by some commenters, One commenter objected to replacing apply throughout amended Item 303. As the word ‘‘should’’ with ‘‘must’’ both in adopting modifications to be more such, they emphasize a registrant’s explicit or prescriptive. Rather, we proposed Item 303(a) and throughout future prospects and highlight the continue to believe that MD&A’s the item, stating these terms are not importance of materiality and trend 96 materiality-focused and principles- interchangeable. This commenter disclosures to a thoughtful MD&A.98 stated that only ‘‘should’’ allows the These amendments are intended to based approach facilitates disclosure of requisite flexibility appropriate for remind registrants that MD&A should complex and often rapidly evolving MD&A whereas ‘‘must’’ results in a provide an analysis that encompasses areas, without the need to continuously ‘‘checklist item’’ that creates exposure to short term results as well as future amend the text of the rule to update or absolute liability and second guessing. prospects.99 Consistent with this impose additional prescriptive Another commenter suggested revising amendment and current guidance, and requirements.102 These amendments are proposed Item 303(a) and the remainder in a slight modification from our intended to further emphasize these of the item to account for the statement proposals, amended Item 303(a) goals. of cash flows, stating that existing specifies that the disclosure must MD&A rules largely pre-date the requirement in U.S. GAAP to provide 100 This language codifies Commission guidance recommended replacing ‘‘changes in financial on forward-looking information where the statements of cash flows.97 condition’’ with ‘‘cash flows’’ throughout Item 303 Commission stated, that as part of the two-step test, and adding ‘‘cash flows’’ to proposed Item 303(a)). ‘‘management must make two assessments.’’ See 90 98 As proposed, our amendments replace the See 2003 MD&A Interpretative Release, at 1989 MD&A Interpretive Release, at 22330. See also 75056. See also 1989 Interpretative Release, at word ‘‘shall’’ with ‘‘must’’ throughout Item 303 to footnote 145 below. 22428. clarify the rule and avoid any ambiguity associated 101 91 See Proposing Release at Section II.C.1. with the use of ‘‘shall.’’ Our amendments to Item See supra footnote 97. Amended Item 303(a)’s 303 do not replace ‘‘should’’ in the current 92 See, e.g., letters from Grant Thornton; Nasdaq; reference to ‘‘the amounts and certainty of cash requirements with ‘‘must.’’ However, in some FEI; IMA; RSM; Society. flows from operations and from outside sources,’’ instances our amendments update Form 20–F by 93 See letter from RSM. which is in current Instruction 2 to Item 303(a), replacing ‘‘should’’ with ‘‘must’’ to conform the predates the cash flow statement. See Amendments 94 See, e.g., letters from ABA; CFA & CII; D. requirements to Item 303, consistent with our other to Annual Report Form, Related Forms, Rules, Jamieson. amendments to Form 20–F. We do not believe the 95 See letters from CFA & CII; D. Jamieson. use of ‘‘must’’ in these instances modifies the Regulations and Guides; Integration of Securities 96 See letter from ABA. overall flexibility of MD&A’s principles-based Act Disclosure Systems, Release No. 33–6231, 97 See letter from E&Y (stating that the statement approach. (Sept. 2, 1980) [45 FR 63630 (Sept. 25, 1980)]. of cash flows has not been integrated in MD&A like 99 See, e.g., 2003 MD&A Interpretive Release and 102 See Proposing Release at footnote 95 and the balance sheet and income statement and 1989 MD&A Interpretive Release. corresponding text.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2090 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

b. Reasons Underlying Material Changes codifies prior guidance.107 Some In light of these observations and our (Amended Item 303(b)) commenters recommended revising the efforts seeking greater analysis, we i. Proposed Amendments proposal to limit the requirement to continue to believe these amendments provide quantitative disclosure where it are necessary. Accordingly, we are In light of the proposal to add new is ‘‘reasonably available’’ and material, adopting the amendments largely as Item 303(a), the Commission proposed stating that registrants often struggle proposed to enhance the analysis in re-captioning current Item 303(a) as with isolating reasons for material MD&A. By moving a portion of current Item 303(b), which would continue to changes as they can be highly Instruction 4 to Item 303(a) to the main 103 apply to all MD&A disclosures. The interrelated.108 Other commenters text of amended Item 303(b) and Commission also proposed moving to suggested expanding the proposal to clarifying that the provision requires the amended Item 303(b) the portion of provide examples of the type of underlying reasons for material changes current Instruction 4 that provides that ‘‘causes’’ of changes to be discussed, in quantitative and qualitative terms, where the consolidated financial stating this would facilitate a our amendments underscore the statements reveal material changes from meaningful discussion.109 importance of the analysis provided in year to year in one or more line items, MD&A. In a change from what was the causes for the changes shall be iii. Final Amendments 104 proposed, we are eliminating language described. The Commission also We are adopting the amendments in current Instruction 4 that the reasons proposed to amend that portion of largely as proposed, with a slight for material changes must be described current Instruction 4 to clarify that modification. The Commission has to the extent necessary to an MD&A requires a narrative discussion of focused on improving the analysis in understanding of the registrant’s the ‘‘reasons underlying’’ material MD&A for many years. Yet, despite business as a whole. We believe this changes rather than only the ‘‘causes’’ specific instructions in Item 303(a) that language is duplicative of the language for material changes.105 This proposal ‘‘the discussion shall not merely repeat in amended Item 303(a) and the was intended to encourage registrants to numerical data contained in the 110 amendments discussed in this section. provide a more meaningful discussion consolidated financial statements,’’ Consistent with MD&A’s principles- of the underlying reasons that may be the Commission has previously based approach, we are not adopting the contributing to material changes in line observed that many registrants simply suggestion of some commenters to items. The Commission also proposed recite the amounts of changes from year provide examples of the types of amending the item to clarify that to year that are readily computable from changes to be discussed.114 Also registrants should discuss material 111 their financial statements. Similarly, consistent with MD&A’s principles- changes within a line item even when the staff continues to seek greater based approach, and as proposed, the such material changes offset each other, 112 analysis in MD&A, and others, amendments require discussion of consistent with prior Commission including commenters, have also underlying reasons only for ‘‘material’’ guidance.106 observed that the quality of analysis in 113 changes. We believe these amendments ii. Comments MD&A could be improved. will encourage registrants to provide a more meaningful discussion of the Some commenters supported this 107 See letters from IMA; Society. proposal, stating that it effectively 108 See letters from RSM; E&Y (also observing that underlying reasons that may be this quantitative disclosure can be challenging contributing to material changes in line 103 Current Item 303(b) of Regulation S–K, which when such factors are not already quantified for items, and avoid simply reciting relates to interim periods requires a ‘‘discussion of internal purposes and that the resulting disclosure amounts of changes. We acknowledge, often yields discussion of individual drivers of material changes in those items specifically listed as suggested by some commenters, that in [Item 303(a)], except that the impact of inflation change that are not material). and changing prices on operations for interim 109 See letters from CFA & CII (providing the isolating reasons for specific material periods need not be addressed.’’ See 1989 MD&A following as examples: Economic trends and changes, and quantifying such isolated Interpretive Release at n. 38 and 39 and industry conditions that impact sales and costs reasons, can sometimes be challenging corresponding text (‘‘The second sentence of Item related to key products and services including 303(b) states that MD&A relating to interim period whether sales or revenues are attributable to because they can be highly interrelated. financial statements ‘shall include a discussion of changes in prices or to changes in volume of goods In such circumstances, we encourage material changes in those items specifically listed or services that are sold; information on fixed and registrants to acknowledge this fact, and in paragraph (a) of this Item, except that the impact variable costs in the cost structure; information on primitive value drivers of most businesses such as to explain such interrelated of inflation and changing prices on operations for 115 interim periods need not be addressed.’ As this materials, labor costs, and the maintenance capex circumstances to the extent possible. sentence indicates, material changes to each and needed to survive as a business; currency effects on every specific disclosure requirement contained in every line item; large acquisitions as a separate c. ‘‘Segment Information . . . Other paragraph (a), with the noted exception, should be segment or required discussion so that investors can Subdivisions (e.g., Geographic Areas discussed.’’); 2003 MD&A Interpretive Release discern whether the synergies are actually emerging Product Lines)’’ (Amended Item 303(b)) (‘‘Disclosure in MD&A in quarterly reports is as expected; and the productivity of new complementary to that made in the most recent investments (capex, R&D) as opposed to older i. Proposed Amendments annual report and in any intervening quarterly investments); D. Jamieson. reports.’’). 110 See Instruction 4 to current Item 303(a) of Item 303(a) currently requires that, 104 Instruction 4 to Item 303(a) of Regulation S– Regulation S–K. where in the registrant’s judgment a K [17 CFR 229.303(a)]. 111 See Business and Financial Disclosure discussion of segment information and/ 105 See Proposing Release at Section II.C.1. Required by Regulation S–K, Release No. 33–10064 or other subdivisions (e.g., geographic 106 (Apr. 13, 2016) [81 FR 23915 (Apr. 22, 2016)] (‘‘S– See, e.g., 1989 MD&A Interpretive Release areas) of the registrant’s business would (providing an example of a description of the effects K Concept Release’’) at Section IV.B.3.b.i. of offsetting developments in material changes in 112 See S–K Concept Release at Section IV.B.4.b. be appropriate to an understanding of revenue: ‘‘Revenue from sales of single-family See also SEC Comment Letter Trends available at such business, the discussion shall homes for 1987 increased 6 percent from 1986. The https://www.pwc.com/us/en/cfodirect/publications/ focus on each relevant ‘‘reportable’’ increase resulted from a 14 percent increase in the sec-comment-letter-trends.html. average sales price per home, partially offset by a 113 See, e.g., letter from CFA & CII. See also letter 6 percent decrease in the number of homes from Better Markets to the S–K Concept Release 114 See letters from CFA & CII; D. Jamieson. delivered. Revenues from sales of single-family dated July 21, 2016. Comment letters related to the 115 See Securities Act Rule 409 [17 CFR 230.409] homes for 1986 increased 2 percent from 1985. The S–K Concept Release are available at https:// and Exchange Act Rule 12b-21 [17 CFR 240.12b-21], average sales price per home in 1986 increased 6 www.sec.gov/comments/s7-06-16/s70616.htm. We which generally states that information required percent, which was offset by a 4 percent decrease refer to these letters throughout as ‘‘S–K Concept need be given only insofar as it is known or in the number of homes delivered.’’). Release Letters.’’ reasonably available to the registrant.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2091

segment and/or other subdivision. The registrant’s business that should be Capital Resources—Material Cash Commission proposed removing the discussed where, in the registrant’s Requirements (New Item 303(b)(1) and reference to a ‘‘reportable’’ segment and, judgment, it is necessary to an Amended Item 303(b)(1)(ii)) instead, proposed requiring a discussion understanding of the registrant’s a. Proposed Amendments of ‘‘each relevant segment and/or other business. This additional example is not subdivision.’’ The Commission also intended to require product line Current Item 303(a)(2) requires a proposed adding ‘‘product lines’’ as disclosure where, in the registrant’s registrant to discuss its material another example of a subdivision of a judgment, it is not necessary to an commitments for capital expenditures registrant’s business that should be understanding of the registrant’s as of the end of the latest fiscal period, discussed where necessary to an business. Rather, it is intended to and to indicate the general purpose of understanding of the registrant’s remind registrants of the type of and the anticipated sources of funds business. Finally, the Commission 125 disclosure that may be required. needed to fulfill such commitments. proposed certain other amendments to A registrant also must discuss, among streamline the text of Item 303. Lastly, we are adopting as proposed other things, any known material trends, several amendments that will further ii. Comments favorable or unfavorable, in its capital streamline the text of Item 303: resources, and indicate any expected Commenters were generally opposed • Instruction 8 to current Item 303(b) material changes in the mix and relative to removing the term ‘‘reportable’’ cost of such resources.126 before segment.116 Many of these indicates that the term ‘‘statement of commenters suggested that registrants comprehensive income’’ is defined by The Commission proposed amending 121 typically focus their MD&A on Rule 1–02 of Regulation S–X. We are current Item 303(a)(2) to specify, reportable segments, consistent with the moving this language to the full fiscal consistent with the Commission’s 2003 financial statements.117 Some of these year requirement in amended Item MD&A Interpretive Release, that a commenters questioned whether 303(b) as Instruction 11 to clarify that registrant should broadly disclose removal of the term ‘‘reportable’’ was the instruction applies to both full fiscal material cash commitments, including intended to effect a substantive change year and interim period MD&A but not limited to capital expenditures. and sought clarification.118 Another of disclosure.122 Specifically, the Commission proposed requiring a registrant to describe its these commenters stated that the • We are also eliminating current material cash ‘‘requirements,’’ including proposal could create uncertainty Instructions 13 and 14 to Item 303(a) to among registrants about what must be commitments for capital expenditures, simplify the item. These instructions as of the end of the latest fiscal period, disclosed and could lead to greater call the attention of bank holding detail than is reasonably useful to the anticipated source of funds needed 119 companies and property-casualty to satisfy such cash requirements, and investors. Only one commenter 123 insurance companies to Guide 3 and the general purpose of such provided input on the addition of 124 ‘‘product lines’’ as an example of a Guide 6, respectively. Registrants that requirements.127 apply industry guides should still subdivision, stating that the proposal The proposal was intended to require consider them in preparing their could be interpreted as a requirement registrants to disclose known material rather than an example.120 disclosures generally, but we do not cash requirements and to modernize believe the cross-reference is necessary iii. Final Amendments Item 303(a)(2) by specifically requiring to an understanding of the requirements this disclosure in addition to capital We are adopting the amendments of Item 303. expenditures. The Commission largely as proposed, with some recognized that, while capital modifications in response to comments expenditures remain important in many 121 received. Specifically, we are retaining 17 CFR 210.1–02(cc). Rule 1–02 defines a industries, certain expenditures and the term ‘‘reportable’’ segment in ‘‘statement of comprehensive income’’ as follows: cash commitments that are not amended Item 303(b). As a result, and ‘‘[t]he term statement(s) of comprehensive income means a financial statement that includes all necessarily capital investments in similar to current Item 303, the property, plant, and equipment may be amendments require that the discussion changes in equity during a period except those resulting from investments by owners and increasingly important to companies, focus on each ‘‘reportable segment’’ distributions to owners.... A statement of especially those for which human and/or or other subdivision of the operations or variations thereof may be used in capital or intellectual property are key business and on the registrant as a place of a statement of comprehensive income if resources. The proposals were intended whole. While the proposal to remove there was no other comprehensive income during to encompass these and other material the term ‘‘reportable’’ was not intended the period.’’ Thus, references to a statement of cash requirements. The proposal was to suggest a further disaggregation of comprehensive income would include a statement also intended to enhance the discussion MD&A beyond the reportable segment of operations prepared by certain issuers, such as of capital resources and complement the level, we acknowledge commenter BDCs. 122 See Section II.C.9. proposed deletion of the contractual feedback about the potential confusion 123 17 CFR 229.801(c) and 17 CFR 229.802(c). We obligations table.128 that could be created by removal of the recently adopted rules relating to Guide 3. See term. Update of Statistical Disclosures for Bank and b. Comments We are adopting the proposed Savings and Loan Registrants, Release No. 33– amendment to include ‘‘product lines’’ 10835 (Sept. 11, 2020) [85 FR 66108 (Oct. 16, While commenters generally as an example of a subdivision of a 2020)]. The new rules update the disclosures that supported the proposal to amend Item investors receive, codify certain Guide 3 disclosures 303(a)(2) to broaden the disclosure 116 See, e.g., letters from RSM; KPMG; FEI; and eliminate other Guide 3 disclosures that Medtronic; E&Y; Deloitte. overlap with Commission rules, U.S. GAAP, or 125 Item 303(a)(2)(i) of Regulation S–K [17 CFR 117 See, e.g., letters from RSM; KPMG; IMA; International Financial Reporting Standards 229.303(a)(2)(i)]. Deloitte; E&Y. (‘‘IFRS’’). In addition, the Commission relocated the 126 Item 303(a)(2)(ii) [17 CFR 229.303(a)(2)(ii)]. 118 See letters from Deloitte; E&Y. codified disclosures to a new subpart of Regulation 127 See 2003 MD&A Interpretive Release, at 119 See letter from IMA. S–K and rescinded Guide 3. 75063. 120 See letter from KPMG. 124 17 CFR 229.801(f). 128 See also Section II.C.7 infra.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2092 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

beyond capital expenditures,129 a few Commission guidance.139 The revenues, the change in the relationship commenters stated that use of material Commission has consistently must be disclosed.143 cash ‘‘requirements’’ was too broad and emphasized the need for attention to The Commission proposed amending provided recommendations on how to disclosure of cash requirements.140 Item 303(a)(3)(ii) to provide that when a registrant knows of events that are limit the requirement to facilitate We acknowledge commenters’ 130 reasonably likely to cause (as opposed to compliance. These commenters concerns that registrants have numerous will cause) a material change in the stated that registrants would struggle to cash requirements and that the relationship between costs and identify which commitments to amendments could therefore result in 131 revenues, such as known or reasonably disclose and that the proposals could extensive new record keeping and likely future increases in costs of labor result in extensive new record keeping controls. As noted above, we do not and controls.132 These commenters or materials or price increases or expect that registrants would have to inventory adjustments, the reasonably recommended limiting the proposal by deviate substantially from current requiring ‘‘material cash commitments’’ likely change must be disclosed. This practices with respect to an assessment proposed amendment was intended to instead of ‘‘material cash of material cash requirements as the 133 conform the language in this paragraph requirements,’’ focusing on material amendments reflect current Commission cash commitments outside of normal to other Item 303 disclosure guidance and resulting disclosure 144 operations,134 or providing guidance on requirements for known trends, and practices.141 Further, our amendments the expected content of these align Item 303(a)(3)(ii) with the are limited to and address only those disclosures, including examples.135 One Commission’s guidance on forward- cash requirements that are material and of these commenters recommended looking disclosure, which specifies that, accordingly, do not reflect a new modernizing the liquidity and capital where a trend, demand, commitment, threshold for these disclosures and resources requirements, such as by event, or uncertainty is known, should not require extensive or new merging and streamlining the two management must make an assessment procedures or controls. We are not, as sections.136 consistent with the two-step test the suggested by one commenter limiting Commission articulated for disclosure of Another commenter stated that the the amendments to require only forward-looking information.145 proposal may broaden the current disclosure of material cash requirements capital resources requirement.137 This outside of normal operations, as b. Comments commenter recommended limiting the registrants can and do have cash Commenters were mixed in their proposal to require only a discussion of requirements related to their normal support for or opposition to the cash to fund current operations (i.e., operations that are material. proposal. Several commenters either working capital cash requirements), but Additionally, and consistent with the generally opposed the two-step test 146 only if working capital is insufficient for suggestion of one commenter, our or specified opposition to the the next 12 months. Other commenters amendments create Item 303(b)(1) to ‘‘reasonably likely’’ standard for supported the proposal and provide the overarching requirements MD&A.147 Some of these commenters recommended enhancing it by retaining for liquidity and capital resources stated the two-step test or the term 138 the contractual obligations table. disclosures in order to clarify the ‘‘reasonably likely’’ is unclear,148 with some stating that the current two-step c. Final Amendments liquidity and capital resources requirements, as discussed in more test is not well understood and thus not We are adopting amendments to the detail below in Section II.C.7. well applied.149 One of these capital resources requirement as commenters recommended replacing proposed. We acknowledge commenter 3. Results of Operations—Known suggestion to use the term material cash Trends or Uncertainties (Amended Item 143 Examples given include known future 303(b)(2)(ii)) increases in costs of labor or materials or price ‘‘commitments.’’ However, we are increases or inventory adjustments. See id. retaining the term material cash a. Proposed Amendments 144 See, e.g., Item 303(a)(1), which requires ‘‘requirements’’ as we believe this term registrants to ‘‘[i]dentify any known trends or any is more consistent with the intended Item 303(a)(3)(ii) currently requires a known demands, commitments, events or registrant to describe any known trends uncertainties that will result in or that are purpose of MD&A and with prior reasonably likely to result in the registrant’s or uncertainties that have had or that liquidity increasing or decreasing in any material 129 See, e.g., letters from EEI & AGA; FEI; IMA; the registrant reasonably expects will way.’’ Item 303(a)(1) of Regulation S–K [17 CFR Chamber; Society; CFA & CII; D. Jamieson. have a material impact (favorable or 229.303(a)(1)]. 130 See, e.g., letters from FEI; IMA; E&Y. unfavorable) on net sales or revenues or 145 See 1989 MD&A Interpretive Release, at 131 See letters from E&Y; FEI (stating that the term 142 22430, where the Commission articulated a two- income from continuing operations. step test for assessing when forward-looking ‘‘requirements’’ is too broad, registrants have In addition, if the registrant knows of numerous cash requirements including the payment disclosure is required in MD&A; Where a trend, of operating expenses (e.g., salaries and wages, raw events that will cause a material change demand, commitment, event or uncertainty is materials, utilities, taxes) and the change from in the relationship between costs and known, management must make two assessments: (1) Is the known trend, demand, commitment, event ‘‘commitments’’ to ‘‘requirements’’ would lead to or uncertainty likely to come to fruition? If inconsistent application). 139 See 2003 MD&A Interpretive Release at 75062, management determines that it is not reasonably 132 See letter from IMA. which states that a ‘‘company is required to include likely to occur, no disclosure is required. (2) If 133 See letter from FEI. in MD&A, to the extent material, . . . the existence management cannot make that determination, it 134 See letter from IMA. and timing of commitments for capital expenditures must evaluate objectively the consequences of the 135 See letter from E&Y. and other known and reasonably likely cash known trend, demand, commitment, event or 136 See id. requirements.’’ uncertainty, on the assumption that it will come to 137 See letter from SIFMA (also recommending 140 See 2003 MD&A Interpretive Release. fruition. Disclosure is then required unless restating, in any final release, guidance from the 141 Commission staff has observed that registrants management determines that a material effect on 2003 MD&A Interpretive Release that a discussion have provided discussion of material cash the registrant’s financial condition or results of of working capital cash requirements is required requirements pursuant to the requirements of operations is not reasonably likely to occur. where there are material trends or uncertainties MD&A and consistent with the 2003 MD&A 146 See, e.g., letters from Nareit; FEI; ABA. relating to the sufficiency of cash funding sources Interpretive Release. 147 See, e.g., letters from SIFMA; ABA; CalPERS. through working capital). 142 Item 303(a)(3)(ii) of Regulation S–K [17 CFR 148 See, e.g., letters from ABA; FEI; SIFMA. 138 See letters from CFA & CII; D. Jamieson. 229.303(a)(3)(ii)]. 149 See letters from ABA; FEI.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2093

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

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2094 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

registrant’s disclosures.161 This analysis We are not, as recommended by one decreases in net sales or revenues.169 should be made objectively and with a commenter, adopting the probability/ Accordingly, the Commission proposed view to providing investors with a magnitude test of Basic. In Basic, the amending Item 303(a)(3)(iii) to apply to clearer understanding of the potential Supreme Court framed the issue of disclosures in the ‘‘statement of material consequences of such known materiality of forward-looking comprehensive income,’’ codify prior forward-looking events or uncertainties. disclosure as depending on a balancing guidance, and clarify the requirement by Because the analysis does not call for of both ‘‘the indicated probability that tying the required disclosure to disclosure of immaterial or remote the event will occur and the anticipated ‘‘material changes’’ in net sales or future events, it should not result in magnitude of the event in light of the revenues, rather than solely to ‘‘material voluminous disclosures or totality of the company activity.’’ 165 We increases’’ in these line items. unnecessarily speculative agree with commenters that the b. Comments information.162 probability/magnitude test could result As noted above, some commenters in disclosure of issues that are large in Several commenters specifically also indicated that application of the potential magnitude but low in supported this proposal,170 with one of two-step test as the Commission probability.166 The probability/ these commenters stating that articulated it in 1989 may result in magnitude test in Basic was developed registrants already provide this disclosure that is not material or present in the context of a potential merger, disclosure.171 No commenters challenges to registrants, such as by where the probability of the event, the specifically opposed this proposal. requiring a registrant to prove a potential timing, and the expected c. Final Amendments negative. This was not the intended effects may be readily estimated. Some result of that test, and we believe that commenters have noted that the We are adopting Item 303(b)(2)(iii) the clarifications we have provided probability/magnitude test can be with these amendments as proposed. above regarding the appropriate difficult to apply where there is We believe clarifying in the rule text application of the analysis should uncertainty as to the probability, timing, that disclosure is required of ‘‘material alleviate these concerns. The and magnitude of the financial impact changes’’ in net sales or revenues will ‘‘reasonably likely’’ threshold, which of future events.167 As articulated above, facilitate compliance. This clarification requires that management evaluate the we believe that the ‘‘reasonably likely’’ is consistent with MD&A’s focus on the consequences of the known trend, threshold provides registrants with a importance of an analysis that should demand, commitment, event, or tailored and meaningful framework consist of material substantive uncertainty, is grounded in whether from which to objectively analyze information and present a balanced disclosure of the event or uncertainty whether forward-looking information is view of the underlying dynamics of the 172 would be material to investors. We required and provides specific guidance business. We also believe this remind registrants that this approach is on how registrants should evaluate amendment will complement our not intended to, nor does it require, known events or uncertainties where change to Item 303(b) which will registrants to affirm the non-existence or the likelihood of fruition cannot be require that, where the financial non-occurrence of a material future ascertained. statements reveal material changes from event.163 Instead, it requires period-to-period in one or more line management to make a thoughtful and 4. Results of Operations—Net Sales and items, registrants must describe the objective evaluation, based on Revenues (Amended Item 303(b)(2)(iii)) underlying reasons for these material materiality, including where the fruition a. Proposed Amendments changes in quantitative and qualitative 164 terms. of future events is unknown. Item 303(a)(3)(iii) currently specifies that, to the extent the ‘‘financial 5. Results of Operations—Inflation and 161 Id. Price Changes (Current Item 162 statements’’ disclose ‘‘material See, e.g., Off-Balance Sheet Arrangements and 303(a)(3)(iv), and Current Instructions 8 Contractual Obligations Adopting Release at 5985 increases’’ in net sales or revenues, a (stating ‘‘We believe that the ‘reasonably likely’ registrant must provide a narrative and 9 to Item 303(a)) threshold best promotes the utility of the disclosure discussion of the extent to which such a. Proposed Amendments requirements by reducing the possibility that ‘‘increases’’ are attributable to increases investors will be overwhelmed by voluminous 173 in prices, or to increases in the volume Item 303(a)(3)(iv) generally disclosure of insignificant and possibly requires registrants, either for the three unnecessarily speculative information.’’). See also or amount of goods or services being Matrixx Initiatives, Inc. v. Siracusano, 131 U.S. sold, or to the introduction of new most recent fiscal years or for those 1309 (2011) (‘‘Matrixx Initiatives’’) at 1318, quoting products or services.168 The fiscal years in which the registrant has TSC Industries at 449. In Matrixx Initiatives, the Commission previously clarified that a been engaged in business, whichever Court applied the materiality standard, as set forth period is shorter, to discuss the impact in TSC Industries and Basic. In articulating these results of operations discussion should standards, the Supreme Court recognized that describe not only increases but also of inflation and price changes on their setting too low of a materiality standard for net sales, revenue, and income from purposes of liability could cause management to continuing operations. Instruction 8 to ‘‘bury shareholders in an avalanche of trivial facts and circumstances surrounding the forward- information.’’ Id. at 1318, quoting TSC Industries at looking disclosure. 448–449. 165 See Basic (quoting SEC v. Texas Gulf Sulphur 169 See 1989 MD&A Interpretative Release, at n. 163 We are not, as suggested by a commenter, Co., 401 F.2d 833, 849 (2d Cir. 1968)). 36 (‘‘Although Item 303(a)(3)(iii) speaks only to reformulating the language to require an affirmative 166 See S–K Concept Release Letter from Stephen material increases, not decreases, in net sales or determination. Such reformulated language would Percoco dated July 24, 2016. revenues, the Commission interprets Item substantively alter the called for disclosures as it 167 See, e.g., S–K Concept Release Letters from the 303(a)(3)(i) and Instruction 4 as seeking similar would not account for circumstances where Sustainability Accounting Standards Board dated disclosure for material decreases in net sales or management cannot determine whether a known July 1, 2016; See also letters from Edward D. White revenues.’’). trend, demand, commitment, event or uncertainty dated July 20, 2016; Thomas F. Steyer dated July 170 See, e.g., letters from FEI; IMA; Chamber; is likely to come to fruition. 20, 2016; Michael R. Bloomberg dated July 26, 2016; Society; CFA & CII; D. Jamieson. 164 Accordingly, we are not, as suggested by one Brita Voss dated July 6, 2016 (supporting the 171 See letter from FEI. commenter, providing specific guidance on a recommendations of the Sustainability Accounting 172 See 2003 MD&A Interpretive Release at timeframe for which management should consider Standards Board). Section III.B.4. its outlook for forward-looking information as such 168 Item 303(a)(3)(iii) of Regulation S–K [17 CFR 173 Item 303(a)(3)(iv) of Regulation S–K [17 CFR timeframe will depend on the nature of and the 229.303(a)(3)(iii)]. 229.303(a)(3)(iv)].

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2095

Item 303(a) clarifies that a registrant is this item have been of value to arrangements if necessary to an only required to provide this disclosure investors.181 No commenters understanding of a registrant’s financial to the extent material. The instruction specifically opposed this proposal. condition, changes in financial further states that the discussion may be condition or results of operations.’’ 187 c, Final Amendments made in whatever manner appears The 2003 amendments supplemented appropriate under the circumstances We are eliminating Item 303(a)(3)(iv) and clarified the disclosures that and that no specific numerical financial and Instructions 8 and 9 to Item 303(a) registrants must make about off-balance data is required, except as required by as proposed. Consistent with the sheet arrangements and required Rule 3–20(c) of Regulation S–X,174 discussion above and in the Proposing registrants to provide those disclosures which applies to FPIs. Instruction 9 to Release, under amended Item 303, in a separately designated section of Item 303(a) states that registrants that registrants will be required to discuss MD&A.188 elect to disclose supplementary the impact of inflation or changing In the release proposing Item information on the effects of changing prices if they are part of a known trend 303(a)(4), the Commission recognized prices may combine such disclosures or uncertainty that had, or is reasonably that parts of the proposed off-balance with the Item 303(a) discussion and likely to have a material impact on net sheet arrangements disclosure analysis or provide it separately (with sales, revenue, or income from requirements might overlap with an appropriate cross-reference).175 continuing operations. Further, disclosure presented in the footnotes to The Commission proposed amended Item 303 requires that, where the financial statements.189 The eliminating Item 303(a)(3)(iv) and the financial statements reveal material Commission stated, however, that the Instructions 8 and 9 to encourage changes from period-to-period in one or proposed rules were designed to registrants to focus their MD&A on more line items, registrants must provide more comprehensive material information that is tailored to describe the underlying reasons for information and analysis in MD&A than their respective facts and circumstances. these material changes in quantitative the disclosure that U.S. GAAP required In the Proposing Release, the and qualitative terms, which may also in footnotes to financial statements.190 Commission stated that a specific implicate a discussion of inflation and Since the adoption of Item 303(a)(4), reference to inflation and changing changing prices.182 as described further in the Proposing prices may give undue attention to the Release,191 the FASB has issued topic.176 Registrants are already 6. Off-Balance Sheet Arrangements additional requirements that have expected to discuss the impact of (New Instruction 8 to Item 303(b)) caused U.S. GAAP to further overlap inflation or price changes if they are a. Proposed Amendments with the item.192 In the Commission part of a known trend or uncertainty In 2002, the Sarbanes-Oxley Act 183 staff’s experience, this overlap often that has had, or is reasonably likely to was enacted and added Section 13(j) to leads to registrants providing cross- have, a material favorable or the Exchange Act, which required the references to the relevant notes to their unfavorable impact on net sales, Commission to adopt rules providing financial statements or providing revenue, or income from continuing that each annual and quarterly financial disclosure that is duplicative of 177 operations. report required to be filed with the information in the notes in response to Commission disclose all material off- Item 303(a)(4). b. Comments As a result, and consistent with the balance sheet arrangements.184 To Commenters generally supported other proposed amendments intended to implement Section 13(j), in 2003, the eliminating Item 303(a)(3)(iv) and promote the principles-based nature of Commission adopted specific disclosure Instructions 8 and 9 to Item 303(a), as MD&A, the Commission proposed that requirements for off-balance sheet proposed.178 Some commenters stated the current more prescriptive off- arrangements in current Item that registrants should focus their balance sheet arrangement definition 303(a)(4).185 When adopting Item MD&A on registrant-specific material and related disclosure requirement in 303(a)(4), the Commission reiterated information and that eliminating this Item 303(a)(4) be replaced with a new that, while at that time only one item in item and the related instructions would Item 303 specifically identified off- aid in that endeavor.179 Other 187 See Off-Balance Sheet Arrangements and balance sheet arrangements,186 other commenters stated that where inflation Contractual Obligations Adopting Release, at 5983. requirements ‘‘clearly require[d] 188 See id. is material, registrants would still be disclosure of off-balance sheet 189 See Disclosure in Management’s Discussion required to disclose this under current and Analysis About Off-Balance Sheet 180 rules. One commenter noted that in 181 Arrangements, Contractual Obligations and See letter from IMA. Contingent Liabilities and Commitments, Release order to satisfy this item, many 182 See amended Item 303(b). No. 33–8144 (Nov. 4, 2002) 67 FR 68054 (Nov. 8, registrants provide ‘‘boilerplate 183 Sarbanes-Oxley Act of 2002, Pub. L. 107–204, 2002), at n.72. disclosures’’ and stated that as a result, 116 Stat 745 (Jul. 2002) (‘‘Sarbanes-Oxley Act’’). 190 See id. few, if any, disclosures in response to 184 Section 401(a) of the Sarbanes-Oxley Act 191 See Proposing Release at Section II.C.6. added Section 13(j) to the Exchange Act [15 U.S.C. 192 In June 2009, the FASB Issued SFAS No. 166, 78m(j)], which directed the Commission to adopt 174 Rules 3–20(c) and 3–20(d) of Regulation S–X Accounting for Transfers of Financial Assets an rules requiring each annual and quarterly financial provide the situations when a registrant must amendment of FASB Statement No. 140, which report filed with the Commission to disclose ‘‘all discuss hyperinflation. Rule 3–20(d) generally requires enhanced disclosures about transfers of material off-balance sheet transactions, describes a hyperinflationary environment as one financial assets and a transferor’s continuing arrangements, obligations (including contingent that has cumulative inflation of approximately 100 involvement with transfers of financial assets obligations), and other relationships of the issuer percent or more over the most recent three-year accounted for as sales. Also in June 2009, the FASB with unconsolidated entities or other persons, that period. issued SFAS No. 167, Amendments to FASB may have a material current or future effect on 175 Instruction 9 to Item 303(a). Interpretation No. 46(R), which requires enhanced financial condition, changes in financial condition, disclosures about an enterprise’s involvement in a 176 See Proposing Release at Section II.C.5. results of operations, liquidity, capital variable interest entity, including unconsolidated 177 See Item 303(a)(3)(ii) [CFR 229.303(a)(3)(ii)] expenditures, capital resources, or significant entities. SFAS No. 166 and 167 have been codified and amended Item 303(b)(2)(ii). components of revenues or expenses.’’ as ASC Topics 860 (Transfers and Servicing) and 178 See, e.g., letters from EEI & AGA; FedEx; 185 See Off-Balance Sheet Arrangements and 810 (Consolidation), respectively. See also Section Nasdaq; FEI; IMA; Chamber; Society. Contractual Obligations Adopting Release, at 5983. II.D.1.b and see infra note 344 for a discussion of 179 See, e.g., letters from EEI & AGA; Nasdaq. 186 Item 303(a)(2)(ii) of Regulation S–K [17 CFR IFRS requirements that overlap with Item 5.E of 180 See, e.g., letters from FEI; IMA. 229.303(a)(2)(ii)]. Form 20–F.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2096 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

Instruction to Item 303(b). This the financial statements is dispersed.201 item. We have nonetheless observed proposed instruction would require One commenter stated that the proposed that registrants typically discuss these registrants to discuss commitments or amendments would allow management contingent milestone payments in obligations, including contingent to hide off-balance sheet MD&A to provide investors with an obligations, arising from arrangements arrangements.202 Additionally, some appropriate understanding of their with unconsolidated entities or persons commenters recommended that we liquidity and capital resources, which that have, or are reasonably likely to provide illustrative guidance.203 we believe can be useful to a broader have, a material current or future effect c. Final Amendments understanding of the impact of off- on a registrant’s financial condition, balance sheet arrangements to a changes in financial condition, revenues We are adopting the amendments to registrant’s financial condition, and the or expenses, results of operations, replace Item 303(a)(4) with a principles- nature and purpose of such liquidity, cash requirements, or capital based instruction as proposed.204 For arrangements. Accordingly, we believe resources.193 This proposed instruction the reasons discussed in the Proposing that the principles of MD&A, was intended to build on the current Release, we continue to believe that the supplemented with the new instruction, requirement in Item 303(a)(2) that updates to U.S. GAAP since the and the requirements of U.S. GAAP will specifically requires consideration of adoption of Item 303(a)(4), as well as the elicit discussion sufficient to enable an off-balance sheet financing current amendments designed to understanding of the off-balance sheet arrangements as part of the capital emphasize the principles-based nature arrangement. resources discussion.194 of MD&A, justify the replacement of the By no longer requiring this disclosure current, more prescriptive requirement in a separately-captioned section, we b. Comments with a principles-based instruction.205 expect that a registrant will incorporate Many commenters supported the With respect to commenters that its discussion of off-balance sheet proposal to replace Item 303(a)(4) with suggested that the amendments may arrangements into its broader discussion a principles-based instruction.195 One of result in a loss of discussion of the of liquidity and capital resources. We these commenters further recommended nature and business purpose of off- also acknowledge the commenters that modifying the proposal to allow balance sheet arrangements or other stated that a separately-captioned registrants discretion to make this information, we continue to believe that section is useful. We continue to believe disclosure under a separate caption new Instruction 8 would mitigate any that a discussion of off-balance sheet within the capital resources section.196 potential loss of information by arrangements that is more integrated Another commenter stated that if there requiring, among other things, a with other aspects of MD&A will discussion of material matters of are concerns about specific matters that produce better disclosure and facilitate liquidity, capital resources, and are not addressed under U.S. GAAP, a more meaningful understanding of the financial condition as they relate to off- these concerns should be addressed by impact of such arrangements; however, balance sheet arrangements.206 the FASB.197 One commenter to the extent that a registrant determines Furthermore, we highlight that current recommended reiterating that the that some discussion of off-balance Item 303(a)(4) does not require amendment is not intended to broaden sheet arrangements should be disclosure of certain types of off-balance or narrow the scope of off-balance sheet highlighted separately or in a separately sheet arrangements that do not meet the arrangements disclosure requirements captioned section in order to facilitate specific definition in Item 303(a)(4)(ii). in MD&A, but rather, it is intended to an understanding of such disclosure, or incorporate this disclosure in a more For example, many registrants in the pharmaceutical industry are to highlight particularly material holistic, principles-based discussion.198 contingently obligated to make information about such arrangements, it Several commenters expressed has the discretion to do so.207 Finally, concern with the proposal.199 One milestone payments to licensors of drug compounds. These milestone payments we have not given examples or guidance commenter cautioned that the proposed for the disclosure of off-balance sheet amendments may result in the loss of are not covered by the definition of ‘‘off- balance sheet arrangement’’ in Item arrangements, as suggested by some discussion of the nature and business commenters. Disclosures will need to be purpose of off-balance sheet 303(a)(4) and currently are not required to be disclosed in the separately- tailored to a registrant’s arrangements arrangements and any known event, captioned section called for by that and circumstances, and we do not want demand, commitment, trend, or to promote a checklist approach to the uncertainty that will result, or is likely 201 See letter from CFA & CII. disclosures. to result, in a material change in the 202 See letter from CalPERS. 7. Contractual Obligations Table availability of the off-balance sheet 203 See letters from Pfizer and Society. (Current Item 303(a)(5)) and Amended arrangement.200 Another commenter 204 For the same reasons discussed in the stated that the separate section for off- Proposing Release, we believe our amendments are Item 303(b)(1)—Liquidity and Capital balance sheet arrangements remains consistent with the statutory mandate in Section Resources) 13(j) of the Exchange Act. See Proposing Release at important because the overlapping Section II.C.6. a. Proposed Amendments information required to be disclosed in 205 We are also adopting the amendments to Items Under Item 303(a)(5),208 registrants 2.03 and 2.04 of Form 8–K as proposed to include other than SRCs must disclose in tabular 193 the definition of ‘‘off-balance sheet arrangements’’ See Proposing Release at Section II.C.6. format their known contractual 194 See Item 303(a)(2)(ii) of Regulation S–K [17 that is currently in Item 303(a)(4). As stated in the CFR 302(a)(2)(ii)]. Proposing Release, we believe it is appropriate to obligations. The item requires a retain the current definition of ‘‘off-balance sheet 195 See, e.g., letters from EEI & AGA; FedEx; FEI; registrant to arrange its table to disclose arrangements’’ in Form 8–K in light of the Form’s SIFMA; IMA; E&Y; Medtronic; Chamber; and 209 four business day filing requirement. See Proposing contracts by type of obligations, the Society. Release at footnotes 188 and 189. In addition, we 196 See letter from EEI & AGA. are making technical amendments to Item 2.03 of 207 See, e.g., Instruction 3 to amended Item 197 See letter from IMA. Form 8–K to refer to FASB ASC Topic 842, which 303(b). 198 See letter from Society. has superseded FASB ASC Topic 840. 208 Item 303(a)(5) of Regulation S–K [17 CFR 199 See, e.g., letters from Pfizer; CalPERS; CFA & 206 For a discussion of the requirements in Item 229.303(a)(5)]. CII; and D. Jamieson. 303(a)(4) that overlap with U.S. GAAP see the 209 The types of obligations required to be 200 See letter from Pfizer. Proposing Release at Section II.C.6. included are long-term debt obligations, capital

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2097

overall payments due, and by four financial statements and in light of the table,225 such as with internal prescribed periods.210 A registrant may concurrent proposed expansion of the hyperlinks 226 or by requiring the data disaggregate the categories of capital resources requirement, discussed be tagged and accompanied with a obligations, but it must disclose all above in Section II.C.2.215 narrative.227 Some of these commenters obligations falling within the prescribed also stated that the table is not entirely b. Comments five categories and for the prescribed duplicative of disclosures elsewhere time periods. A registrant may provide Many commenters supported and instead is critical to assessing the footnotes to the table to the extent such eliminating this item,216 while a few cadence or funding of liabilities.228 information is necessary to understand 217 commenters opposed the proposal. c. Final Amendments the disclosures in the contractual Of the commenters who supported obligations table. There is no materiality eliminating this item, a few emphasized We are eliminating Item 303(a)(5) as threshold for this item, meaning the burdens imposed by the table.218 proposed and, in consideration of registrants must disclose all contractual One of these commenters stated that comments received, we are also obligations falling within the prescribed producing the table is burdensome amending Item 303(b) to specifically five categories.211 because, as a multinational company require disclosure of material cash When the Commission implemented with hundreds of subsidiaries, the table requirements from known contractual this disclosure requirement, its purpose ‘‘takes a significant amount of time . . . and other obligations as part of a was to ensure that aggregated especially as the information is not liquidity and capital resources information about contractual referenced in how we operate our discussion. As discussed in the obligations was presented in one place business.’’ 219 Another commenter Proposing Release, the Commission and to improve transparency of a stated that the contractual obligations believed that eliminating current Item registrant’s short- and long-term table requires resources beyond those 303(a)(5) should not result in the loss of liquidity and capital resources needs material information. The Commission 212 needed for the financial statements and and demands. This was intended to involves departments across their stated that, in addition to disclosure in aid investors in determining the effect organization including, but not limited the financial statements, registrants such obligations would have in the to, accounting, information technology, would, under the proposals to amend context of off-balance sheet real estate, legal, tax, and the discussion of capital resources, be arrangements.213 Commission guidance merchandising.220 required to discuss material cash that followed the implementation of this requirements, which would include requirement encouraged registrants to Commenters that opposed the material contractual obligations.229 The include narratives to the table to proposal questioned the cost savings to amendments described below further provide more context and analysis for registrants from the proposal and clarify and enhance this point. the numbers presented.214 suggested the proposal would increase We are adopting amendments to the The Commission proposed burdens to investors to gather this liquidity and capital resources 221 eliminating Item 303(a)(5). As part of its data. A few of these commenters requirements in Item 303(b) that are a rationale, the Commission stated its stated that the table is more important change from what was proposed. These belief that eliminating the requirement during a crisis such as the COVID–19 changes are in response to commenter 222 would not result in a loss of material crisis. Some of these commenters input on the proposed elimination of information to investors given the stated that during periods of liquidity Item 303(a)(5) and on the proposals overlap with information required in the stress, such as the COVID–19 pandemic, related to the liquidity and capital investors find it extremely useful to resource requirements. The lease obligations, operating lease obligations, have aggregated disclosure of cash amendments to Item 303(b) are intended purchase obligations, and other long-term liabilities commitments in a single location.223 reflected on the registrant’s balance sheet under to clarify the requirements while GAAP. Another of these commenters observed continuing to emphasize a principles- 210 The payment obligations must be disclosed for that this requirement was adopted based approach focused on material 224 the following timeframes: Less than one year; one during an economic crisis. A few of short- and long-term liquidity and to three years; three to five years; and more than these commenters also specified that the capital resources needs, while also five years. information in the table is useful and 211 The first three categories of obligations specifying that material cash required under current Item 303(a)(5) (i.e., long- material and suggested augmenting the requirements from known contractual term debt, capital leases, and operating leases) are and other obligations should be defined by reference to the relevant U.S. GAAP 215 See Proposing Release at Section II.C.7. considered as part of these disclosures. accounting pronouncements that require disclosure 216 See, e.g., letters from Pfizer; EEI & AGA; of these obligations in the financial statements or Specifically, these amendments: FedEx; Nasdaq; Nareit; FEI; SIFMA; IMA; E&Y; • notes thereto. The fourth category, purchase UnitedHealth; Costco Wholesale Corporation dated Create a new Item 303(b)(1) to obligations, is defined as an agreement to purchase April 28, 2020 (‘‘Costco’’); Chamber; Society. provide the overarching requirements goods or services that is enforceable, legally binding 217 See, e.g., letters from CalPERS; CFA & CII; D. for liquidity and capital resources on the registrant and specifies all significant terms. Jamieson. See also IAC Recommendation. The fifth category of contractual obligations 218 captures all other long-term liabilities that are See, e.g., letters from Eli Lilly; FEI; 225 See letters CFA & CII; D. Jamieson. See also reflected on the registrant’s balance sheet under UnitedHealth; Costco. IAC Recommendation (providing, as an example of generally accepted accounting principles applicable 219 See letter from Eli Lilly (also opposing the potential materiality of the table, a recent to the registrant. retaining the table in modified form). analyst report on the cruise line industry during the 212 See Off-Balance Sheet Arrangements and 220 See letter from Costco. COVID–19 crisis and the report’s reliance on the Contractual Obligations Adopting Release at 5990. 221 See letters from CalPERS (stating that table to juxtapose the mismatch between revenue See also Off-Balance Sheet Arrangements and registrants already have systems in place to provide shortfalls and near-term obligations). Contractual Obligations Proposing Release. this disclosure while investors do not have the 226 See, e.g., letters from CFA & CII; D. Jamieson. 213 See id. technology to efficiently find these disclosures See also IAC Recommendation. 214 See Commission Guidance on Presentation of elsewhere); CFA & CII; D. Jamieson. See also IAC 227 See, e.g., letters from CFA & CII; D. Jamieson. Liquidity and Capital Resources Disclosures in Recommendation. 228 See letters from CFA & CII and D. Jamieson Management’s Discussion and Analysis, Release 222 See letters from CalPERS; CFA & CII; D. (providing purchase obligations as an example of No. 33–9144 (Sept. 17, 2010) [75 FR 59894 (Sept. Jamieson. disclosure in the table that is not duplicated 28, 2010)] (‘‘2010 MD&A Interpretive Release’’), at 223 See letter from CFA & CII; D. Jamieson. elsewhere). 59896. 224 See letter from CalPERS. 229 See Proposing Release at Section II.C.7.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2098 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

disclosures in order to clarify these Given these developments since the its business.236 Additionally, as requirements; 230 adoption of the contractual obligations registrants prepare their financial • Incorporate in Item 303(b)(1) table, and consistent with the long- statements in accordance with U.S. portions of current Instruction 5 to Item standing principles-based focus of GAAP, and with the exception of certain 303(a), which defines ‘‘liquidity’’ as the MD&A, we are eliminating Item purchase obligations, they are already ability to generate adequate amounts of 303(a)(5) as proposed. Combined with required to assess currently prescribed cash to meet the needs for cash, the amended liquidity and capital categories of contractual obligations. To clarifying its applicability to the resource requirements, our amendments the extent obligations under these liquidity and capital resources are intended to improve the currently prescribed categories are requirements more generally; transparency of a registrant’s short- and material, they are required to be • Codify prior Commission guidance long-term liquidity and capital discussed in MD&A, regardless of that specifies that short-term liquidity resources needs and demands while whether our rules prescribe these and capital resources covers cash needs reducing undue burdens to prepare such categories. Likewise, our amendments up to 12 months into the future while disclosure. do not specify or provide examples of long-term liquidity and capital Our amendments are also intended to ‘‘other obligations’’ that may be material resources covers items beyond 12 address commenters’ concerns about the to a registrant, allowing registrants months; 231 challenges imposed by the current flexibility to determine what may be • Require the discussion on both a contractual obligations table. We material and necessary to be disclosed. short-term and long-term basis; recognize that, because the current While the current table requires • Require the discussion to analyze contractual obligations table does not disclosure of all contractual obligations material cash requirements from known have a materiality threshold, the aggregated by type of obligation and for contractual and other obligations and burdens imposed by the table on specified periods, we recognize not all such disclosures to specify the type of registrants can include identifying, obligations presented nor the periods for obligation and the relevant time period evaluating, and aggregating contracts which they are presented are material. for the related cash requirements; that are not material. By eliminating the Accordingly, our amendments to Item • Include a new instruction that prescriptive requirement to prepare a 303(b)(1) further require that the states that the discussion of material contractual obligations table and disclosures specify the type of cash requirements from known refocusing instead on a principles-based obligation and relevant time period for contractual obligations may include, for approach that requires a robust the related cash requirements, in example, lease obligations, purchase discussion of liquidity and capital recognition of commenter concerns that obligations, or other liabilities reflected resources, including a discussion of such information may be lost with the on the registrant’s balance sheet; and contractual obligations, our intent is to elimination of Item 303(a)(5). Our • Include a new instruction that relieve registrants of these burdens amendments are intended to focus only states, consistent with prior while continuing to provide investors on material disclosures and specifically, Commission guidance,232 the analysis with material information. disclosure of those periods where the for all of Item 303(b) should be in a Our amendments allow registrants cash requirements or reasonably likely format that facilitates easy flexibility in discussing material cash effect of these cash requirements on understanding and does not duplicate requirements from known contractual liquidity and capital resources is disclosure already provided in the and other obligations. To that end, material. For example, if a financial filing.233 while amended Instruction 4 provides obligation is reasonably likely to have a The Commission’s objective in examples of the types of known material effect on liquidity and capital adopting current Item 303(a)(5) was to contractual obligations that may be resources over a number of subsequent provide aggregated information about included that are generally consistent periods or sometime within a range of contractual obligations in a single with those required by current Item future periods, these amendments location and to improve transparency of 303(a)(5), unlike the current would require registrants to identify and a registrant’s short- and long-term requirement, the amendments do not discuss this obligation and related liquidity and capital resources needs prescribe specific categories of effects. and demands.234 Much of the disclosure contractual obligations. We We are mindful of commenters who required by current Item 303(a)(5) is acknowledge a commenters’ observation stated that the current table is an easy- now provided in the financial that the current table is not entirely to-use format as it aggregates disclosure statements, unlike when the duplicative of U.S. GAAP, and therefore in a single location or otherwise requirement was first adopted. As a the elimination of Item 305(a)(5) could requested that the table be retained and result, much of this information is also result in a loss of certain information.235 expanded. We also acknowledge input required to be tagged in XBRL, allowing Examples in amended Instruction 4 are from registrants who emphasized that users to extract and compare this data. deliberately not tied to U.S. GAAP to preparation of the table can be provide flexibility for company-specific burdensome and costly. On balance, we 230 See Section II.C.2 supra. disclosure, avoid unnecessary believe our amendments help ensure 231 See 1989 MD&A Interpretive Release. duplication with the financial that material information of contractual 232 See, e.g., 2003 MD&A Interpretive Release. statements, and allow registrants to obligations continues to be provided to 233 Notwithstanding the adoption of Item consider disclosing other categories of investors, while reducing some of the 303(b)(1) that sets forth the overarching burdens and costs associated with the requirements for a liquidity and capital resources contractual obligations appropriate for discussion and the related elimination of language prescriptive requirements of current in Item 303 indicating that discussions of liquidity 235 For example, information relating to certain Item 303(a)(5). and capital resources may be combined whenever purchase obligations is not specifically called for We further believe that, consistent the two topics are interrelated, this new instruction under U.S. GAAP and is therefore not typically with the objectives in the Proposing would, for example, continue to allow registrants disclosed in the financial statements. Additionally, Release of enhancing and clarifying flexibility to either combine or separate the two information related to the ‘‘payments due by topics. period’’ currently required by the item may not be certain requirements in MD&A, the 234 See Off-Balance Sheet Arrangements and required to be disclosed in a registrant’s financial Contractual Obligations Proposing Release. statements. 236 See also amended Instruction 3 to Item 303(b).

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2099

changes we are making to Item 303(b)(1) variability of information regarding proposed requirements to disclose the will assist registrants in considering financial condition and operating sensitivity of the reported amounts to what disclosure is needed in that performance.240 the methods, assumptions, and context, both in connection with the The Commission proposed amending estimates underlying the estimate’s impact of contractual obligations on Item 303 to add new Item 303(b)(4), calculation and how much each those areas and more generally.237 which would explicitly require estimate has changed during the disclosure of critical accounting reporting period.244 8. Critical Accounting Estimates (New estimates in order to clarify the required Item 303(b)(3)) Some commenters supported the disclosures of critical accounting proposed requirement to disclose a a. Proposed Amendments estimates, facilitate compliance, and sensitivity analysis and requested that it While not specified in Item 303, the improve the resulting disclosure. be rigorously enforced.245 In contrast, Commission has stated in prior Because registrants often repeat the several commenters suggested this guidance that, while preparing MD&A, information in the financial statement requirement—by virtue of the nature of registrants should consider whether footnotes about significant accounting some critical accounting estimates, the accounting estimates and judgments policies, the proposals were also potential interrelatedness of could materially affect reported intended to eliminate disclosure that assumptions, and the degree of inputs financial information. Specifically, the duplicates the financial statement used to arrive at the estimate—would Commission addressed critical discussion of significant accounting result in investor confusion, disclosure accounting estimates in the 2003 MD&A policies and, instead, promote enhanced that is not useful to investors, Interpretive Release.238 The analysis of measurement uncertainties. unwarranted questioning of past As proposed, critical accounting Commission stated that when preparing judgments, or heightened liability estimates were defined as those MD&A disclosure, companies should exposure.246 estimates made in accordance with consider whether they have made Many commenters stated that a accounting estimates or assumptions generally accepted accounting principles that involve a significant sensitivity analysis is challenging for where the nature of the estimates or registrants to provide,247 with a number assumptions is material due to the level of estimation uncertainty and have had or are reasonably likely to have a of these commenters stating that levels of subjectivity and judgment quantitative disclosures can be necessary to account for highly material impact on the registrant’s financial condition or results of particularly challenging or costly.248 uncertain matters or the susceptibility of Several commenters asked the such matters to change; and the impact operations. By focusing the definition on estimation uncertainties, the Commission to allow management of the estimates and assumptions on discretion in providing the disclosure financial condition or operating Commission stated that it intended to 239 avoid any unnecessary repetition of based on consideration of factors such performance is material. This as whether: a sensitivity or quantitative guidance further stated that if critical significant accounting policy footnotes.241 For each critical analysis would be meaningful or accounting estimates or assumptions are relevant; 249 a reasonably likely change identified, a registrant should analyze, accounting estimate, the proposal would require registrants to disclose, to the to an assumption would be material; 250 to the extent material, factors such as or a sensitivity analysis is either how it arrived at the estimate, how extent material, why the estimate is practicable 251 or produced in the accurate the estimate/assumption has subject to uncertainty, how much each ordinary course of business rather than been in the past, how much the estimate has changed during the solely to satisfy the disclosure estimate/assumption has changed in the reporting period, and the sensitivity of requirement.252 Other commenters past, and whether the estimate/ the reported amounts to the methods, assumption is reasonably likely to assumptions, and estimates underlying 244 change in the future. This guidance also the estimate’s calculation.242 Lastly, the See, e.g., letters from RSM; PWC; Pfizer; EEI proposal specified that the discussion & AGA; Deloitte; KPMG; Grant Thornton; CAQ; stated that a registrant should analyze BDO; FEI; SIFMA; IMA; UnitedHealth; Medtronic; its specific sensitivity to change based should provide quantitative as well as Chamber; ABA; E&Y; Society. on other outcomes that are reasonably qualitative information when 245 See, e.g., letters from CFA & CII and D. likely to occur. Any disclosure should quantitative information is reasonably Jamieson. supplement, not duplicate, the available and will provide material 246 See, e.g., letters from PWC; Pfizer; KPMG; information to investors. CAQ; BDO; SIFMA; UnitedHealth; Medtronic; ABA. description of accounting policies that 247 See, e.g., letters from RSM; PWC; Pfizer are already disclosed in the notes to the b. Comments (stating that, for the pharmaceutical industry, financial statements, and provide critical accounting estimates are often based on greater insight into the quality and Commenters were generally many complex judgments and assumptions that can supportive of the proposed amendments be inherently uncertain and unpredictable, including qualitative changes in the industry and 237 See Section II.C.2.c supra. With respect to the to add critical accounting estimates to 243 that disclosing sensitivity of the reported amounts application of the enhanced liquidity and capital Item 303. However, many to the assumptions would be highly subjective and resource requirements on SRCs, see Section II.C.11. commenters raised concerns with the not provide additional insight); KPMG; CAQ; BDO; infra. FEI; SIFMA (stating that ‘‘[it understood] from 238 See 2003 MD&A Interpretive Release. Prior to 240 discussions with outside auditors that preparation this release, the Commission reminded registrants See id. 241 of these kinds of quantitative disclosures, which are that, under the existing MD&A disclosure Additionally, the proposals included an instruction stating that critical accounting estimate required under IFRS, is extremely burdensome on requirements, a registrant should address material both registrants and their auditors’’); IMA; E&Y implications of uncertainties associated with the disclosure should supplement, but not duplicate, the description of accounting policies or other (noting concerns about disclosing potentially methods, assumptions, and estimates underlying confidential assumptions); UnitedHealth; ABA. the registrant’s critical accounting measurements, disclosures in the notes to the financial statements 248 See, e.g., letters from KPMG, CAQ, BDO, FEI, and encouraged companies to explain the effects of 242 These proposed requirements are similar to SIFMA, E&Y. the critical accounting policies applied and the those found in IFRS. See IAS 1, paragraph 129. 249 judgments made in their application. See 243 See, e.g., letters from CFA & CII; D. Jamieson; See, e.g., letters from FEI; UnitedHealth; Cautionary Advice Regarding Disclosure, Release RSM; PWC; Pfizer; EEI & AGA; Deloitte; KPMG; Medtronic; PWC; ABA. No. 33–8040 (Dec. 12, 2001) [66 FR 65013 (Dec. 17, Grant Thornton; CAQ; BDO; FEI; SIFMA; IMA; 250 See, e.g., letters from RSM; KPMG; CAQ; E&Y. 2001)]. UnitedHealth; Medtronic; Chamber; ABA; E&Y; 251 See, e.g., letters from KPMG; Chamber. 239 See id. Society. 252 See letter from SIFMA.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2100 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

recommended limiting the disclosure to estimates can differ and that such did not specifically solicit comment on only qualitative disclosure, which they differences are not necessarily an the submission format of critical believed would be more meaningful to indication of an error or deviation from accounting estimates, one commenter investors than quantitative U.S. GAAP so long as the risks and recommended that information disclosure,253 or disclosures of rough uncertainties relating to such estimates provided be submitted in machine- ranges due to the difficulty in are disclosed.262 readable format, stating that tagged quantifying sensitivities.254 One We received several comments related critical accounting estimates disclosure commenter asked the Commission to to aspects of the proposal other than may help investors compare critical specify that registrants are not required disclosure of sensitivity analysis and accounting estimates with critical audit to quantify individual assumptions changes in estimates. One commenter matters.271 underlying their critical accounting stated that it is challenging for c. Final Amendments estimates as long as they quantify how registrants to determine ‘‘a reference reasonably likely changes would point (i.e., at the assumption level or at We are adopting new Item materially affect the critical accounting the financial statement level) in 303(b)(3) 272 substantially as proposed estimates.255 Another commenter stated determining materiality for disclosure of for the reasons described in the that, if the final rule requires a the methods, assumptions and estimates Proposing Release and above, but with quantitative sensitivity analysis and it is underlying the calculation of the critical certain modifications in response to impracticable to disclose the extent of accounting estimate.’’ 263 Several commenters’ concerns to make clear the possible effects on an assumption, commenters expressed support for the that: (i) The application of the material the rule should state that the registrant proposed instruction stating that critical and reasonably available qualifier can disclose that it is reasonably accounting estimate disclosure is applies to all parts of the disclosure, not possible that outcomes within the next intended to supplement, not repeat, the just to quantitative information; (ii) the fiscal year that are different than the description of significant accounting discussion on how much each estimate assumption could require a material policies in the notes to the financial has changed may also be met through a adjustment, similar to disclosure statements,264 though one commenter discussion of changes in the required under IFRS about estimation asked that this be moved to the rule assumptions during the period; and (iii) uncertainty.256 itself to elevate its prominence.265 the disclosure of changes in the Several commenters asked the Several commenters recommended that estimate/assumption will cover a Commission to clarify the period over the Commission provide illustrative ‘‘relevant period,’’ rather than a which the changes in estimates should examples of critical accounting estimate ‘‘reporting period.’’ 273 be described (i.e., most recent period or disclosures 266 or further guidance 267 to We agree with commenters who all periods presented, including interim facilitate application of the final rule. raised concerns that, as proposed, the periods).257 A few commenters opposed Some commenters recommended requirements to disclose the sensitivity the proposed requirement to disclose clarifying whether this proposal is of reported amounts to the methods, how much an estimate has changed over intended to modify current Commission assumptions, and estimates underlying the reporting period,258 stating that the guidance on critical accounting a calculation and how much each disclosure either could result in estimates or to change existing estimate has changed during the confusion and unwarranted questioning practice.268 reporting period for each critical of past judgments 259 or would be In response to the Commission’s accounting estimate could have been reflected in amounts that are reported in request for comment, a few commenters read to require disclosure that is not the financial statements and discussed stated that they did not perceive any material, or that was costly or otherwise in Item 303(a) pursuant to requirements issues with or overlap between critical challenging to prepare. Specifically, to discuss material changes.260 One accounting estimates and critical audit these commenters stated that the commenter recommended that an matters.269 One commenter proposed requirement could suggest ‘‘estimate’’ in this context be the key recommended aligning the definition of that registrants are required to provide assumptions or inputs underlying the critical accounting estimates with the estimate recognized in the financial definition of critical accounting estimate is consistent with that contained in the 2003 MD&A Interpretive Release. 261 used by the Public Company statements. Two commenters that 271 Accounting Oversight Board in AS See letter from CFA. opposed disclosure of how much an 272 1301: Communications with Audit Proposed as Item 303(b)(4). estimate has changed over the reporting 273 Consistent with the proposal, new Item 270 period stated their belief that ASC Topic Committees (‘‘AS 1301’’). While we 303(b)(3) does not require a registrant to submit the 275 (Risks and Uncertainties) critical accounting estimates disclosure in a acknowledges that actual results and 262 See letters from PWC; Medtronic. machine-readable format as requested by a 263 See letter from RSM. commenter, who stated that this may help investors 264 See, e.g., letters from Grant Thornton; BDO; compare critical accounting estimates with critical 253 See letter from SIFMA (stating the current Chamber; ABA; Society. audit matters. See letter from CFA. The proposal’s language of ‘‘reasonably available’’ communications auditors are expected to provide 265 See letter from Grant Thornton. would, in the event of a lawsuit predicated on 266 on critical audit matters in an audit report have a omission of this information, still require resolution See, e.g., letters from KPMG; BDO; IMA; different objective than disclosures related to Society. of the factual issue of whether this information was critical accounting estimates. Critical audit matters 267 reasonably available). See letter from IMA. provide insight into matters that are especially 268 254 See letter from IMA. See letters from Deloitte; E&Y (recommending challenging, subjective, and complex to audit from this clarification specifically for quantitative 255 See letter from E&Y. the perspective of the auditor. On the other hand, disclosures). 256 See letter from KPMG (citing International critical accounting estimates disclosure should 269 See, e.g., letters from IMA; Chamber; BDO. Accounting Standards (IAS) 1, paragraph 131). provide management’s insights into estimation 270 See letter from RSM. AS 1301 defines critical uncertainties that have had or are reasonably likely 257 See, e.g., letters from RSM; Deloitte; KPMG; accounting estimate as ‘‘[a]n accounting estimate to have a material impact on reported financial CAQ. where (a) the nature of the estimate is material due statements. See Proposing Release at Section II.C.8. 258 See, e.g., letters from Medtronic; ABA; to the levels of subjectivity and judgment necessary Likewise, we are not adopting any new XBRL Society. to account for highly uncertain matters or the requirements for this Item more broadly. See 259 See letter from Medtronic. susceptibility of such matters to change and (b) the Section IV.E infra for discussion on alternatives 260 See letters from ABA and Society. impact of the estimate on financial condition or considered for Item 303 of Regulation S–K, 261 See letter from KPMG. operating performance is material.’’ This definition including submission in a machine readable format.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2101

quantification for ‘‘every’’ critical discussions of quantitative changes to financial statements in narrative form accounting estimate,274 have limited reported amounts, which would be extends to disclosure of critical flexibility in presenting such disclosed in response to other accounting estimates.281 disclosures,275 or are subject to a requirements in Item 303, such as the Our proposal would have required different standard than the rest of discussion of results of operations under disclosure of how much estimates MD&A.276 In order to clarify that this new Item 303(b)(2). Instead, our intent changed during a ‘‘reporting period,’’ was not our intent, new Item 303(b)(3) is for registrants to provide investors and several commenters asked the more clearly states that the reasonably with a greater understanding of the Commission to specify this period. New available and material qualifier applies variability that is reasonably likely to Item 303(b)(3) will require disclosure of to all information about a critical affect the financial condition or results changes in each estimate and/or accounting estimate that has had or is of operations so investors can assumption over a ‘‘relevant period,’’ reasonably likely to have a material adequately evaluate the estimation but does not specify the period over impact on financial condition or results uncertainty of a critical accounting which a registrant should discuss the of operations, whether qualitative or estimate. changes in the estimate or assumption. quantitative, including whether the We also believe that such information This approach is intended to give information relates to sensitivity of the would not be duplicative of financial registrants the flexibility to determine reported amount or how much the statement disclosures, as suggested by the relevant period necessary to estimate has changed.277 some commenters. While U.S. GAAP describe material changes in estimates While some commenters asked the requires discrete disclosure of the or assumptions that would facilitate an Commission to adopt different underlying assumptions for certain understanding of estimation thresholds, such as when ‘‘practicable’’ accounting estimates,279 it does not uncertainty, consistent with the or ‘‘in the ordinary course of business require a discussion of material changes principles-based nature of MD&A. For and not solely for purposes of in those assumptions over a relevant certain estimates or assumptions, disclosure,’’ we believe that ‘‘reasonably period, and there is no general providing information about estimates available’’ is the appropriate standard as requirement to disclose underlying and/or assumptions only as of the it is familiar to registrants and assumptions for all material accounting balance sheet date may be appropriate consistent with current Commission estimates included in the financial to inform investors about the nature of rules.278 We believe that, in practice, if statements. For that reason, we believe the estimation uncertainty and how the disclosure is ‘‘impracticable’’ to that quantification of certain reported amounts bear the risk of provide, it would not be ‘‘reasonably assumptions, when material and change. In contrast, other estimates or available.’’ In addition, limiting the reasonably available, may be necessary assumptions may require disclosure discussion to material information is to facilitate understanding of the over the number of years presented in intended to avoid disclosure that is not material critical accounting estimate the financial statements to facilitate an useful to investors and is consistent and allow an investor to better understanding of the estimation with the principles-based nature of understand the degree of estimation uncertainty. We do not believe that the MD&A. uncertainty. To the extent the financial requirement to disclose changes in the New Item 303(b)(3) will require statements include information about estimate and/or assumption over a registrants to disclose how much an specific changes in the estimate or relevant period is inconsistent with the estimate and/or assumption has underlying assumptions, the provisions of ASC Topic 275, Risks and Uncertainties, that were cited by some changed over a relevant period. This is amendments include an instruction 280 commenters.282 In this regard, intended to allow an investor to better that specifies that critical accounting disclosure of changes in an estimate/ evaluate the uncertainty associated with estimates should supplement, but not assumption should not be implied to the critical accounting estimate by duplicate, the description of accounting mean that the earlier estimate was made observing changes in estimates or policies or other disclosures in the notes in error. Rather, the disclosure provides assumptions over time. The revised item to the financial statements. Further, insight into the estimation uncertainty also specifically references unlike existing requirements in U.S. and the variability that could result over ‘‘assumptions’’ in addition to estimates GAAP, our amendments emphasize time. because, as suggested by one forward-looking information as they are commenter, this would make clear that Some commenters recommended intended to provide investors with specifying a reference point (i.e., registrants have flexibility to provide greater insight into estimation appropriate context in the discussion of assumption-level or financial statement- uncertainty that is reasonably likely to level) in determining materiality for changes underlying a critical accounting have a material impact on financial estimate. This disclosure requirement, disclosure of the methods, assumptions, condition and operating performance. and estimates underlying the along with the required sensitivity We remind registrants that the principle disclosure, is not intended to yield calculation of the critical accounting that MD&A should not be a recitation of estimate. We are not specifying a 274 reference point in order to allow See letter from ABA. 279 For example, ASC 820 Fair Value requires 275 See letter from PWC. disclosure of the valuation techniques and inputs flexibility to discuss the level that 276 See letter from E&Y. used to arrive at a measure of fair value, including provides material information to an 277 For both qualitative and quantitative judgments and assumptions made. We also note investor about the critical accounting information, the disclosure requirement is only that while ASC 275, Risks and Uncertainties estimate. Similarly, we have not given triggered if the information is necessary to requires a discussion of estimates, it includes understand the estimation uncertainty and the specific criteria including a reasonably possible examples or guidance for particular impact the critical accounting estimate has had or ‘‘change in the near term due to one or more future estimates at this time, as suggested by is reasonably likely to have on financial condition confirming events.’’ By contrast, the critical some commenters. Disclosures will or results of operations. accounting estimate requirement is broader as it is need to be tailored to a registrant’s 278 See, e.g. Securities Act Rule 409 [17 CFR not tied only to changes in the near term and particular business, uncertainties 230.409] and Exchange Act Rule 12b–21 [17 CFR encompasses items that may not be affected by 240.12b–21] which generally state that information future events, such as the range in methods a required need be given only insofar as it is known registrant may use in estimation. 281 See 2003 MD&A Interpretive Release. or reasonably available to the registrant. 280 See amended Instruction 3 to Item 303(b). 282 See letters from PWC and Medtronic.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2102 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

underlying its financial statement line requires registrants to discuss any comparison from the comparison items, and other circumstances, and we material changes in their results of presented in the immediately prior do not want to promote a checklist operations for the most recent fiscal Form 10–Q, the registrant would be approach to the disclosures. In addition, year-to-date period presented in their required to explain the reason for the although a commenter requested that we income statement, along with a similar change and present both comparisons in conform the definition of critical discussion of the corresponding year-to- the filing where the change is accounting estimate to that found in AS date period of the preceding fiscal year. announced.290 1301, Communications with Audit If a registrant is required or elects to b. Comments Committees,283 we continue to believe provide an income statement for the that the rule’s definition, which places most recent fiscal quarter, the Commenters generally supported greater focus on describing the discussion must also cover material amending current Item 303(b) as estimation uncertainty, will promote changes with respect to that fiscal proposed.291 Some of these commenters disclosure that avoids any unnecessary quarter and the corresponding fiscal recommended allowing registrants repetition of significant accounting quarter in the preceding fiscal year.288 additional flexibility by revising the policy footnotes. Current Item 303(b)(2) also states that existing requirement to compare current We acknowledge commenters’ request registrants subject to Rule 3–03(b) of year-to-date information to prior year-to- for clarification on whether the Regulation S–X 289 providing statements date information and giving registrants proposed critical accounting estimate of comprehensive income for the discretion to decide whether this disclosure requirements are intended to twelve-month period ended as of the disclosure would be meaningful.292 Two change how registrants currently date of the most recent interim balance of these commenters also stated that approach these disclosures.284 We sheet must discuss material changes of investors do not use the year-to-date believe the principles of new Item that twelve-month period as compared comparative information.293 Both of 303(b)(3) are not materially different to the preceding fiscal year rather than these commenters recommended from the guidance on critical accounting the preceding period. amending the year-to-date comparative estimates set forth in the 2003 MD&A The Commission proposed amending information requirement to make such Interpretive Release. Our amendments, current Item 303(b) (to be renumbered information optional, with greater including the modifications to the as proposed Item 303(c)) to allow for guidance provided to registrants to help proposed amendments, are intended to flexibility in comparisons of interim them determine whether to include clarify the required disclosures under periods and to simplify the item. such information.294 this requirement, facilitate compliance, Specifically, the Commission proposed Two commenters opposed the and improve the resulting disclosure. permitting registrants to compare their proposal to allow registrants flexibility In addition, as required by current most recently completed quarter to in comparisons of interim periods.295 Item 303(b), new Item 303(c) will either the corresponding quarter of the Both of these commenters stated that continue to require that MD&A prior year (as is currently required) or current prescribed disclosure disclosure for interim periods include a the immediately preceding quarter. requirements ‘‘provide uniformity of discussion of the material changes in Under the proposal, if a registrant elects information essential to making items specified in the full fiscal year to discuss changes from the assessments.’’ 296 Both commenters also requirements in amended Item immediately preceding quarter, the stated that if a comparison to the prior 303(b).285 As this applies to critical registrant must provide summary quarter were relevant or material, the accounting estimates disclosure in financial information that is the subject current structure provides the discussion of interim periods, of the discussion for that quarter or registrants the flexibility to make such registrants would be required to discuss identify the prior EDGAR filing that comparisons in addition to the year-to- 297 material changes to the full fiscal year presents such information so that a date comparative information. disclosures. reader may have ready access to the c. Final Amendments prior quarter financial information being 9. Interim Period Discussion (Amended We are adopting Item 303(c) with the discussed. In addition, under the Item 303(c)) amendments as proposed. We proposed amendment, if in a subsequent acknowledge commenters’ concerns a. Proposed Amendments Form 10–Q, a registrant changes the regarding the benefits of uniform Current Item 303(b) requires disclosures. However, we continue to registrants to provide MD&A disclosure interim date of the preceding year, the registrant for interim periods that enables market must also discuss any material changes in financial believe that the flexibility provided by participants to assess material changes condition from that date to the date of the most these amendments will help registrants recent interim balance sheet provided. At their in financial condition and results of discretion, registrants may combine discussions of 290 The Commission also proposed eliminating operations between certain specified changes from both the end and the corresponding language in current Item 303(b)(2) relating to 286 periods. Current Item 303(b)(1) interim date of the preceding fiscal year when such requirements for registrants subject to Rule 3–03(b) requires registrants to discuss any discussions are required. See Item 303(b)(1). of Regulation S–X. See Proposing Release at Section 288 In addition, if the registrant elects to provide II.C.9. material change in financial condition a statement of comprehensive income for the from the end of the preceding fiscal year 291 See, e.g., letters from Pfizer; Nareit (noting, twelve-month period ended as of the date of the however, that some members of their task force to the date of the most recent interim most recent interim balance sheet provided, the ‘‘reasoned that a requirement to only disclose balance sheet.287 Current Item 303(b)(2) registrant must also discuss material changes with information in one manner could mislead investors respect to that twelve-month period and the twelve- if a company had a material transaction that was month period ended as of the corresponding 283 See letter from RSM. not reflected in the comparative period presented’’); interim balance sheet date of the preceding fiscal FEI; SIFMA; IMA; Medtronic; Chamber; Society. 284 See letters from Deloitte; E&Y (recommending year. See Item 303(b)(2). 292 See, e.g., letters from FEI; Medtronic; this clarification specifically for quantitative 289 These registrants include those primarily Chamber. disclosures). engaged in: The generation, transmission, or 285 293 See, e.g., letters from FEI; Medtronic. See infra Section II.C.9. distribution of electricity; the manufacture, mixing 294 286 Item 303(b) of Regulation S–K [17 CFR transmission, or distribution of gas; the supplying See id. 229.303(b)]. or distribution of water; or the furnishing of 295 See, e.g., letters from CFA & CII; D. Jamieson. 287 If the interim financial statements include an telephone or telegraph services; or in holding 296 See id. interim balance sheet as of the corresponding securities of companies engaged in such business. 297 See id.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2103

provide a more tailored and meaningful that a discussion of material year-to-date quarter of the prior year (as is currently analysis that is relevant to their specific changes remains valuable and required) or the immediately preceding business cycles while also providing complements the MD&A provided in quarter.301 Additionally, amended Item investors with material information to annual reports. We also believe that a 303(c) will continue to require that the assess quarterly performance. Because comparative year-to-date discussion interim discussion and analysis must not all businesses are seasonal, a provides important context for the include a discussion of the material comparison to the corresponding current quarter. changes in items specified in the full quarter of the preceding year may not be Additionally, we are adopting as fiscal year requirements in amended as meaningful as a comparison to the proposed several amendments that will Item 303(b). preceding quarter. Additionally, by further streamline the item. These We are also amending as proposed the requiring registrants not only to explain amendments will: item to eliminate language requiring the reasons for a change in comparison • Eliminate the text that states that registrants subject to Rule 3–03(b) of from prior periods but also to provide registrants need not provide a Regulation S–X 302 that elect to provide both comparisons when there is such a discussion of the impact of inflation and a statement of comprehensive income change, we believe investors will benefit changing prices, consistent with the for the 12-month period ended as of the from greater insight into a registrant’s amendments described above; 300 and date of the most recent interim balance decision making and have sufficient • Amend current Item 303(b)(2) sheet to discuss material changes in that disclosure to understand any period- (amended Item 303(c)(2)) material 12-month period with respect to the over-period change. changes in results of operations—to preceding fiscal year, rather than the We are not, as suggested by some break the requirements into two corresponding preceding period. These commenters, amending the year-to-date subsections: amendments are intended to give these comparative information requirement in Æ Amended Item 303(c)(2)(i) will registrants the same flexibility as other current Item 303(b) to make it optional. continue to require registrants to discuss registrants to make the most meaningful When adopting the precursor to current any material changes in their results of comparisons in their interim period Item 303(b), the Commission noted the operations between the most recent MD&A. item was intended to complement year-to-date interim period(s) and the Finally, as proposed, and for the discussion in annual reports.298 At that corresponding period(s) of the reasons discussed in the Proposing time, the Commission stated ‘‘that the preceding fiscal year for which Release, our amendments delete most meaningful discussion of financial statements of comprehensive income are Instructions 2, 3, 5, 6, 7, and 8 to current condition for interim reporting purposes provided; and Item 303(b) to help streamline the item would deal with the end of the Æ Amended Item 303(c)(2)(ii) will, as and eliminate unnecessary preceding fiscal year and the date of the discussed above, require registrants to instructions.303 The following table most recent interim balance sheet compare their most recently completed outlines the current and amended provided.’’ 299 We continue to believe quarter to either the corresponding structure of amended Item 303(c): 304

Current structure Amended structure

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

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

298 See New Interim Financial Information 299 See Item 303(b) Adopting Release. 304 The information in this table is not Provisions and Revisions of Form 10–Q for 300 See supra discussion at Section II.C.5. comprehensive and is intended only to highlight Quarterly Reporting, Release No. 33–6288 (Feb. 9, 301 As described above, if a registrant changes the the general structure of the current rules and 1981), 46 FR 12480 (Feb. 17, 1981) (adopting comparison from the prior interim period amendments. It does not reflect all of the substance current Item 303(b) of Regulation S–K as then Item of the amendments or all of the rules and forms that 11(b) of Regulation S–K)(‘‘Item 303(b) Adopting comparison, the registrant would be required to will be affected. All changes are discussed in their Release’’). See also 1982 Integrated Disclosure explain the reason for the change. entirety throughout this release. As such, this table Adopting Release (reorganizing Regulation S–K to, 302 See supra footnote 289. should be read together with this Section II.C.9. among other things, move the substance of Item 303 Instruction 5 to Item 303(b) is currently 11(b) of Regulation S–K to Item 303(b) of Regulation 305 Item 303(c) of Regulation S–K [17 CFR reserved. S–K). 229.303(c)].

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2104 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

certain enumerated persons.306 For Securities Act Rule 175 311 and regulatory safe harbors would be current Item 303(a)(4), current Item Exchange Act Rule 3b–6 312 (the evaluated consistently with other 303(c) further states that the ‘‘regulatory safe harbors’’), which forward-looking disclosures in MD&A. ‘‘meaningful cautionary statements’’ expressly apply to forward-looking Because our amendments to eliminate element of the statutory safe harbors is information in MD&A disclosure.313 current Item 303(c) do not alter the availability or scope of the statutory and satisfied if a registrant satisfies all of b. Comments current Item 303(a)(4)’s requirements.307 regulatory safe harbors, and because we The Commission added current Item A few commenters recommended are eliminating the prescriptive 303(c) in 2003 when it adopted Items revising the proposal to expand the safe requirements associated with Items 303(a)(4) and (5).308 Item 303(c) was harbors available to registrants.314 One 303(a)(4) and (5), we are eliminating the intended to remove possible ambiguity of these commenters recommended item, as proposed. While we about the application of the statutory harmonizing the treatment of forward- acknowledge the suggestion of one safe harbors to these items and to looking information in MD&A and the commenter to consider expanding the 315 promote more meaningful disclosure.309 financial statements. This commenter scope of the statutory safe harbors to Because the Commission proposed to also asked the Commission to reiterate, apply more broadly, including to cover eliminate both Items 303(a)(4) and (5), it in any final release, its statements in the all transactions and issuers, an also proposed eliminating current Item Proposing Release regarding its expansion would warrant a broader 303(c), which specifically and commitment to the statutory safe review of the statutory and regulatory exclusively refers to those disclosure harbors and that the amendments are safe harbors and any areas where requirements. The proposed not intended to alter application of this expansion may be necessary or amendments were not intended to alter safe harbor. Another commenter asked appropriate. It is therefore beyond the the application of the statutory safe the Commission to ‘‘expand the scope of the current rulemaking. harbors, which protect eligible forward- statutory safe harbors to apply to all As requested by a commenter, we looking statements in MD&A against forward-looking statements wherever explicitly confirm that eliminating they appear in MD&A, for all current Item 303(c) does not alter the private legal actions that are based on 316 allegations of a material misstatement or transactions and registrants.’’ This application or availability of the omission, with certain exceptions. 310 commenter also asked the Commission statutory safe harbors or the regulatory The Proposing Release also reiterated to ‘‘expand the . . . statutory safe safe harbors for all of amended Item the availability of the safe harbors in harbors to cover any forward-looking 303, including the new requirement to critical accounting estimates disclosure disclose critical accounting estimates.320

306 for all types of companies and We continue to believe that the statutory Such persons are the issuer; a person acting 317 on behalf of the issuer; an outside reviewer retained transactions (including IPOs).’’ and regulatory safe harbors for eligible by the issuer making a statement on behalf of the c. Final Amendments forward-looking statements have issuer; or an underwriter, with respect to encouraged greater disclosure of information provided by the issuer or information We are adopting amendments to forward-looking information that has derived from information provided by the issuer. eliminate current Item 303(c) as 307 Item 303(c)(2)(ii) of Regulation S–K [17 CFR benefited investors and our markets. As 229.303(c)(2)(ii)]. proposed. As the Commission stated registrants prepare their MD&A 308 See Off-Balance Sheet Arrangements and when adopting Item 303(c), the item disclosures under the amendments, we Contractual Obligations Adopting Release at 5992 was intended to remove possible remind registrants of the availability (‘‘To encourage the type of information and analysis ambiguity about the application of the and scope of these safe harbors and necessary for investors to understand the impact of statutory safe harbors to the specific off-balance sheet arrangements and to reduce the encourage greater disclosure of forward- burden of estimating the payments due under disclosures called for by current Items looking information. contractual obligations, the amendments include a 303(a)(4) and (5).318 While the final safe harbor for forward-looking information.’’). amendments continue to require 11. Smaller Reporting Companies 309 See id. disclosure regarding off-balance sheet (Current Item 303(d)) 310 See Sections 27A of the Securities Act and 21E arrangements and contractual a. Proposed Amendments of the Exchange Act. The statutory safe harbors by obligations,319 such disclosure will now their terms do not apply to forward-looking Current Item 303(d) 321 states that an be integrated into a registrant’s broader statements included in financial statements SRC may provide current Item prepared in accordance with generally accepted MD&A discussion. We therefore believe 303(a)(3)(iv) information for the most accounting principles. Notably, the statutory safe the potential ambiguity that motivated harbors also would not apply to MD&A disclosure recent two fiscal years if it provides the Commission to adopt current Item if the MD&A forward-looking statements were financial information on net sales and 303(c) in the context of the prescriptive made: (1) In connection with an initial public revenues and income from continuing offering; a tender offer; an offering by, or relating requirements of Item 303(a)(4) and (5) operations for only two years. Item to the operations of, a partnership, limited liability no longer exists. Rather, whether and company, or a direct participation investment 303(d) also states that an SRC is not the extent to which disclosure related to program, an offering of securities by a blank check required to provide the contractual contractual obligations or off-balance company; a roll-up transaction; or a going private obligations table specified in Item transaction; or (2) or by an issuer of penny stock. sheet arrangements constitutes forward- 303(a)(5). Because the Commission See Section 27A(b) of the Securities Act and looking statements that fall under the Section 21E(b) of the Exchange Act. Also, the proposed to eliminate current Items protections of either the statutory or statutory safe harbors do not, absent a rule, 303(a)(3)(iv) and (a)(5), the Commission regulation, or Commission order, apply to forward- also proposed eliminating current Item looking statements by issuers covered by Section 311 [17 CFR 230.175]. 27A(b)(1)(A) of the Securities Act and Section 312 [17 CFR 240.3b–6]. 320 21E(b)(1)(A) of the Exchange Act. Because the 313 See Proposing Release at Section II.C.10. Instruction 7 to Item 303(a) of Regulation S–K [17 CFR 229.303(a)], Securities Act Rule 175 statutory safe harbors only apply to forward-looking 314 See letters from SIFMA; Chamber. statements made by or on behalf of an issuer that [17 CFR 230.175], and Exchange Act Rule 3b–6 [17 315 See letter from Chamber. is subject to the reporting requirements of Section CFR 240.3b–6]. Our amendments to Item 303 retain 316 13(a) or 15(d) of the Exchange Act, they would not See letter from SIFMA. Instruction 7 to current Item 303(a), which will be apply to forward-looking statements made in 317 See id. renumbered as Instruction 6 to amended Item connection with an offering under Regulation A 318 See Off-Balance Sheet Arrangements and 303(b). unless the issuer is a reporting company and no Contractual Obligations Adopting Release. 321 Item 303(d) of Regulation S–K [17 CFR other exclusions from the safe harbor apply. 319 See amended Instruction 8 to Item 303(b). 229.303(d)].

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2105

303(d), which specifically and Item 303(d) was a reduction in the 301, Item 3.A also permits a FPI to omit exclusively references these two burdens associated with the preparation either or both of the earliest two years disclosure requirements. of the contractual obligations table of data if it represents that it cannot itself, and because we are eliminating provide the information, or cannot b. Comments that prescriptive requirement, we provide the information on a restated One commenter supported the believe that the elimination of current basis, without unreasonable effort or proposal to eliminate current Item Item 303(d) is likewise appropriate. expense. Given the similarities between 303(d).322 Some commenters, while not Item 3.A and Item 301, the Commission D. Application to Foreign Private Issuers commenting on this specific proposal, proposed deleting Item 3.A and the indicated they generally opposed any We are adopting corresponding related instructions. further accommodations allowing SRCs amendments that will apply to FPIs to provide scaled disclosure.323 providing disclosure required by Form ii. Final Amendments c. Final Amendments 20–F or Form 40–F largely as For reasons similar to those discussed proposed.327 We are also adopting above with respect to the elimination of In light of the elimination of current amendments to current Instruction 11 to Item 301, we are eliminating Item 3.A of Items 303(a)(3)(iv) and (5), we are Item 303 as proposed, which Form 20–F, as proposed.331 We adopting amendments to current Item specifically applies to FPIs that choose recognize that, unlike Item 301, Item 303(d) as proposed. Notwithstanding to file on domestic forms. Similar to our 3.A. permits an FPI in certain situations the elimination of current Item discussions above and for the reasons to omit either or both of the earliest two 303(a)(5), new Item 303(b) specifically discussed in greater detail below, our years of data. However, as with Item requires disclosure of material cash amendments to these forms are intended 301, trend disclosure elicited by Item requirements from known contractual to modernize, clarify, and streamline 3.A typically would be discussed in and other obligations as part of a these disclosure requirements. response to Item 5 of Form 20–F, which liquidity and capital resources Generally, commenters did not 324 requires MD&A disclosure similar to discussion. SRCs are currently specifically comment on the proposed Item 303. Despite the deletion of Item required to provide MD&A disclosure amendments related to FPIs. One 3.A., FPIs should continue to consider addressing liquidity and capital commenter stated that, unless otherwise whether such tabular disclosure as part resources, and we believe that SRCs specified, its comments apply to all of an introductory section or overview, should continue to provide this registrants, including FPIs.328 including to demonstrate material disclosure under the amended trends, would be appropriate.332 requirements. Excluding SRCs from the 1. Form 20–F relevant discussion of liquidity and a. Selected Financial Data (Item 3.A of b. Operating and Financial Review and capital resources would be inconsistent Form 20–F) Prospects (Item 5 of Form 20–F) with the objectives and requirements i. Proposed Amendments stated in amended Item 303(a), as such i. Proposed Amendments disclosure may be necessary to an Similar to Item 301, Item 3.A of Form The disclosure requirements for Item understanding of the registrant’s 20–F requires FPIs to provide selected 5 of Form 20–F (Operating and financial condition, cash flows, and historical financial data for the most Financial Review and Prospects) are other changes in financial condition and recent five financial years (or such substantively comparable to the MD&A results of operations. shorter period that the company has requirements under Item 303 of 333 Although SRCs are not currently been in operation). Also similar to Item Regulation S–K. To maintain a required to include a contractual 301, Item 3.A specifies the information consistent approach to MD&A for obligations table, they are already that must be included in the selected domestic registrants and FPIs, the required under U.S. GAAP to assess financial data and provides that EGCs Commission proposed amendments to most of the currently prescribed are not required, in a Securities Act Form 20–F that generally conformed to categories that would otherwise be registration statement, to present the proposed amendments to Item 334 included in this table. Additionally, selected financial data for any period 303. some of the revisions to the liquidity prior to the earliest audited financial ii. Final Amendments and capital resources disclosure statements presented in connection with We are adopting the amendments to requirements codify current MD&A the registrant’s initial public offering of Item 5 of Form 20–F largely as guidance, which already applies to its common equity securities.329 In a 325 proposed, with some modifications to SRCs. registration statement, periodic report, conform to our amendments to Item 303 When adopting the contractual or other report filed under the Exchange by incorporating any relevant changes obligations table requirement, the Act, an EGC need not present selected made to Item 303 in response to Commission excluded the predecessor financial data for any period prior to the to SRCs, small business issuers, stating earliest audited financial statements 331 See supra Section II.A. that the exclusion was consistent with presented in connection with the EGC’s the policies of facilitating capital raising 332 See 2003 MD&A Interpretive Release first registration statement that became (‘‘Companies should consider whether a tabular by small businesses and reducing the effective under the Exchange Act or the presentation of relevant financial or other compliance burdens placed on these Securities Act.330 However, unlike Item information may help a reader’s understanding of registrants by the federal securities MD&A.’’). See also footnote 1 of 2003 MD&A laws.326 Because the basis for current Interpretive Release which states that the guidance Small Business Initiatives, Release No. 33–6949 in that release is intended to apply to FPIs. (July 30, 1992) [57 FR 36442 (Aug. 13, 1992)]. 333 When the Commission revised the wording of 322 See letter from Chamber. 327 To the extent that other forms, such as Form Item 5 of Form 20–F in 1999, the adopting release 323 See letters from CFA & CII; D. Jamieson. F–1, require information provided by Form 20–F, noted that the requirements correspond with Item 324 See Section II.C.7 supra. these amendments to Form 20–F will also apply to 303 of Regulation S–K. See International Disclosure 325 See 1989 MD&A Interpretive Release and 2003 those other forms. Standards, Release No. 33–7745 (Sept. 28, 1999) [64 MD&A Interpretive Release. 328 See letter from CAQ. FR 53900 (Oct. 5, 1999)], at 53904 (‘‘International 326 See Off-Balance Sheet Arrangements and 329 See Instruction 3 to Item 3.A. Disclosure Standards Release’’). Contractual Obligations Adopting Release. See also 330 Id. 334 See Proposing Release at Section II.D.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2106 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

comments received. Specifically, and including but not limited to capital Release, 2010 MD&A Interpretive for reasons similar to those discussed expenditures; 341 Release, and the 2020 MD&A above with respect to the amendments • Amend Item 5.A.2, which currently Interpretive Release 347 to explicitly to Item 303, we are adopting, the requires disclosure of inflation, if direct FPIs to this guidance. amendments modify the proposals for material, and hyperinflation if the These and all of our amendments to Item 5 of Form 20–F by: currency in which the financial Item 5 of Form 20–F are intended to • Consistently using the term statements are presented is of a country ensure that existing MD&A ‘‘reasonably likely’’ throughout; 335 that has experienced hyperinflation,342 requirements for FPIs continue to mirror • Eliminating the contractual to require only disclosure of the substantive MD&A requirements in obligations table and amending the item hyperinflation; 343 and Item 303.348 • Replace Item 5.E, which covers off- to include a principles-based liquidity 2. Form 40–F and capital resources requirement balance sheet arrangements, with a focused on material short- and long- principles-based instruction.344 a. Proposed Amendments term cash requirements from known Our rationale for these amendments is Form 40–F generally permits eligible contractual and other obligations; 336 consistent with the rationale discussed Canadian FPIs to use Canadian and above for amending corresponding disclosure documents to satisfy the • Modifying the critical accounting provisions of Item 303. Commission’s registration and estimate proposal to emphasize that this Some of the amendments to Form 20– disclosure requirements. As a result, the disclosure is only required to the extent F are unique to this form but consistent MD&A contained in Forms 40–F is reasonably available and material.337 with MD&A’s focus on materiality. largely prepared in accordance with More generally, similar to our Specifically, as proposed and for the Canadian disclosure standards. The amendments to Item 303 and consistent reasons discussed in the Proposing Commission proposed replacing the off- with what was proposed, we are Release, we are amending: balance sheet disclosure requirement in • Item 5.D of Form 20–F to require amending the forepart of Item 5 to General Instruction B.(11) of Form 40– disclosure of ‘‘material trends’’ instead specify the purpose of MD&A and F with a principles-based instruction of ‘‘the most significant recent highlight the item’s objective. These 345 and deleting General Instruction B.(12), amendments state that the disclosure trends;’’ and • Instruction 1 to Item 5 to add the contractual obligations disclosure responsive to Item 5 must: references to the 2002 Commission requirement. The proposal would only • Include other statistical data that Statement,346 2003 MD&A Interpretive require disclosure of off-balance sheet will enhance a reader’s understanding arrangements to the extent disclosure is of the company’s financial condition, 341 See supra Sections II.C.2 and II.C.7. not already provided under the MD&A changes in financial condition, and 342 Rules 3–20(c) and 3–20(d) of Regulation S–X required by Canadian law. Lastly, and results of operations; provide the situations when a foreign private issuer consistent with the Item 303 proposals, • Focus specifically on material must reflect hyperinflation in its financial the Commission proposed to eliminate events and uncertainties known to statements. Rule 3–20(d) generally describes a hyperinflationary environment as one that has General Instruction B.(13), which management that would cause reported cumulative inflation of approximately 100 percent acknowledges application of the financial information not to be or more over the most recent three-year period. statutory safe harbor, and specifically necessarily indicative of future 343 See supra Section II.C.5. Consistent with our and exclusively applies to General operating results or future financial proposals, our amendments do not alter the requirement in Item 5.A.2 as it relates to Instructions B.(11) and B.(12). condition; hyperinflation. Instruction 1 to Item 5.A states that b. Final Amendments • Provide a narrative explanation of disclosure of hyperinflation must be provided if the financial statements that enables hyperinflation has occurred in any of the periods We are adopting the amendments to investors to see a registrant ‘‘through the for which an FPI is required to provide audited Form 40–F largely as proposed, with financial statements or unaudited interim financial 338 eyes of management;’’ and statements. We continue to believe that for FPIs in modifications to conform to our • Provide information relating to a hyperinflationary economy, hyperinflation is a amendments to Item 303 by other subdivisions, such as geographic salient issue such that it merits specific mention. incorporating relevant changes made to areas or product lines, in addition to 344 See amended Instruction 7 to Item 5 of Form Item 303 in response to comments 20–F. For FPIs filing on Forms 20–F and 40–F that providing information relating to all apply IFRS, the overlap between the requirements received. For the reasons discussed separate segments.339 of those Forms and IFRS are similar to the overlap above with respect to the liquidity and Additionally, the amendments: between Item 303(a)(4) and U.S. GAAP, as capital resources requirements in Item • Amend Item 5 to specify that the described in supra Section II.C.6. Certain IFRS 303(b), we are replacing the contractual standards require some disclosures that discussion must include a quantitative substantially overlap with the requirements of Item obligations disclosure requirement in and qualitative description of the 5.E. of Form 20–F including but without limitation: General Instruction B.(12) with a reasons underlying material changes, Information that enables users of the financial principles-based instruction that statements to evaluate the nature and extent of risks expands the MD&A discussion to including where material changes arising from financial instruments to which the within a line item offset one another; 340 entity is exposed or has continuing involvement in require analysis of material cash • Revise the liquidity and capital at the end of the reporting period and how those requirements from known contractual resources requirement in Item 5.B to risks have been managed (see Paragraphs 31, 32 and and other obligations.349 In addition, as 42A of IFRS 7, Financial Instruments; Disclosures specify that a registrant must broadly (‘‘IFRS 7’’)) such as: Credit risk relating to financial disclose material cash commitments, guarantee contracts (see Paragraph 35M of IFRS 7); Results of Operations, Release No. 33–8056 (Jan. 22, risk relating to continuing involvement in 2002) [67 FR 3746 (Jan. 25, 2002)] (‘‘2002 transferred financial assets (see Paragraphs 42B(b), Commission Statement’’). 335 See supra Section II.C.3. 42C and 42E of IFRS 7); and obligations under 347 See Commission Guidance on Management’s 336 See supra Section II.C.7. interests in unconsolidated entities (see Paragraphs Discussion and Analysis of Financial Condition and 337 See supra Section II.C.8. 1 and 24 to 31 of IFRS 12, Disclosure of Interests Results of Operations, Release No. 33–10751 (Jan. 338 See 2003 MD&A Interpretative Release, at in Other Entities). 30, 2020) [85 FR 10568 (Feb. 25, 2020)]. 75056. See also 1989 Interpretative Release, at 345 See, e.g., 2003 MD&A Interpretive Release, at 348 See International Disclosure Standards 22428. 75060. Release. See also Off-Balance Sheet Arrangements 339 See supra Section II.C.1.c. 346 Commission Statement about Management’s and Contractual Obligations Adopting Release. 340 See supra Section II.C.1.b. Discussion and Analysis of Financial Condition and 349 See supra Section II.C.7.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2107

proposed, we are amending the form to Specifically, current Instruction 11 to b. Final Amendments replace General Instruction B.(11) with Item 303(a) is being amended as We are adopting amendments to Item 350 a principles-based instruction. As Instruction 9 to Item 303(b) to require a 914(a) to eliminate the reference to Item noted above, unlike Item 303 and Form ‘‘foreign private issuer’’ to consider the 301, as proposed, but will retain the 20–F, the MD&A required under Form impact of hyperinflation if reference to Item 302 in light of our final 40–F is defined as required by Canadian hyperinflation has occurred in any of amendments to retain that item.358 For 351 law. Accordingly, our amendments to the periods for which audited financial Item 301, we recognize that, in the Form 40–F only require disclosure of statements or unaudited financial context of Item 914(a), disclosure off-balance sheet arrangements and an statements are filed. This modification provided under this item would not be analysis of material cash requirements is intended to align the requirement in duplicative of the financial statements to the extent it is not already provided Item 303 more closely with Form 20–F. and would otherwise be unavailable. under the MD&A required by Canadian However, Item 914(a) requires E. Additional Conforming Amendments law. Lastly, and as proposed, we are disclosure of other specified financial eliminating General Instruction B.(13), The Commission proposed additional information 359 and states that which acknowledges application of the conforming amendments, consistent additional or other information should statutory safe harbor and specifically with the rationale for the proposals.356 be provided if material to an and exclusively applies to General No commenters opposed these understanding of each partnership Instructions B.(11) and B.(12).352 proposals. proposed to be included in a roll-up Notwithstanding this deletion and transaction. In light of these other consistent with the amendments we are 1. Roll-up Transactions—Item 914 of requirements, we continue to believe making to Item 303, given that eligible Regulation S–K that our amendment deleting references Canadian FPIs may still need to disclose a. Proposed Amendments to Items 301 in Item 914(a) would not certain contractual obligations and off- result in a loss of material information. balance sheet transactions, the statutory The Commission proposed deleting As discussed above, our amendments to safe harbors and regulatory safe harbors references to Items 301 and 302 in Item Item 302(a) are intended to address will continue to cover forward-looking 914(a) of Regulation S–K. This item discrete areas of disclosure that we statements, if applicable. applies to roll-up transactions, which, believe may be important to investors. 3. Item 303 of Regulation S–K subject to certain exceptions, generally Accordingly, we are retaining current (Hyperinflation Requirement in Item involve the combination or references to Item 302(a). 303 for FPIs) reorganization of one or more 2. Regulation AB—Items 1112, 1114, partnerships, directly or indirectly, a. Proposed Amendments and 1115 where some or all of the investors in any FPIs may voluntarily choose to file on such partnerships will receive new a. Proposed Amendments forms that would require disclosure securities or securities in another Item 1112 of Regulation AB requires under Item 303. Current Instruction 11 entity.357 Item 914(a) provides that, for disclosure of financial information to Item 303 requires ‘‘foreign private each partnership to be included in a required by Item 301 or Item 3.A of registrants’’ to discuss briefly any roll-up transaction, certain financial Form 20–F about significant obligors of pertinent governmental economic, information, including disclosure under pool assets if the pool assets relating to fiscal, monetary, or political policies or Item 301 and Item 302, must be the significant obligor represent 10% or factors that have materially affected or provided. more, but less than 20%, of the asset could materially affect, directly or pool in an asset-backed securities indirectly, their operations or 356 In addition to the conforming amendments (‘‘ABS’’) transaction. Similarly, Items investments by United States discussed in this section, we are also amending 1114 and 1115 of Regulation AB require nationals.353 The Commission proposed certain rules and forms to update references to the disclosure of financial information amending this FPI instruction to items we are amending, as follows: remove required by Item 301 or Item 3.A of references to Item 301 or Item 3.A of Form 20–F incorporate the requirement for FPIs to (Item 10 of Regulation S–K [17 CFR 229.10]; Forms Form 20–F about credit enhancement discuss hyperinflation in a S–1 [17 CFR 239.11], N–2 [17 CFR 274.11a–1], S– providers and derivatives hyperinflationary economy. The 11 [17 CFR 239.18], S–4 [17 CFR 239.25], F–1 [17 counterparties, respectively, whose Commission also proposed replacing the CFR 239.31], F–4 [17 CFR 239.34], 1–A [17 CFR support represents a similar level of 239.90], 10 [17 CFR 249.208c], and 10–K [17 CFR concentration in an ABS transaction. As reference to ‘‘foreign private registrants’’ 249.310]; Schedule 14A [17 CFR 240.14a–101]; and with the defined term ‘‘foreign private Exchange Act Rule 14a–3 [17 CFR 240.14a–3]); and a result of the proposal to eliminate Item issuer.’’ 354 update references to subparagraphs of Item 303 (Securities Act Rule 419 [17 CFR 230.419]). While 358 We are also including a technical amendment b. Final Amendments the disclosure requirements for Item 9 of Form to Item 914 to eliminate the reference to the ratio For consistency with the requirements 1–A for Regulation A issuers are similar to the of earnings to fixed charges. See Disclosure Update MD&A requirements under Item 303, we did not and Simplification, Release No. 33–10532 (Aug. 17, 355 of Form 20–F, we are adopting propose amendments to Form 1–A. See Proposing 2018) [83 FR 50234 (Oct. 4, 2018)] at Section amendments to Item 303 as proposed. Release at footnote 2. However, in the preparation III.B.1.f. of Part II of Form 1–A, Regulation A issuers have 359 In addition to disclosure under Items 301 and the option of disclosing either the information 350 See supra Section II.C.6. We believe our 302, Item 914(a) calls for the following financial required by (i) the Offering Circular format amendments to General Instruction B.(11) of Form disclosures: Ratio of earnings to fixed charges, cash (including Item 9 referenced above) or (ii) Part I of 40–F is consistent with the statutory mandate in and cash equivalents, total assets at book value, Forms S–1 or S–11 (except for the financial Section 13(j) of the Exchange Act for the same total assets at the value assigned for purposes of the statements, selected financial data, and reasons discussed in the Proposing Release. See roll-up transaction (if applicable), total liabilities, supplementary information called for by those Proposing Release at Section II.C.6. general and limited partners’ equity, net increase forms). Accordingly, while the final rules do not (decrease) in cash and cash equivalents, net cash 351 See General Instruction B.(3) of Form 40–F. amend Item 9 of Form 1–A, they would still impact provided by operating activities, distributions; and 352 See supra Section II.C.10. Regulation A issuers that choose to disclose the per unit data for net income (loss), book value, 353 See Instruction 11 to Item 303(a) of Regulation information required by Part I of Forms S–1 or S– value assigned for purposes of the roll-up S–K. 11. See Paragraph (a)(1)(ii) of Part II of Form 1–A. transaction (if applicable), and distributions 354 See Rule 405 and Rule 3b–4(c). 357 See Rule 901(c) of Regulation S–K [17 CFR (separately identifying distributions that represent a 355 See supra Section II.D.1. 229.901(c)]. return of capital).

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2108 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

301 and Item 3.A of Form 20–F for provide for use of a summary combination accounted for as a corporate issuers, financial information prospectus under Rule 431.363 A purchase, financial information is about these third parties to an ABS summary prospectus is intended to required for the same periods required transaction, including any trend provide prospective investors with a by Article 11 of Regulation S–X. information comparable to information condensed statement of the more Because these pro forma requirements required by Item 303 or Item 5 of Form important information in the are effectively duplicative of the pro 20–F, would not otherwise be available. registration statement.364 Consistent forma financial statements required Accordingly, the Commission proposed with this purpose, the Instructions as to elsewhere by the form, the Commission replacing in Regulation AB those Summary Prospectuses in Forms S–1 proposed deleting them.367 requirements to disclose selected and F–1 call for disclosure of selected Similarly, the Commission proposed financial data under Item 301 or Item financial data under Item 301 or Item eliminating references to Item 301 and 3.A of Form 20–F with requirements to 3.A of Form 20–F, respectively. These Item 3.A of Form 20–F in Item 17(b)(3) disclose summarized financial instructions also state that, with the of both Form S–4 and Form F–4. Lastly, information, as defined by Rule 1– exception of these items, the summary the Commission proposed deleting the 02(bb) of Regulation S–X,360 for each of prospectus shall not contain any other reference to Item 302 in Item 17(b)(4) of the last three fiscal years (or the life of financial information.365 Form S–4. Because Item 17(b) of Forms the relevant entity or group of entities, S–4 and F–4 applies to non-reporting b. Final Amendments if less). target companies in a business We are adopting amendments to combination, this disclosure may not be b. Final Amendments Forms S–1 and F–1 as proposed. To available elsewhere. In connection with We are adopting amendments to Items preserve disclosure of financial this, the Commission stated its belief 1112, 1114, and 1115 of Regulation AB information in summary prospectuses, that the requirement for discussion and as proposed. We continue to believe the our amendments replace the analysis of trends in Item 303 would information required under Rule 1– requirement for selected financial data also be sufficient to address material 02(bb) is similar to the information in Forms S–1 and F–1 with summarized information related to a target company currently required and is consistent financial information under Item 1– in a business combination context. with other types of financial statement 02(bb) of Regulation S–X. We continue disclosures that are required to be to believe the information required b. Final Amendments disclosed when certain significance under Rule 1–02(bb) is similar to the We are adopting amendments to Form thresholds have been met.361 The information currently required and is S–4, Form F–4, and Schedule 14A, to amendments require disclosure of the consistent with other types of financial eliminate the reference to Item 301, as same periods as the historical data that statement disclosures that should be proposed, but will retain the reference the ABS registrant is required to provide included when certain significance to Item 302 in light of our final for the pool assets under Item 1111 of thresholds have been met. amendments, which will retain that Regulation AB.362 We recognize that the item. As discussed above, our 4. Business Combinations—Form S–4, amendments would generally result in amendments to Item 302(a) are intended Form F–4, and Schedule 14A fewer periods being presented under to address discrete areas of disclosure these items. However, we do not believe a. Proposed Amendments that we believe may be important to requiring disclosure beyond three years The Commission proposed investors. Accordingly, we are retaining is necessary as such disclosure would eliminating references to Items 301 and current references to Item 302(a), cover periods beyond those presented 302 in Form S–4, Form F–4, and including in Form S–4 and Schedule for the underlying pool assets to which Schedule 14A. Where these forms are 14A. the third-party financial information used in conjunction with a business 5. Form S–20 would relate. combination, pro forma financial a. Proposed Amendments 3. Summary Prospectus in Forms S–1 statements for the most recent fiscal and F–1 year and interim period under Article The Commission proposed a 11 of Regulation S–X are required.366 conforming change to Form S–20 to a. Proposed Amendments Additionally, Item 3(e) and (f) in both remove references to Item 302 of The Commission proposed replacing Forms S–4 and F–4 require Item 301 or Regulation S–K.368 Form S–20 is used to references to Item 301 and Item 3.A of Item 3.A of Form 20–F information, register standardized options under the Form 20–F in Form S–1 and Form F–1, respectively, on a pro forma basis. Item Securities Act and requires limited respectively, with Rule 1–02(bb) of 14(b)(9) and (10) of Schedule 14A information about the clearing agency Regulation S–X, where these forms generally call for similar pro forma registrant and the options being information in the context of a business registered. Since the adoption of Rule 360 [17 CFR 210.1–02(bb)]. combination. A related instruction 238 in 2002, which exempts from 361 We are also amending Rule 1–02(bb) of stipulates that, for a business Securities Act Section 5 the registration Regulation S–X as proposed, which calls for of offerings of standardized options that disclosure of summary financial information. To 363 eliminate any implication that a registrant would See 17 CFR 230.431. See also Instruction 1(f) are issued by a registered clearing need to prepare disclosure that is not consistent under Instructions as to Summary Prospectuses in agency and traded on a national with the disclosure in the entity’s financial Form S–1 and Instruction 1(c)(v) under Instructions as to Summary Prospectuses in Form securities exchange, Form S–20 is rarely statements, the amendments clarify that the 369 disclosure of summary financial information may F–1. used. vary, as appropriate, to conform to the nature of the 364 See Adoption of Summary Prospectus Rule entity’s business. and Amendments to Form S–1 and S–9, Release No. 367 The Commission also proposed deleting the 362 While ABS registrants are generally not 33–3722 (Nov. 26, 1956) [21 FR 9642 (Dec. 6, related instruction to these items. required to provide financial statements, under Item 1956)]. 368 17 CFR 239.20. Current references in Form 1111 of Regulation AB, ABS registrants must 365 See Instruction 2 under Instructions as to S–20 to Item 302 are references to the item’s provide historical data on the pool assets as Summary Prospectuses for Form S–1 and Form F– predecessor, Item 12. appropriate (e.g., the lesser of three years or the 1. 369 See Exemption for Standardized Options From time such assets have existed) to allow material 366 See Item 5 under Part 1 of Forms F–4 and Provisions of the Securities Act of 1933 and From evaluation of the pool data. See 17 CFR 229.1111. S–4. the Registration Requirements of the Securities

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2109

b. Final Amendments to amended Item 303 before its disclose material information relevant to As discussed above, our amendments mandatory compliance date. In this an assessment of the financial condition to Item 302(a) are intended to address case, the registrant must provide and results of operations, further discrete areas of disclosure that we disclosure pursuant to each provision of mitigating the effects of any potential believe may be important to investors. amended Item 303 in its entirety, and loss of information. Accordingly, we are retaining current must begin providing such disclosure in We are mindful of the costs and references to Item 302(a), including in any applicable filings going forward.372 benefits of the final amendments. The Form S–20.370 discussion below addresses the III. Other Matters potential economic effects of these F. Compliance Date If any of the provisions of these rules, amendments, including the likely The final rules are effective February or the application thereof to any person benefits and costs, as well as the likely 10, 2021. After considering feedback or circumstance, is held to be invalid, effects on efficiency, competition, and from commenters,371 registrants will be such invalidity shall not affect other capital formation.374 At the outset, we required to apply the amended rules for provisions or application of such note that, where possible, we have their first fiscal year ending on or after provisions to other persons or attempted to quantify the benefits, costs, August 9, 2021 (the ‘‘mandatory circumstances that can be given effect and effects on efficiency, competition, compliance date’’). Registrants will be without the invalid provisions or and capital formation expected to result required to apply the amended rules in application. from the final amendments. In many a registration statement and prospectus Pursuant to the Congressional Review cases, however, we are unable to that on its initial filing date is required Act,373 the Office of Information and quantify the potential economic effects to contain financial statements for a Regulatory Affairs has designated these because we lack information necessary period on or after the mandatory rules as not a ‘‘major rule,’’ as defined to provide a reasonable estimate. For compliance date. by 5 U.S.C. 804(2). example, we are unable to reasonably Although registrants will not be quantify the costs to investors of IV. Economic Analysis required to apply the amended rules accessing and assessing alternative until their mandatory compliance date, A. Introduction information sources, such as the footnotes to financial statements or they may provide disclosure consistent As discussed above, we are adopting voluntary earnings announcements. We with the final amendments any time amendments to modernize, simplify, are also unable to quantify the potential after the effective date, so long as they and enhance certain financial disclosure information processing cost savings that provide disclosure responsive to an requirements in Regulation S–K. may arise from the elimination of amended item in its entirety. For Specifically, the final amendments will disclosures that are duplicative or example, upon effectiveness of the final (1) eliminate Item 301 of Regulation S– immaterial. No commenters provided amendments, a registrant may K, Selected Financial Data, (2) data or estimates that would allow us to immediately cease providing disclosure streamline Item 302 of Regulation S–K, quantify benefits or costs generated by pursuant to former Item 301, and may Supplementary Financial Information; the amendments. Where we are unable voluntarily provide disclosure pursuant and (3) amend Item 303 of Regulation to quantify the economic effects of the S–K, Management’s Discussion & final amendments, we provide a Exchange Act of 1934, Release No. 33–8171 (Dec. Analysis of Financial Condition and 23, 2002) [68 FR 188 (Jan. 2, 2003)] (‘‘New qualitative assessment of their potential Results of Operations. The amendments Securities Act Rule 238 does not make Form S–20 effects. obsolete. We are retaining Form S–20 for use by an are intended to eliminate duplicative Two commenters expressed their issuer of standardized options that is not a clearing disclosures and enhance MD&A agency registered under Section 17A of the concerns regarding the cost estimates in Exchange Act, such as a foreign clearing agency, or disclosures for the benefit of investors, the proposal.375 One of these for use by issuers of standardized options that do while simplifying compliance efforts for commenters stated that we failed to not trade on a registered national securities registrants. quantify the negative impact on exchange or on a registered national securities Overall, investors and registrants may association.’’). Since the effective date of Rule 238 investors.376 Further, one of these in 2003, we estimate that approximately one entity benefit from the amendments to the commenters stated that we should has used Form S–20. extent that they help avoid duplicative empirically study the costs and benefits 370 We are making a technical amendment to disclosure and result in more tailored Form S–20 to update the reference from Item 12, of the proposed rule, and cited to disclosures that allow investors to better specific studies.377 We have the predecessor to Item 302, to reference Item 302. understand the registrant’s business 371 See, e.g., letters from RSM; Nareit; SIFMA; qualitatively discussed the costs and CalPERS; E&Y; ABA; Society; CAQ; Chamber. through the eyes of management. We benefits of the rule below, including Commenters generally supported a transition period acknowledge the risk that modernizing greater than 180 days. See, e.g., letters from RSM; and simplifying the approach to MD&A 374 Section 2(b) of the Securities Act [15 U.S.C. Nareit; SIFMA; CalPERS; E&Y; ABA; Society. may result in the loss of certain Several of these commenters stated that registrants 77b(b)] and Section 3(f) of the Exchange Act [17 may need more time to transition to certain of the information to investors. However, we U.S.C. 78c(f)] require the Commission, when proposed amendments, such as to prepare believe that any loss of information engaging in rulemaking where it is required to disclosures in response to the proposed critical consider or determine whether an action is would be limited because the necessary or appropriate in the public interest, to accounting estimate requirements. See, e.g., letters disclosures eliminated as a result of the from RSM; SIFMA; E&Y; Society. Some commenters consider, in addition to the protection of investors, recommended a longer transition period because of amendments are mostly duplicative. whether the action will promote efficiency, the COVID–19 pandemic. See letters from Nareit; Additionally, under the principles- competition, and capital formation. Further, Section CalPERS. Other commenters recommended 23(a)(2) of the Exchange Act [17 U.S.C. 78w(a)(2)] based approach we are adopting, requires the Commission, when making rules under modifying the compliance date to require registrants will still be required to compliance in the first annual report on Form 10– the Exchange Act, to consider the impact that the K or Form 20–F that is due on or after the proposed rules would have on competition, and prohibits the effective date of 180 days, thereby allowing 372 To the extent that registrants have questions Commission from adopting any rule that would registrants a minimum of 180 days and requiring about application of the amended rules in advance impose a burden on competition not necessary or initial compliance on an annual report. See letters of their mandatory compliance date, they should appropriate in furtherance of the Exchange Act. from ABA and Society. However, a few commenters reach out to Commission staff for additional 375 See CalPERS and PRI Letters. supported a transition period of 180 days. See transition guidance. 376 See CalPERS Letter. letters from Chamber; CAQ. 373 5 U.S.C. 801 et seq. 377 See PRI Letter.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2110 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

those to investors.378 However, as hold securities issued by reporting potential benefits and costs of specific discussed above, in many cases, we are companies. In addition, prospective amendments. unable to accurately quantify the investors may also be affected by the 1. Overall Potential Benefits and Costs potential economic effects of the final rule as they may derive information amendments, and we lack information from those filings affected by the final We anticipate the final necessary to undertake empirical study amendments. Because the final amendments 384 will benefit registrants of the final rule. For example, we are amendments would affect current and and investors in several ways. First, by unable to quantify the costs to investors potential individual and institutional eliminating certain duplicative of the increased flexibility provided to investors, both large and small investors disclosure requirements, the registrants under the final amendments will be affected. amendments could reduce registrants’ because we lack the data (e.g., search or The final amendments may affect both disclosure burden and associated information processing costs) necessary domestic registrants and FPIs.382 We compliance costs. Second, by for such quantification. Commenters did estimate that during calendar year 2019 modernizing and simplifying Item 303 not provide data or estimates on such there were approximately 6,987 disclosure requirements, the final costs. We have, however, addressed the registrants that filed on domestic amendments may benefit registrants and additional studies referenced by these forms 383 and 849 FPIs that filed on F– investors by reducing disclosure commenters.379 forms, other than registered investment burdens and associated compliance costs. In addition, to the extent the B. Baseline and Affected Parties companies. Among the registrants that filed on domestic forms, approximately amendments result in more tailored and The current disclosure requirements 30 percent were large accelerated filers, informative disclosure, they could under Items 301, 302, and 303 of 18.5 percent were accelerated filers, and potentially reduce information Regulation S–K, and the related 51.5 percent were non-accelerated filers. asymmetry between registrants and requirements under Items 3.A and 5 of In addition, we estimate that investors, which could enhance the Form 20–F, and General Instructions approximately 43 percent of these investment decision process, improve B.(11), (12), and (13) of Form 40–F, domestic issuers were SRCs and 21.1 firms’ liquidity, and decrease the cost of together with the current disclosure percent were EGCs. The final capital. Finally, certain of the practices registrants have adopted to amendments will also affect ABS amendments emphasize a more comply with these requirements, form issuers. ABS issuers are required to file principles-based approach to MD&A, the baseline from which we estimate the on Forms SF–1 and SF–3 and, as a which we believe will benefit registrants likely economic effects of the final result, may be subject to the changes to and investors by underscoring the 380 amendments. The disclosure Regulation AB requirements in this flexibility available in presenting requirements apply to various filings, release. We estimate that during financial results that are more indicative including registration statements, calendar year 2019, there were 24 of their business and accordingly periodic reports, and certain proxy unique depositors filing at least one provide investors with better statements filed with the Commission. Form SF–1 or Form SF–3. information on which to base Thus, the parties that are likely to be decisions.385 A more principles-based affected by the amendments include C. Potential Benefits and Costs of the investors and other market participants Amendments 384 See supra Sections II.A. through II.F. that use the information in these filings In this section, we discuss the 385 A number of academic studies have explored (such as financial analysts, investment the use of prescriptive thresholds and materiality anticipated economic benefits and costs criteria. Many of these papers highlight a preference advisers, and portfolio managers), as of the final amendments. We first for principles-based materiality criteria. See, e.g., well as registrants subject to the relevant analyze the overall economic effects of Eugene A. Imhoff Jr. and Jacob K. Thomas, disclosure requirements discussed the amendments. We then discuss the Economic consequences of accounting standards: above. The lease disclosure rule change, 10 J. Acct. & Econ. One commenter stated that we did not 277 (1988) (providing evidence that management 382 The number of domestic registrants and FPIs modifies existing lease agreements to avoid crossing attempt to identify who uses the affected by the final amendments is estimated as the rules-based criteria for lease capitalization); Cheri L. disclosures affected by the rule and number of unique companies, identified by Central Reither, What are the best and the worst accounting why.381 We continue to believe that Index Key (CIK), that filed a Form 10–K, Form 20– standards?, 12 Acct. Horizons 283 (1998) investors, financial analysts, investment F, and Form 40–F, an amendment thereto, or both (documenting that due to the widespread abuse of a Form 10–Q and a Form S–1, S–3, or S–4 with the bright-lines in rules for lease capitalization, SFAS advisers, and portfolio managers use the Commission during calendar year 2019. For No. 13 was voted the least favorite FASB standard information in these filings. We believe purposes of this economic analysis, these estimates by a group of accounting academics, regulators, and that these parties use the information in do not include registrants that filed only a practitioners); Christopher P. Agoglia, Timothy S. these filings in connection with making Securities Act registration statement during Doupnik, and George T. Tsakumis, Principles-based calendar year 2019, or only a Form 10–Q not versus rules-based accounting standards: The investment decisions, such as preceded by a Securities Act registration statement, influence of standard precision and audit comparing information across in order to avoid including entities, such as certain committee strength on financial reporting decisions, companies, valuing companies, co-registrants of debt securities, which may not 86 The Acct. Rev. 747 (2011) (conducting investing in companies, exercising have an independent reporting obligation and experiments in which experienced financial therefore would not be affected by the amendments. statement preparers are placed in a lease control of voting securities, etc. We believe that most registrants that have filed a classification decision context and finding that Investors affected by the final Securities Act registration statement or a Form 10– preparers applying principles-based accounting are amendments may directly hold a variety Q not preceded by a Securities Act registration less likely to make aggressive reporting decisions of types of securities issued by reporting statement, other than such co-registrants, would be than preparers applying a more precise rules-based captured by this estimate. The estimates for the standard and supporting the notion that a move companies, such as stocks or bonds, or percentages of SRCs, EGCs, accelerated filers, large toward principles-based accounting could result in they may indirectly hold these accelerated filers, and non-accelerated filers are better financial reporting); Usha Rodrigues and securities by investing in funds that based on data obtained by Commission staff using Mike Stegemoller, An inconsistency in SEC a computer program that analyzes SEC filings, with disclosure requirements? The case of the supplemental data from Ives Group Audit ‘‘insignificant’’ private target, 13 J. Corp. Fin. 251 378 See infra Section C. Analytics. (2007) (providing evidence, in the context of 379 See infra Section IV(C)(1). 383 This number includes fewer than 20 FPIs that mergers and acquisitions, where rule-based 380 See supra Section I. filed on domestic forms in 2019 and approximately [disclosure] thresholds deviate from investor 381 See CalPERS Letter. 100 BDCs. preferences). Papers that highlight a preference for

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2111

approach, however, could lead to However, investors could incur misjudgment may be mitigated by registrants incurring increased costs certain transition costs under the final factors including accounting, financial associated with assessing materiality. amendments. For example, investors reporting, and disclosure controls or Many commenters agreed that the who are used to the current disclosure procedures,392 as well as the antifraud final amendments would decrease format might experience costs when provisions of the securities laws.393 compliance costs for registrants.386 adjusting to the new format. Several There also may be incentives for Some commenters, however, questioned commenters expressed concern that registrants to voluntarily disclose whether the elimination of duplicative eliminating duplicative disclosure could additional information if the benefits of disclosure would result in cost savings, result in greater work for investors to reduced information asymmetry exceed stating that registrants already have the locate this disclosure, with particular the disclosure costs. One commenter procedures in place to disclose this burdens on investors who lack skills to further cited academic studies it information.387 However, the navigate EDGAR effectively, and believes indicate how issuers could elimination of disclosure requirements, potential direct and indirect impacts of respond to the increased flexibility even where the information must be having to adjust to operating in this provided under the final rule, including disclosed elsewhere and registrants way.389 Investors could incur monetary through the increased use of boilerplate already have the disclosure procedures costs such as database subscriptions, or disclosure.394 For example, one study in place, would lead to certain costs opportunity costs such as time spent, if shows that MD&A disclosure has savings to registrants. For example, they need to obtain or reconstruct become longer and its usefulness registrants will not need to devote time information through alternative sources. (measured by stock market reaction to or resources to preparing or reviewing However, any such costs should changes in MD&A) has declined.395 This the duplicative disclosure. The resulting decrease over time as investors become study, however, acknowledges that its cost savings may be small, but we do more familiar with the new disclosure documented decrease in the usefulness not believe they are negligible. format. In a similar vein, some of MD&A disclosure could be due to a We believe the final amendments commenters stated that the elimination host of factors (e.g., increased corporate could provide various benefits to of certain disclosure items as a result of interim disclosures, more media outlets, investors. First, the amendments that the final amendments would increase faster information dissemination, ease of clarify and codify existing guidance, the time and costs for investors to obtain private information search), and not such as the amendments related to such disclosure through other means.390 necessarily the use of more principles- critical accounting estimates and capital However, we do not expect such costs based disclosure requirements in resources, could enhance MD&A to be significant since registrants would MD&A. Two of the academic studies disclosure. More robust and informative still need to disclose material cited by the commenter also purport to disclosure on these topics could information relevant to an assessment of provide evidence of increasing use of facilitate investors’ decision making and the financial condition and results of boilerplate disclosure in companies’ enhance investor protection. Second, if operations. annual reports, and a correlation the amendments result in enhanced and There could be certain additional between boilerplate disclosure and improved disclosure, they could allow costs associated with the amendments liquidity as well as analyst coverage.396 investors to more efficiently process the to the extent that they result in the However, one of the studies presents disclosure and make better-informed elimination of disclosure material to an evidence that three specific disclosure investment decisions. In particular, investment decision if registrants requirements that are not part of investors may benefit from more misjudge what information is material, MD&A—fair value, internal controls, tailored disclosures that allow them to or if disclosure becomes less and risk factors—play a significant role better understand the registrant’s comparable across firms.391 The risk of business through the eyes of heavily on the exercise of professional judgment, management. Investors also could individuals’ relative information disadvantage. A but comparability may improve as financial benefit from the reduction of one standard deviation increase in disclosure statement preparers become more experienced and duplicative disclosure, because readability and conciseness corresponds to return hold higher organizational rank); Andrew A. Acito, Jeffrey J. Burks, and W. Bruce Johnson, The reducing such duplication may improve increases of 91 and 58 basis points, respectively. The article acknowledges that, given the changes in Materiality of Accounting Errors: Evidence from the readability and conciseness of the financial disclosure standards and the possible SEC Comment Letters, 36 Contemp. Acct. Res. 839, information provided, help investors advances in individual investor sophistication, the 862 (2019) (studying managers’ responses to SEC focus on material information, and extent to which these findings, which are based on inquiries about the materiality of accounting errors historical data from the 1990s, would differ from and finding that managers are inconsistent in their facilitate more efficient information application of certain qualitative considerations and 388 those today is unknown. Recent advances in processing. information processing technology, such as may omit certain qualitative considerations from machine learning for textual analysis, may also their analysis that weigh in favor of an error’s rules-based materiality criteria are cited below in affect the generalizability of these findings. materiality). footnote 391. 389 See letters from CalPERS; CFA & CII; D. 392 See, e.g., Exchange Act Rules 13b–2b [17 CFR 386 See letters from PWC; Pfizer; Eli Lilly; EEI & Jamieson; NASAA. See also IAC Recommendation. 240.13b–2b], 13a–15e [17 CFR 240.13a–15e], and AGA; KPMG; CAQ; FedEx; Nasdaq; Nareit; FEI; 390 See letters from NASAA; CalPERS; CFA & CII; 13a–15f [17 CFR 240.13a–15f]. SIFMA; IMA; E&Y; UnitedHealth; Medtronic; D. Jamieson; E&Y. See also IAC Recommendation. 393 See, e.g., Exchange Act Rule 10b–5(b) [17 CFR Chamber; ABA; Society. 391 See Mark W. Nelson, Behavioral Evidence on 240.10b–5(b)]. 387 See letters from NASAA; CalPERS. See also the Effects of Principles- and Rules-Based 394 See PRI Letter. IAC Recommendation. Standards, 17 Acct. Horizons 91 (2003); and 395 See, e.g. Stephen V. Brown and Jennifer Wu 388 See Alastair Lawrence, Individual Investors Katherine Schipper, Principles-based accounting Tucker, Large-Sample Evidence on Firms’ and Financial Disclosure, 56 J. Acct. & Econ., 130 standards, 17 Acct. Horizons 61 (2003) (noting Year-over-Year MD&A Modifications, 49 J. Acct. (2013). Using data on trades and portfolio positions potential advantages of rules-based accounting Res. 309 (2011) of 78,000 households, this article shows that standards, including: Increased comparability 396 See, e.g. Travis Dyer, Mark H. Lang and Lorien individuals invest more in firms with clear and among firms, increased verifiability for auditors, Stice-Lawrence, The Evolution of 10–K Textual concise financial disclosures. This relation is and reduced litigation for firms). See also Randall Disclosure: Evidence from Latent Dirichlet reduced for high frequency trading, financially Rentfro and Karen Hooks, The effect of professional Allocation, J. Acct. & Econ., forthcoming, at Fig. 5, literate investors, and speculative individual judgment on financial reporting comparability, 1 J. panel B (Mar. 7, 2016); Mark Lang & Lorien Stice- investors. The article also shows that individuals’ Acct. & Fin. Res. 87 (2004) (finding that Lawrence, Text Analysis and International returns increase with clearer and more concise comparability in financial reporting may be reduced Financial Reporting: Large Sample Evidence, J. disclosures, implying such disclosures reduce under principles-based standards, which rely more Acct. & Econ., forthcoming, at 17 (Mar. 13, 2014).

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2112 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

in any increase in boilerplate investors could also incur additional a. Selected Financial Data (Item 301) 397 disclosure. To the extent that the costs as a result of the amendments Current Item 301 requires certain increased flexibility of the final because they may need to obtain registrants 402 to furnish selected amendments may encourage information from alternative sources, financial data in comparative tabular opportunistic behavior by management which could involve monetary costs, form for each of the registrant’s last five of the registrants, this could result in such as database subscriptions, or fiscal years and any additional fiscal boilerplate disclosure in some opportunity costs, such as time spent years necessary to keep the information circumstances. However, we continue to searching for alternative sources. These from being misleading.403 The purpose believe that this potential risk may be costs may be higher for retail investors of this disclosure is to supply in a mitigated by other factors including than for institutional investors. One convenient and readable format selected accounting disclosure requirements, commenter broadly stated that we did financial data that highlights certain financial reporting, and disclosure not attempt to examine the impacts on significant trends in the registrant’s controls or procedures, as well as the investment decisions across different financial conditions and results of antifraud provisions of the securities asset classes.399 We believe that operations. For certain registrants, laws. To the extent that the final information disclosed under Item 301 amendments will increase the relevancy investors, whether shareholders, bondholders, or holders of other has also been disclosed in historical and materiality of the information financial data and related XBRL data disclosed in the registrants filings, securities, use information derived from registrants’ filings to make informed submissions that can be accessed investors would benefit from the final through prior filings on EDGAR. Several rule. investment decisions. We do not anticipate different effects of the final commenters noted that much Another commenter suggested that we information disclosed under Item 301 is amendments on investors of different did not make an effort to examine the readily available in such prior filings.404 impacts on investors seeking to compare asset classes. The current disclosure requirement 398 different issuers. We acknowledge 2. Benefits and Costs of Specific under Item 301 can result in duplicative the more principles-based approach Amendments disclosure, and it can be costly for resulting from certain final amendments registrants to provide such disclosures may lead to decreased comparability We expect the final amendments to under certain circumstances.405 For among different registrants. However, to result in costs and benefits to registrants example, providing disclosure of the the extent that such an approach will and investors, and we discuss those earliest two years often creates result in the disclosure of important costs and benefits item by item in this challenges for registrants when such information for each issuer, we believe section. The changes to each item would information has not been previously that it will be beneficial to investors impact the compliance burden for provided.406 Therefore, eliminating this despite the potential decrease in registrants in filing forms that require requirement may facilitate capital comparability. With respect to costs disclosures that are responsive to such raising activity and increase efficiency related to comparability of information items. Overall, we expect the net effect for non-EGC issuers contemplating an provided by a single issuer over time, to of the amendments on a registrant’s IPO. Overall, we expect the elimination the extent that investors may incur costs compliance burden to be limited. As of Item 301 will benefit registrants by in comparing such information, we eliminating duplicative disclosures and expect such costs to be limited to the explained in this section, we expect certain aspects of the proposed reducing compliance costs. We also note initial adjustment period for investors, that the benefit associated with amendments to increase compliance and to decline over time as investors eliminating the costs of providing Item burdens, and others to decrease the become more familiar with the amended 301 disclosure may be offset by the costs burdens. The quantitative estimates of disclosures. The potential loss of associated with making materiality comparability within the same registrant changes in those burdens for purposes determinations under a principles-based over time, for example, from the of the Paperwork Reduction Act of 1995 disclosure framework. In general, we do 400 elimination of selected historical (‘‘PRA’’) are further discussed in not expect the elimination of Item 301 financial data, should be minimal as Section V below. For purposes of the will affect the cost of capital given that investors in most instances can pull that PRA, we estimate that the effect of the the eliminated disclosures are largely data from previously filed financial amendments would vary for different statements via XBRL. forms. However, taken together, the 402 As discussed supra in Section II.A, SRCs are The final amendments likely would amendments are likely to result in a net not required to provide Item 301 information and affect individual registrants and decrease in burden hours for all forms, an EGC that is providing the information called for by Item 301 in a Securities Act registration investors differently. For example, any ranging from 0.1 to 5.9 burden hours per statement need not present selected financial data compliance cost reduction might be form.401 Similarly, we believe the final for any period prior to the earliest audited financial more beneficial to smaller registrants amendments will not have significant statements presented in connection with the EGC’s that are financially constrained. IPO of its common equity securities. In addition, an economic effect on investors overall. EGC that is providing the information called for by Similarly, although eliminating Investors would benefit from the Item 301 in a registration statement, periodic report, information that is not material should increased relevance and materiality of or other report filed under the Exchange Act need benefit all investors, retail investors the disclosure resulting from the not present selected financial data for any period could benefit more as they are less prior to the earliest audited financial statements amendments, but in the meantime, likely to have the time and resources to presented in connection with its first registration investors may incur some costs to adapt statement that became effective under the Exchange devote to reviewing and evaluating to the new form of disclosure. Act or Securities Act. See Item 301(c) of Regulation disclosure. On the other hand, retail S–K; Item 301(d)(1) of Regulation S–K. 403 See supra Section II.A. 397 Travis Dyer, Mark H. Lang and Lorien Stice- 404 See letters from FEI; Eli Lilly; UnitedHealth. Lawrence, The Evolution of 10–K Textual 405 See letters from FEI; Eli Lilly; UnitedHealth; 399 Disclosure: Evidence from Latent Dirichlet See CalPERS Letter. and [EEI & AGA] Allocation, J. Acct. & Econ., forthcoming. 400 44 U.S.C. 3501 et seq. 406 See supra Section II.A. See also Proposing 398 See letter from CalPERS. 401 See infra Section V.B. Release at Section II.A.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2113

duplicative. To the extent that there is search costs and costs of adjustment to b. Supplementary Financial Information information loss under certain the new disclosure format because they (Item 302(a)) circumstances, such as in the case of would differ among different investors Under current Item 302(a), certain non-EGC IPOs, these registrants could (e.g., retail investors or institutional registrants are required to disclose potentially experience an increase in the investors) and investors of different quarterly financial data of specified cost of capital as a result of reduced degrees of sophistication. In addition, operating results and variances in these disclosure. However, if the increase in one commenter stated that the loss of results from amounts previously the cost of capital were significant, this information may ease pressure on reported on a Form 10–Q.413 Such registrants would likely voluntarily registrants to explain results, and registrants must provide quarterly provide the disclosures. therefore weaken management information for each full quarter within To the extent the final amendments discipline, which could harm long-term the two most recent fiscal years and any result in the elimination of disclosure investors.412 We believe, however, that subsequent period for which financial that is not material, investors may statements are included or required by benefit. In particular, if the readability pressure on registrants to explain results will remain as a result of Item 303 Article 3 of Regulation S–X. Item 302(a) and conciseness of the information also requires disclosure related to effects provided improves,407 investors may be disclosure requirements, among other factors. of any discontinued operations and able to process information more unusual or infrequently occurring items. effectively by focusing on the material Elimination of Item 301 will also As discussed above, we are amending information. Also, the other affect the financial information Item 302(a) to only require disclosure amendments we are making to Item 303, disclosure by ABS issuers. As discussed where there are one or more as well as our reiteration of prior above, Items 1112, 1114, and 1115 of retrospective changes to the statements Commission MD&A guidance, may Regulation AB require disclosure of of comprehensive income for any of the permit or encourage registrants to financial information required by Item quarters within the two most recent present more tailored information, 301 or Item 3.A of Form 20–F about fiscal years and any subsequent interim which also may benefit investors by certain significant obligors of pool period for which financial statements allowing them to better understand the assets, credit enhancement providers, are included or are required to be registrant’s business. and derivatives counterparties. By included by Article 3 of Regulation Investors may incur costs to the extent eliminating Item 301 and Item 3.A of S–X that, individually or in the the amendments result in a loss of Form 20–F for corporate issuers, this aggregate, are material. In such cases, information.408 While we do not financial information about these third the disclosure must provide an anticipate significant information loss explanation of the reasons for such from the elimination of Item 301, we parties to an ABS transaction, including material changes, and include, for each recognize that selected financial data for any trend information comparable to affected quarterly period and the fourth the two earliest years would no longer information required by Item 303 or quarter in the affected year, summarized be disclosed in non-EGC IPOs. However, Item 5 of Form 20–F, may not otherwise financial information related to the the purpose of the item is to highlight be available. To mitigate this potential statements of comprehensive income certain significant trends in the information loss, the final amendments and earnings per share reflecting such registrant’s financial condition and will replace in Regulation AB those changes. results of operations, and we expect that requirements to disclose selected Since the information required under any material trend information that financial data under Item 301 or Item the current item, other than fourth would have been disclosed pursuant to 3.A of Form 20–F with requirements to quarter data and the effect of a Item 301 would be disclosed under Item disclose summarized financial retrospective change in the earliest of 303.409 We also recognize investors may information, as defined by Rule 1– the two years,414 typically can be found incur certain other costs that, for 02(bb) of Regulation S–X, for each of the in prior quarterly filings through example, result from the inability to last three fiscal years (or the life of the EDGAR, the prescriptive requirements view the information required by Item relevant entity or group of entities, if under current Item 302(a) typically 301 in one place.410 In particular, less). investors would incur search costs if result in duplicative disclosures. By Since the changes related to ABS eliminating these duplicative they have to spend more time to retrieve issuers are intended to conform to the the information from prior filings and to disclosures and reducing the associated other changes related to selected compliance costs, the final amendments the extent investors are used to the financial data and MD&A, our analysis current format and rely on the compiled would benefit registrants. We do not of the costs and benefits for registrants comparable data, they may incur costs expect the elimination of these and their investors under the to adjust to new disclosure formats. One duplicative disclosures to affect amendments to Item 301 and Item 3.A commenter expressed concern that our registrants negatively. While a decrease analysis fails to quantify the costs to of Form 20–F can be carried over to ABS in disclosure could potentially increase investors.411 We do not, however, issuers. In addition, while this the company’s cost of capital in general, believe that it is feasible to accurately amendment would generally result in the final amendments should elicit measure and quantify these costs the presentation of fewer periods, we do information regarding material because we lack information necessary not expect this amendment to have a retrospective changes that should to provide a reasonable estimate. For significant effect on ABS issuers and mitigate this risk. Additionally, a example, we are unable to quantify their investors. The presentation of the registrant can always choose to disclose earlier years will cover periods beyond the information required under the 407 See supra footnote 388. those presented for the underlying pool current item in its filings or through 408 See letter from NASAA. assets. ABS investors mainly rely on the 409 Commission guidance has also emphasized information relating to the underlying 413 As discussed in Section II.B.1, SRCs, FPIs, the importance of trend disclosure in MD&A. See, issuers conducting an IPO, and registrants that have e.g., 2003 MD&A Interpretive Release. pool assets. a class of securities registered under Section 15(d) 410 See letters from CFA & CII and CalPERS. of the Exchange Act are not subject to Item 302(a). 411 See CalPERS letter. 412 See letter from NASAA. 414 See supra footnote 47 and corresponding text.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2114 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

other channels. For example, as some as annual data. However, to the extent expenditures historically relates to commenters indicated, separate fourth that there are material trends or events physical assets, such as buildings and quarter information is often disclosed in in the fourth quarter or throughout the equipment, this requirement may not earnings releases. fiscal year, registrants would be fully reflect market developments. Investors could benefit to the extent required to address those matters in While capital expenditures remain that the final amendments result in less their MD&A. important in many industries, certain duplicative disclosure and less expenditures that are not necessarily disclosure of immaterial information. c. Item 303(a) Restructuring and Streamlining capital investments may be increasingly The final amendments may result in important to companies. For example, improved readability and conciseness of The final rules include multiple expenditures for human resources or the information provided, helping changes that are intended to clarify and intellectual property may be essential investors focus on material information streamline the requirements of Item 303. for companies in certain industries. The and facilitating more efficient For example, we are adopting a new amendments to current Item 303(a)(2) information processing by investors. Item 303(a) to provide a succinct and (new Item 303(b)(1)(ii)) are intended to The amendments will also allow clear description of the purpose of encompass these types of expenditures. registrants to present financial MD&A. As discussed above, The amendments will also explicitly information that is more reflective of emphasizing the purpose of MD&A at require, consistent with the their own industry and firm operating the outset of the item is intended to Commission’s 2003 MD&A Interpretive cycles, which could allow investors to provide clarity and focus to registrants Release that registrants broadly disclose better understand their business. as they consider what information to material cash commitments, including We anticipate information loss from discuss and analyze, which could but not limited to capital expenditures. the elimination of fourth quarter encourage management to disclose those We believe the final amendments will financial information currently required factors that are most specific and modernize the requirement and make under Item 302(a), other than where relevant to a registrant’s business. Other the disclosure more reflective of current there has been a material retrospective changes include restructuring and and future industry outlays. change during the year that would streamlining language in Item 303 and We believe that the final amendments require disclosure of fourth quarter the related instructions. could benefit registrants by providing information. It is generally expected that We anticipate that the amendments additional clarity on the term ‘‘capital fourth quarter financial data could be will provide registrants with more resources’’ and reducing confusion, calculated from annual report and clarity on disclosure requirements. thereby eliciting appropriate disclosure cumulative third quarter data. When there is confusion related to from registrants and potentially Nonetheless, calculating or otherwise disclosure requirements, registrants may obtaining fourth quarter data may be either over-disclose and incur decreasing litigation risk. Capital costly for investors. While such costs additional compliance costs, or under- expenditures vary across industries. might be minimal for institutional disclose and face increased litigation While firms in traditional industries investors, which have both resources risk. To the extent that the final rely more on physical assets, firms in and sophistication to obtain the needed amendments reduce registrants’ other industries such as the technology financial information, for retail confusion, registrants could potentially sector may invest more heavily in investors, the search costs might be benefit from reduced compliance costs intellectual property and human capital. substantially larger, which could and litigation risk. More informative By specifying only capital expenditures, involve monetary costs such as database disclosure could potentially benefit both the rule may not be clear about what subscriptions, or opportunity costs such registrants and investors by reducing information should be provided. As a as time spent searching for alternative information asymmetry in the market. result, registrants may over-disclose and sources and cross-referencing. Reduced information asymmetry could incur additional compliance costs, or Additionally, investors could make help investors make more informed under-disclose and face increased mistakes in deriving the fourth quarter investment decisions, which may litigation risk. Further, we expect that financial information. To the extent that benefit registrants in their capital registrants will benefit from decreased there is a lack of accurate fourth quarter raising. For registrants, reduced compliance costs to the extent that the information which cannot be obtained information asymmetry could also amendments reduce the need to consult through alternative means, investors’ potentially improve firm liquidity and existing Commission guidance to decision making could be affected.415 reduce cost of capital. process and understand the disclosure However, such potential loss of requirements. As many registrants may information will be mitigated by the fact d. Capital Resources (Item 303(b)(1)(ii))) already be following relevant that the final amendments will require Current Item 303(a)(2), which requires Commission guidance, this effect is not disclosure of fourth quarter financial a registrant to discuss its material expected to be significant. information where there has been a commitments for capital expenditures The amendments should also benefit material retrospective change during the as of the end of the latest fiscal period, investors through improved disclosure. fiscal year. Also, the potential does not define the term ‘‘capital As discussed above, lack of clarity information loss from the amendments resources.’’ The lack of specificity was might lead to under- or over-disclosure to Item 302(a) might be mitigated under intended to provide management by registrants. For example, disclosure MD&A’s principles-based framework. flexibility for a meaningful discussion focusing only on capital expenditures We believe that fourth quarter data may when this disclosure requirement was rather than on material cash not be material to all registrants or in adopted in 1980. Nonetheless, the commitments more generally might lead every fiscal year. For example, for Commission has previously provided to under-disclosure for less capital investors in companies with long guidance to clarify this requirement.416 intensive industries. As a result, operating cycles, fourth quarter data Further, while the required disclosure of investors might not receive adequate or might not be as incrementally important material commitments of capital consistent information to make informed investment decisions. By 415 See letter from NASAA. 416 See 2003 MD&A Interpretive Release. providing clarity on the requirement,

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2115

the amendments may facilitate more slight modification to use a ‘‘reasonably judgments.423 Also, some registrants informative disclosure. likely’’ disclosure threshold throughout might need to spend resources to The amendments might increase the amended Item 303. For example, the evaluate the future likelihood that such disclosure burden for some registrants final amendments clarify that when a events might occur. However, such by prompting disclosure of material registrant knows of events that are registrants might be few in light of investments in non-physical assets that reasonably likely to cause a material existing Commission guidance, and the registrants might not otherwise be change in the relationship between costs increase in compliance costs could be disclosing. However, we do not and revenues, such as known or offset by the potential decrease in the anticipate a significant increase in reasonably likely future increases in cost of capital as a result of enhanced compliance costs. As discussed above, costs of labor or materials or price disclosure and reduced information some registrants already include increases or inventory adjustments, the asymmetry.424 disclosure beyond capital expenditures, reasonably likely change must be f. Results of Operations—Net Sales and which the Commission’s MD&A disclosed. This amendment aligns 417 Revenues (Item 303(b)(2)(iii)) guidance has encouraged. Also, better current Item 303(a)(3)(ii) with the disclosure may eventually benefit Commission’s guidance on forward- Current Item 303(a)(3)(iii) requires registrants, because it could reduce looking disclosure.419 Since many management to discuss certain factors, information asymmetry between registrants may already be following such as changes in prices or volume, management and investors, reduce the relevant Commission guidance, the that led to certain material increases in cost of capital, and thereby improve marginal increase in compliance costs is net sales or revenues. The final firms’ liquidity and their access to not expected to be significant. amendments broaden the current capital markets.418 As discussed above, the language in requirement, which focuses on e. Results of Operations—Known current Item 303(a)(3)(ii) differs from ‘‘material increases in net sales or Trends or Uncertainties (Item other Item 303 disclosure requirements revenue’’ in the ‘‘financial statements’’ to instead require disclosure of 303(b)(2)(ii)) for forward-looking information.420 This ‘‘material changes from period to period differing language may have led to Current Item 303(a)(3)(ii) requires a in one or more line items’’ in the confusion and inconsistent practice registrant to describe any known trends ‘‘statement of comprehensive income.’’ regarding what events should be or uncertainties that have had or that Item 303(b) would similarly clarify that disclosed. While the Commission has the registrant expects will have a MD&A requires a narrative discussion of sought to alleviate some of these material impact (favorable or the underlying reasons for material concerns by clarifying the standard for unfavorable) on net sales or revenues or changes in quantitative and qualitative forward-looking information in its income from continuing operations. As terms. MD&A guidance,421 the amendments discussed above, we are adopting the The final amendments are intended to could further benefit registrants by amendments to Item 303(b)(2)(ii) codify Commission guidance on results reducing any residual confusion, substantially as proposed but with a of operations disclosure. The eliciting more consistent disclosure, and Commission has previously stated that 417 potentially decreasing compliance costs See supra Section II.C.2 and 2003 MD&A MD&A disclosure should include both Interpretive Release. and litigation risk. In addition, a 418 qualitative and quantitative analysis and See Douglas W. Diamond and Robert E. consistent disclosure threshold Verrecchia, Disclosure, Liquidity, and the Cost of clarified that a results of operations throughout Item 303 may allow Capital, 46 J. Fin. 1325 (1991) (finding that discussion should describe increases or investors to make more meaningful revealing public information to reduce information decreases in any line item, including net asymmetry can reduce a firm’s cost of capital comparisons across firms and make sales or revenues.425 The need for through increased liquidity). See also Christian more informed investment decisions. Leuz and Robert E. Verrecchia, The Economic registrants to consult both current Item One commenter suggested that the Consequences of Increased Disclosure, 38 J. Acct. 303(a)(3)(iii) and the Commission’s changes could result in the disclosure of Res. 91 (2000) (providing empirical evidence that guidance to understand the requirement increased disclosure leads to lower information various alternative scenarios that could could lead to confusion and asymmetry component of the cost of capital in a confuse or mislead investors,422 but we sample of German firms); Christian Leuz and Peter inconsistent disclosure practice among believe that this increased consistency D. Wysocki, The Economics of Disclosure and registrants. The additional clarity Financial Reporting Regulation: Evidence and throughout Item 303 will decrease the provided by the amendments could Suggestions for Future Research, 54 J. Acct. Res. likelihood of confusing disclosure benefit registrants by reducing any 525 (2016) (providing a comprehensive survey of overall. the literature on the economic effect of disclosure). confusion, eliciting more consistent Studies that provide both theoretical and empirical Some registrants may experience an disclosure, and potentially decreasing evidence on the link between information increased cost of compliance under the asymmetry and cost of capital include Thomas E. compliance costs and litigation risk. Copeland and Dan Galai, Information Effects on the final amendments to the extent that The final amendments could increase Bid-Ask Spread, 38 J. Fin. 1457 (1983) (proposing these registrants, for example, have been disclosure burdens for registrants, thus a theory of information effects on the bid-ask disclosing events that will cause a potentially increasing compliance costs. spread); David Easley and Maureen O’Hara, Price, material change in the relationship Trade Size, and Information in Securities Markets, However, since many registrants may 19 J. Fin. Econ. 69 (1987) (using a model to provide between costs and revenues as opposed already be following relevant explanation for the price effect of block trades); to events that are reasonably likely to Commission guidance, the marginal David Easley and Maureen O’Hara, Information and cause the change. One commenter, for increase in compliance costs is not the Cost of Capital, 59 J. Fin. 1553 (2004) (showing 426 that differences in the composition of information example, noted that the amended Item expected to be significant. between public and private information affect the 303(a)(3)(ii) will require new processes Additionally, to the extent that cost of capital, with investors demanding a higher and controls to manage relevant registrants do incur additional return to hold stocks with greater private information); Yakov Amihud and Haim Mendelson, 419 423 Asset Pricing and the Bid-Ask Spread, 17 J. Fin. 223 See supra footnote 145. See id. (1986) (predicting that market-observed expected 420 See supra Section II.C.3. See also supra 424 See supra footnote 418. return is an increasing and concave function of the footnote 144 and 145. 425 See, e.g., 2003 MD&A Interpretative Release spread, and providing empirical results that are 421 See 1989 MD&A Interpretive Release. and 1989 MD&A Interpretative Release. consistent with the predictions of the model). 422 See letter from FEI. 426 See letter from FEI.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2116 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

compliance costs, such costs could be tailored information, which also may One commenter noted that obtaining offset by the potential decrease in the benefit investors. a complete picture of an entity’s off- cost of capital as a result of improved balance sheet exposures can be h. Off-Balance Sheet Arrangements disclosure and reduced information challenging for some investors because (Instruction 8 to Item 303(b)) asymmetry.427 this information may be dispersed The amendments will require Current Item 303(a)(4) requires, in a throughout a registrant’s financial 432 registrants to provide a nuanced separately-captioned section, disclosure statements. We believe that investors discussion of the underlying reasons of a registrant’s off-balance sheet might need to spend time searching for that may be contributing to material arrangements that have or are the information and adjusting to the changes in line items, and therefore reasonably likely to have a current or new format and location of the should enhance the disclosure. More future effect on a registrant’s financial disclosure as the final amendments will condition, changes in financial consistent and informative disclosure no longer require the relevant disclosure condition, revenues or expenses, results would allow investors to make more in a separately captioned section. Retail of operations, liquidity, capital meaningful comparisons across firms investors are likely to be affected more expenditures, or capital resources that is and make more informed investment than institution investors. Nevertheless, material to investors. The final such costs are likely to be one-time or decisions. However, any potential amendments will replace Item 303(a)(4) decrease over time for both retail and benefits to investors may be limited to with a new principles-based instruction institutional investors. the extent registrants already are that will require registrants to discuss following the relevant Commission i. Tabular Disclosure of Contractual commitments or obligations, including guidance. Obligations (Current Item 303(a)(5)) contingent obligations, arising from g. Results of Operations—Inflation and arrangements with unconsolidated Under current Item 303(a)(5), Price Changes (Current Item entities or persons that have, or are registrants other than SRCs must 303(a)(3)(iv), Instruction 8, and reasonably likely to have, a material disclose in tabular format their known Instruction 9) current or future effect on a registrant’s contractual obligations. There is no financial condition, changes in financial materiality threshold for this item. A The final amendments will eliminate condition, revenues or expenses, results registrant must arrange its table to current Item 303(a)(3)(iv) and related of operations, liquidity, cash disclose the aggregate amount of Instructions 8 and 9, which generally requirements, or capital resources. contractual obligations by type and with require that registrants specifically We do not believe the amendments subtotals by four prescribed periods. discuss the impact of inflation and price will lead to significant information loss, The Commission originally adopted this changes on their net sales, revenue, and as we expect the principles-based requirement so that aggregated income from operations for the three instruction will continue to elicit information about contractual most recent fiscal years, to the extent material information about off-balance obligations was presented in one place material. The purpose of the elimination sheet arrangements.431 As discussed and to improve transparency of a is to streamline Item 303 by eliminating above, we believe that the amendments registrant’s short- and long-term the specific reference to these topics, will encourage registrants to consider liquidity and capital resources needs which may not be material to most and integrate disclosure of off-balance and demands.433 However, as discussed registrants. This change is consistent sheet arrangements in the context of above, most of the information with the principles-based disclosure their broader MD&A disclosures and presented in response to this framework of Item 303. may avoid boilerplate disclosure that requirement is already included in the We do not believe that these changes either duplicates information in the notes to the financial statements. In will result in a loss of material financial statements, or cross-references order to promote the principles-based information for market participants.428 the financial statements without nature of MD&A and streamline Registrants will still be required to additional disclosure to put such disclosures by reducing overlapping discuss in their MD&A the impact of information into appropriate context. requirements, the final amendments inflation and changing prices, if We acknowledge that the flexibility will eliminate Item 303(a)(5) and material, as is currently required. associated with the principles-based enhance the liquidity and capital resources requirements to specifically The elimination of this item could approach might lead to certain require disclosure of material cash benefit registrants by streamlining Item opportunistic firm behavior if requirements from known contractual 303 and reducing compliance costs. registrants cherry pick the information and other obligations. The amendments Similar to what we have discussed to be disclosed, although we do not also specify that such disclosures must above,429 to the extent that the believe this risk is significant. include the type of obligation and the elimination encourages registrants that The amendments could benefit relevant time period for the related cash currently disclose inflation and registrants by avoiding duplicative requirements. Under this approach, changing prices even if not material to disclosure and reducing compliance registrants will be relieved of the burden modify such disclosure,430 investors costs. As discussed above, to the extent associated with the current prescriptive could potentially benefit from a focus the amendments improve the readability table and be afforded more flexibility to on material information, which would and conciseness of the information integrate a discussion of contractual allow them to process information more provided, they may help investors obligations in the broader context of its effectively. Similarly, emphasizing a process information more effectively. liquidity and capital resources principles-based approach may Also, emphasizing a principles-based disclosures. encourage registrants to present more approach may encourage registrants to provide disclosure that is more tailored 432 See letter from CFA & CII. 427 and informative, which could benefit See supra footnote 418. 433 See Off-Balance Sheet Arrangements and 428 investors. See letter from FEI. Contractual Obligations Adopting Release, at 5990. 429 See supra Section III.B.2.i. See also Off-Balance Sheet Arrangements and 430 See supra footnote 385. 431 See letter from FEI. Contractual Obligations Proposing Release.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2117

We believe the amendments could subscriptions. Investors may also incur duplicative disclosure, thereby lead to reduced compliance costs by opportunity costs, such as time spent decreasing compliance costs. avoiding duplicative, prescriptive searching for alternative sources, and A number of commenters expressed disclosures, therefore benefiting these costs may fall more heavily on concerns that the required disclosure of registrants, while also providing retail investors than on other types of critical accounting estimates may result important information to investors investors, such as institutional in information that is not material and regarding the registrants’ liquidity and investors. Additionally, one commenter costly or otherwise challenging to 434 capital resource needs. We recognize suggested that the preparation of the prepare.438 To allay such concerns, the that there might be increased costs contractual obligations table is a useful final amendments will clarify that the associated with assessing the materiality exercise for management to obtain a material and reasonably available of contractual obligations under the ‘‘picture of such obligations,’’ 436 and to qualifier applies to all parts of the principles-based approach. However we the extent that management needs but disclosure, not just to quantitative do not expect such costs to be does not otherwise have such information. significant given that the materiality information, management and investors standard is already used by registrants Investors will likely benefit from the could be subjected to costs. However, to amendments. The amendments could when preparing MD&A disclosures. As the extent management needs such a discussed above, to the extent the elicit more informative disclosure from table to conduct its duties or the elimination of redundant or immaterial registrants related to their estimates and benefits of collecting this information in disclosure improves the readability and assumptions, which would help one place outweighs the costs, we conciseness of the information investors better understand any provided, the amendments could expect that management will continue potential risk or uncertainty related to potentially benefit investors by helping to obtain this information without the these estimates and make more them process information more additional costs of preparing related informed investment decisions. The effectively. Also, since a principles- disclosure. amendments could also promote more consistent disclosure practices among based approach allows registrants to j. Critical Accounting Estimates (Item registrants by providing more clarity, present more tailored information, it 303(b)(3)) could lead to more informative allowing investors to make more disclosure, which would benefit Item 303(a) does not currently meaningful comparisons across investors. explicitly require registrants to disclose registrants and better informed We recognize that there could be a critical accounting estimates. U.S. investment decisions. loss of certain information due to the GAAP requires disclosure of significant We recognize that this disclosure elimination of the item. As discussed in accounting policies in the notes to the requirement could introduce additional Section II.C.7, some of the information financial statements, but does not costs to market participants. While we in the contractual obligations table such require similar disclosure of estimates do not anticipate that investors would as purchase obligations is not and assumptions, except in limited incur any direct costs (other than specifically called for under U.S. GAAP circumstances. IFRS does require information processing costs) associated and is therefore not typically disclosed disclosures regarding sources of with this amendment, compliance costs in the financial statements. estimation uncertainty and judgments might increase for registrants because of Additionally, information related to the made in the process of applying the more explicit disclosure ‘‘payments due by period’’ currently accounting policies that have the most requirement compared to the existing required by the item may be difficult to significant effect on the amounts Commission guidance. However, some ascertain from a registrant’s financial recognized in the financial of these costs may be minimized statements. However, since the final statements.437 Although the because this disclosure requirement amendments will encompass material Commission has issued guidance on only applies to the extent the cash requirements from known disclosure of critical accounting information is material and reasonably contractual and other obligations, are estimates, many registrants repeat the available. Additionally, the potential not limited to those called for by U.S. discussion of significant accounting increase in compliance costs might GAAP, and will require that such decline over time as registrants become disclosures specify the type of policies from the notes to the financial statements in their MD&A and provide more accustomed to the new filing obligation and the relevant time period requirements. We also note that, for the related cash requirements, we limited additional discussion of critical accounting estimates. We are amending consistent with Commission guidance, believe any loss of information will not some registrants may already provide be significant. Item 303 to explicitly require such disclosure due to the importance of disclosures related to critical accounting We expect investors could experience estimates that do not duplicate the certain additional costs. A centralized critical accounting estimates in providing meaningful insight into the financial statement disclosures, thus the location and tabular format make it increase in compliance costs might be convenient for investors to extract and uncertainties related to these estimates 435 and reported financials and how minimal to those registrants. Finally, the analyze information. Under the increase in compliance costs could be amendments, the absence of a accounting policies of registrants faced with similar facts and circumstances offset by a potential decrease in centralized location and tabular format registrants’ cost of capital, because such may cause investors to incur search may differ, and also to eliminate disclosure that duplicates the financial disclosure could reduce information costs to derive the data from the asymmetry between investors and financial statements or from information statement discussion of significant firms.439 embedded in MD&A, or monetary costs accounting policies. Providing a clear to obtain the information through disclosure framework could benefit registrants by reducing confusion and 438 See letters from RSM; PWC; Pfizer; EEI & alternative channels, such as database AGA; Deloitte; KPMG; Grant Thornton; CAQ; BDO; FEI; SIFMA; IMA; UnitedHealth; Medtronic; 434 See, e.g., letters from Costco; Eli Lilly; FEI 436 See letter from CFA & CII. Chamber; ABA; E&Y; Society. 435 See letter from CFA & CII. 437 See IAS 1, paragraphs 122 to 133. 439 See supra footnote 418.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2118 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

k. Interim Period Discussion (Item them make more informed decisions. states that an SRC is not required to 303(c)) Investors will also benefit from the provide the contractual obligations chart Current Item 303(b) requires requirement that companies that choose specified in Item 303(a)(5). To conform registrants to provide MD&A disclosure to change the method of their to the elimination of the prescriptive for interim periods that enables market presentation must discuss the reasons requirements of Item 303(a)(3)(iv) and participants to assess material changes for changing the basis of comparison (a)(5), the final rules will eliminate Item in financial condition and results of and provide both comparisons in the 303(d). SRCs may rely on Instruction 1 444 operations between certain specified first filing in which the change is made. to Item 303(b), which states that an periods. The final rules will amend This requirement is intended to prevent SRC’s discussion shall cover the two- current Item 303(b) (renumbered as Item companies from using a change in year period required in §§ 210.8–01 presentations to obscure negative 303(c)), to allow for flexibility in through 210.8–08 (Article 8 of information, and to discourage frequent comparisons of interim periods and to Regulation S–X). switching between them from quarter to streamline the item. Specifically, under The elimination of Item 303(d) will quarter. Item 303(c), registrants will be allowed have the effect of subjecting SRCs to the to compare their most recently l. Safe Harbor for Forward-Looking newly-adopted disclosure requirements completed quarter to either the Information (Current Item 303(c)) in Item 303(b), a principles-based liquidity and capital resources corresponding quarter of the prior year Current Item 303(c) 441 states that the disclosure requirement that includes a (as is currently required) or to the safe harbors provided in Section 27A of requirement to discuss material immediately preceding quarter. The the Securities Act and 21E of the contractual obligations in the context of amendments will also streamline the Exchange Act apply to all forward- that disclosure.445 We do not believe instructions to current Item 303(b), looking information provided in that the preparation of such disclosure consistent with the amendments to response to Item 303(a)(4) (off-balance will be burdensome for SRCs because current Item 303(a) and the related sheet arrangements) and Item 303(a)(5) SRCs are currently required to provide instructions. (contractual obligations), provided such a discussion and analysis that addresses This more flexible approach is disclosure is made by certain material impacts on their liquidity and intended to allow registrants to provide enumerated persons.442 The final capital resources and are also required an analysis that is better tailored to their amendments will eliminate this item to under U.S. GAAP to assess most of the business cycles. This may result in more conform to the elimination of Items currently prescribed categories of informative disclosure that could reduce 303(a)(4) and (a)(5). As discussed above, contractual obligations. We believe that information asymmetry and firms’ cost the final amendments replace the 440 this disclosure will have a benefit to of capital, benefiting registrants. In current prescriptive off-balance sheet investors because such disclosure may addition, streamlining the item could disclosure required by these items with be necessary to an understanding of the avoid duplicative disclosure and reduce more principles-based requirements registrant’s financial condition, cash associated compliance costs. located in other paragraphs of Item 303. flows, and other changes in financial Investors also may benefit from the We do not believe eliminating Item condition and results of operations. amendments. As noted above, the 303(c) will have any economic effect by amendments will provide registrants itself because forward-looking n. Foreign Private Issuers flexibility to choose the interim period disclosure responsive to the new The changes related to Item 3.A and presented, which could allow them to principles-based requirements will Item 5 of Form 20–F and General provide a more tailored analysis. This, continue to be protected by the existing Instructions B.(11), (12), and (13) of in turn, could allow investors to make statutory and regulatory safe harbors. Form 40–F are intended to conform to better informed investment decisions. Therefore, we do not expect changes in the other changes related to selected While this flexibility may encourage market behavior. To the extent that the financial data and MD&A. Therefore, certain registrants to be opportunistic in elimination of the section may result in our analysis of the costs and benefits for terms of what to disclose, thus any confusion as to the application of domestic issuers and their investors potentially negatively affecting the safe harbors, there could be a cost under the amendments to Item 301 can investors, we do not anticipate this risk to registrants. However, we believe such be carried over to FPIs and their to be significant because we believe that cost should be minimal, as registrants investors under the amended items. The other disclosure obligations are likely to are already familiar with analyzing the changes could benefit FPIs through a provide material disclosure. More applicability of the safe harbors. flexibility in disclosure could also reduction in compliance costs, although decrease comparability across firms, m. Smaller Reporting Companies the benefits are likely to be smaller potentially increasing the cost of (Current Item 303(d)) given that current Item 3.A permits a investors’ decision-making. However, Current Item 303(d) 443 states that an FPI to omit either or both of the earliest we do not expect the flexibility in SRC may provide Item 303(a)(3)(iv) two years of data under certain reporting to significantly reduce information for the most recent two conditions and registrants that file on comparability, because registrants in the fiscal years if it provides financial Form 40–F use Canadian disclosure same industry are likely to have similar information on net sales and revenues documents to satisfy the Commission’s business cycles and choose similar and income from continuing operations registration and disclosure interim periods. Therefore, concerns for only two years. Item 303(d) also requirements. Since FPIs would have about a reduction of comparability more flexibility to provide information across firms in the same industry could 441 Item 303(c) of Regulation S–K. that is better tailored to their industry or be mitigated. The resulting reduction of 442 Such persons are: An issuer; a person acting country, investors could benefit from duplicative disclosure might increase on behalf of the issuer; an outside reviewer retained more informative disclosure. However, the effectiveness of information by the issuer making a statement on behalf of the investors might incur additional search issuer; or an underwriter, with respect to processing by investors, thus helping information provided by the issuer or information derived from information provided by the issuer. 444 Amended Item 303(b). 440 See id. 443 Item 303(d) of Regulation S–K. 445 See supra Section II.C.7 and II.C.9.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2119

costs when looking for information in the information distribution process. would be largely duplicative and through alternative channels. Additionally, if registrants misjudge therefore, have limited utility. To maintain a consistent approach to what information is material, there Regarding the alternative that we MD&A for domestic registrants and could be an increase in information expand the current EGC accommodation FPIs, the final rules will make changes asymmetries between registrants and to all initial registrants, while this to Forms 20–F and 40–F that generally investors, negatively affecting approach could provide cost savings to conform to the amendments to Item 303. efficiency, competition, and capital non-EGC initial registrants at the Therefore, our discussion of the costs formation. However, we expect this risk beginning, in the long run, these and benefits for domestic issuers and to be mitigated by factors such as registrants would still face the same their investors under the amendments to accounting controls and the antifraud duplicative disclosure problem that Item 303 generally can be carried over provisions of the securities laws. other registrants do currently. As a to FPIs under the amended item. The The amendments, in particular by result, we decided not to adopt this final rules add to Item 303 the current simplifying and codifying certain alternative. Form 20–F instruction that requires FPIs positions expressed in various that are not subject to the Commission guidance, might reduce the As another alternative, we considered multijurisdictional disclosure system to compliance costs of private companies amending Item 301 to require the discuss hyperinflation in a considering going public. For earliest years only in circumstances hyperinflationary economy. This companies considering an IPO, the where the company can represent that disclosure can be beneficial to investors benefit of easing the burdens associated the information cannot be provided when analyzing FPIs, as hyperinflation with preparing these disclosures for the without unreasonable effort and in some FPIs’ home countries might be first time could decrease the costs of expense, as is currently allowed under an important risk factor for the firm’s going public and thus leave more capital Item 3.A of Form 20–F. Under this results of operations or financial health. for future investment. This could lead to approach, registrants would experience more efficient capital formation. reduced compliance costs under the D. Anticipated Effects on Efficiency, exempted circumstances, albeit a Competition, and Capital Formation E. Alternatives smaller reduction compared to the final We believe the final amendments 1. Alternatives Regarding Item 301 amendments, because they would still could have positive effects on As an alternative to the elimination of need to disclose selected financial data efficiency, competition, and capital Item 301, which requires registrants to for the earliest years when it is deemed formation. As discussed above, we furnish selected financial data in not time consuming and costly. At the expect the amendments could reduce comparative tabular form for each of the same time, while investors would still duplicative disclosure and elicit registrant’s last five fiscal years, we incur search costs if they prefer to disclosure that is more focused on considered amending the item to require analyze five years’ financial data, such material information and tailored to a only the same number of years of data costs would be smaller compared to the registrant’s business, making the as presented in the registrant’s financial proposed approach. We decided not to disclosure more informative. We believe statements in that same filing. Similarly, adopt this alternative because the lack more informative disclosure could another alternative we considered is of a consistent or objective standard to reduce information asymmetry between expanding the current EGC determine when additional financial firms and investors, thereby improving accommodation to all initial registrants. disclosure is required could be time firm liquidity and price efficiency.446 The EGC accommodation generally consuming or burdensome for We also believe the amendments could provides that an EGC need not present registrants. promote competition in the capital selected financial data for any period markets and facilitate capital formation. 2. Alternatives Regarding Item 302 prior to the earliest audited period This is because more informative presented in its initial filing.447 This disclosure could allow investors to Some commenters stated that, in some accommodation allows EGCs to build make more meaningful comparisons instances, it was difficult to calculate up to the full five years of selected across firms and make more informed fourth quarter data from data disclosed financial data. elsewhere.448 As an alternative to investment decisions, and as a result, The benefit of these alternatives more value-enhancing projects may streamlining Item 302(a) to only require would be potential cost savings from a disclosure of retrospective changes from receive more capital allocation. reduction in compliance burdens by not However, as discussed above, since amounts previously reported within the having to reproduce the earliest years of registrants no longer need to present last two most recent fiscal years that, selected financial data. These certain information (e.g., five-year individually or in the aggregate, are alternatives might be sufficient for comparable data), investors could incur material, we considered requiring a investors to make a quick comparison costs when searching for alternative registrant to only disclose fourth quarter with the most recent financial data channels to obtain or reconstruct the data elsewhere in its annual report, such without cross-referencing to other information. Since each investor would as in MD&A. This approach could sources. However, given the nature of have to consider the need for alternative prevent or mitigate the potential loss of electronic access to financial data sources of information, the final the fourth quarter financial data under through EDGAR, we think the potential amendments could result in inefficiency the proposed approach. As discussed benefits of these alternatives would be above, however, we believe that the more limited than the elimination of 446 See supra footnote 418. See also David revised disclosure requirements in Item Item 301. We decided not to adopt the Hirshleifer and Siew Hong Teoh, Limited attention, 302(a) will allow investors to calculate alternative of requiring the same information disclosure, and financial reporting, 36 this data in most instances without J. Acct. & Econ. 337 (2003) (developing a theoretical number of years of data as presented in model where investors have limited attention and the registrant’s financial statements in substantial costs, while also processing power and showing that, with partially that same filing because such disclosure highlighting material retrospective attentive investors, the means of presenting changes better than the existing information may have an impact on stock price reactions, misvaluation, long-run abnormal returns, 447 See Item 301(d) of Regulation S–K [17 CFR and corporate decisions). 229.301]. 448 See, e.g., letters from NASAA and CFA & CII.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2120 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

requirement. Therefore, we decided not maintaining the prescriptive contractual with a greater understanding of the to adopt this alternative. obligations disclosure requirement in a variability that is reasonably likely to modified form. For example, we impact the financial condition or results 3. Alternatives Regarding Item 303 considered reducing the prescribed time of operations. We are amending current Item periods that need to be disclosed, or Another alternative that some 303(a)(2) to specify that a registrant requiring disclosures of only short-term commenters suggested is to specify a should broadly disclose material cash or long-term obligations rather than relevant period for which this requirements, including but not limited requiring disclosure to be grouped in disclosure is required (e.g., most recent to capital expenditures. We considered the four time periods currently specified period, all periods presented, etc.).450 adopting a definition for the term in Item 303(a)(5). While this approach Such a specification would make it ‘‘capital resources.’’ While defining the could be more beneficial to investors by easier for issuers to comply and hence term could provide more clarity for reducing their search costs compared to reduce their compliance costs. We note, registrants, it would also result in a the final approach, it would result in however, that for different estimates the disclosure requirement more redundant disclosure and higher relevant disclosure may vary over prescriptive in nature, inconsistent with compliance costs to registrants. different periods of time to facilitate an our current objective to promote the As an alternative to the adopted Item understanding of the estimation principles-based nature of MD&A. We 303(b)(3), we considered issuing uncertainty. Thus, such an alternative therefore decided not to adopt this additional guidance on critical would have restricted issuers’ flexibility alternative. accounting estimates that enhances the in determining the relevant period Another alternative, as suggested by guidance issued in the 2003 MD&A necessary to describe material changes commenters, that we considered Release. While this alternative could in estimates or assumptions that would adopting was a term with a narrower save compliance costs for registrants facilitate an understanding of estimation meaning than material cash because it would not create a new uncertainty. Therefore, we decided not requirements such as ‘‘material cash requirement, the savings might not to adopt this alternative. commitments’’ or ‘‘material cash necessarily be significant, given the Item 303(c) would allow flexibility for commitments outside of normal existing Commission guidance on this registrants to compare their most operations.’’ 449 According to those topic. Further, we believe that by recently completed quarter to either the commenters, using ‘‘material cash codifying existing guidance, adopted corresponding quarter of the prior year requirements’’ could increase Item 303(b)(3) should provide investors (as is currently required) or to the compliance costs in the form of new with more enhanced disclosure and immediately preceding quarter. As an record keeping and controls. We have protection by ensuring that companies alternative, we considered an approach decided not to adopt this alternative consistently provide such disclosure. under which registrants would be because, as mentioned above, our Therefore, we decided not to adopt this required to compare the most recent amendments are limited to and address alternative. quarter to both the corresponding only those cash requirements that are Another alternative that we could quarter of the prior year and the material and hence should not require have adopted is the use of different immediately preceding quarter. While extensive or new procedures or controls. thresholds for information necessary to this alternative approach would provide Since registrants can and do have cash understand critical accounting investors with more disclosure, it might requirements related to their routine estimates, such as when ‘‘practicable’’ not be clear to investors which time operations that are material, such an or ‘‘in the ordinary course of business period is more representative of the alternative could also result in material and not solely for purposes of registrant’s business, and registrants information remaining undisclosed, disclosure.’’ As mentioned above, would incur more compliance costs. thus negatively affecting investors. however, we believe that if the Also, this alternative is less consistent As an alternative to the replacement disclosure is ‘‘impracticable’’ to with the principles-based nature of of the Item 303(a)(4) off-balance sheet provide, it would not be ‘‘reasonably MD&A. Therefore, we decided not to arrangements disclosure requirement, available.’’ In addition, limiting the adopt this alternative. we considered allowing registrants discussion to material information is We proposed deleting Item 303(d) discretion to make the disclosure intended to avoid disclosure that is not which, in part, provides that an SRC is currently required under Item 303(a)(4) useful to investors and is consistent not required to provide the contractual under a separate caption within the with the principles-based nature of obligations table specified in Item capital resources section. Compared to MD&A. 303(a)(5). In a change from the the final amendments, such an Another alternative that we Proposing Release, the final alternative would have kept information considered was to require disclosure of amendments add a principles-based on off-balance sheet items in a single how much a critical accounting estimate disclosure requirement for contractual location instead of such information has changed during a reporting period. obligations to Item 303 and, unlike the being dispersed throughout the financial This alternative could have provided existing SRC carve-out in Item 303(d), statements, thus making it easier for information on the quantitative changes do not carve out SRCs from this investors to locate. Such an alternative, to the reported amounts. But such an disclosure requirement. As an however, would still result in duplicate alternative could result in information alternative, we could have carved out disclosure and compliance costs for that is not material and may impede SRCs from this disclosure requirement. issuers. investors’ assessments of the Such an alternative could have reduced As an alternative to the elimination of uncertainty associated with the critical SRCs’ compliance costs. However, such Item 303(a)(5), which requires accounting estimate. We believe that the an alternative could have discouraged registrants to disclose in tabular format adopted requirement which allows the disclosure of material contractual contractual obligations by type of issuers to address the change in a obligations that may be important for obligation, overall payments due and critical accounting estimate through a investors. By adopting a principles- prescribed periods, we considered discussion of the change in the assumptions of that estimate over a 450 See, e.g., letters from RSM; Deloitte; KPMG; 449 See letter from FEI and IMA. relevant period would provide investors CAQ.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2121

based approach that requires a robust for comment on whether current XBRL- the PRA.457 The hours and costs discussion of material contractual tagging requirements reliably facilitate associated with preparing, filing, and obligations, the final amendments will compilation and comparison of certain sending the schedules and forms help ensure that investors are provided financial information, and a separate constitute reporting and cost burdens with information about material request for comment as to whether to imposed by each collection of contractual obligations, without require MD&A to be structured in Inline information. An agency may not imposing significant new compliance XBRL format, one commenter conduct or sponsor, and a person is not burdens on SRCs. recommended reconsidering current required to comply with, a collection of XBRL requirements more broadly, information unless it displays a 4. Alternatives Regarding Structured stating concerns about the cost and data currently valid OMB control number. Disclosure quality.454 This commenter also stated Compliance with the information The final amendments do not require that XBRL should be optional and collections is mandatory. Responses to registrants to structure disclosures provided specific information based on the information collections are not kept required by the amendments in a a survey finding that issuers incur confidential and there is no mandatory machine-readable format. An alternative substantial costs associated with XBRL retention period for the information suggested by some commenters 451 despite the fact that less than ten disclosed. The titles for the collections would be to require registrants to percent ‘‘observ[e] active analyst or of information are: structure MD&A in the Inline XBRL investor use of the XBRL data.’’ 455 As ‘‘Form 1–A’’ (OMB Control No. 3235– format. Requiring registrants to structure discussed above, the final amendments 0286); MD&A disclosures could create benefits emphasize MD&A’s principles-based ‘‘Form 10’’ (OMB Control No. 3235– for investors (either through direct use framework, which encourages 0064); of the data or through reliance on the registrants to provide meaningful ‘‘Form 10–Q’’ (OMB Control No. data as extracted and analyzed by disclosure that is tailored to their 3235–0070); intermediaries) as well as other market specific facts and circumstances. This ‘‘Form 10–K’’ (OMB Control No. participants by enabling more efficient may make MD&A less comparable 3235–0063); retrieval, aggregation, and analysis of across issuers, thereby reducing the ‘‘Schedule 14A’’ (OMB Control No. disclosed information and facilitating benefits of this alternative. As a result, 3235–0059); comparisons across issuers and time we did not adopt this alternative. ‘‘Form 20–F’’ (OMB Control No. periods.452 However, filers could incur 3235–0288); V. Paperwork Reduction Act ‘‘Form 40–F’’ (OMB Control No. increased costs under this alternative, 3235–0381); with a block text and detail tagging A. Summary of the Collections of ‘‘Form F–1’’ (OMB Control No. 3235– requirement imposing greater costs than Information 0258); a block text tagging-only requirement. In Certain provisions of our rules, ‘‘Form F–4’’ (OMB Control No. 3235– the Proposing Release, the Commission schedules, and forms that would be 0325); noted that such costs would be affected by the final amendments ‘‘Form N–2’’ (OMB Control No. 3235– incremental to the costs that registrants contain ‘‘collection of information’’ 0026); already incur to structure financial requirements within the meaning of the ‘‘Form S–1’’ (OMB Control No. 3235– statement and cover page disclosures in PRA.456 The Commission published a 0065); the Inline XBRL format and that notice requesting comment on changes ‘‘Form S–4’’ (OMB Control No. 3235– concerns as to filer cost might be to these collection of information 0324); partially alleviated by the overall requirements in the Proposing Release ‘‘Form S–11’’ (OMB Control No. decline in the costs of XBRL tagging and submitted these requirements to the 3235–0067); over time, including for small public Office of Management and Budget The Commission adopted all of the companies.453 In response to a request (‘‘OMB’’) for review in accordance with existing regulations, schedules, and forms pursuant to the Securities Act, the 451 See letters from XBRL US dated April 28, 2020 XBRL/DownloadableDocuments/ Exchange Act, and/or the Investment (‘‘XBRL US’’); Data Coalition dated April 28, 2020 XBRL%20Costs%20for%20Small%20Companies. Company Act. The regulations, (‘‘Data Coalition’’); CFA & CII; D. Jamieson. pdf. See also Mohini Singh, The Cost of Structured schedules, and forms set forth the 452 See Rel. No. 33–10514 (Jun. 28, 2018), Inline Data: Myth vs. Reality, CFA Institute: Survey (Aug. disclosure requirements for registration XBRL Filing of Tagged Data [83 FR 40846 (Aug. 16, 2017), available at https://www.cfainstitute.org/-/ 2018)] (‘‘Inline XBRL Adopting Release’’), at 40851, media/documents/survey/the-cost-of-structured- statements, periodic reports, and proxy footnote 71 and accompanying text, and 40862. See data-myth-vs-reality-august-2017.ashx. and information statements filed by also, e.g., Mohini Singh, Data and Technology: How 454 See letter from Nasdaq. registrants to help investors make Information is Consumed in the New Age, CFA 455 Id. (stating that a ‘‘2019 Nasdaq survey of 151 informed investment and voting Institute: Data Technology (Jul. 3, 2018) (describing issuers found that they spend, on average, over examples of analytical, benchmarking, and $334,000 per firm per quarter to outside vendors, decisions. regulatory XBRL usage); Chunhui Liu, Tawei Wang, lawyers, and other advisors to address the A description of the final and Lee J. Yao, XBRL’s Impact on Analyst Forecast requirement of quarterly reporting, including amendments, including the need for the Behavior: An Empirical Study, 33 J. Acct. & Pub. $20,000 per firm per quarter in XBRL costs alone. information and its use, as well as a Pol’y 69 (2014) (finding that XBRL adoption has Meanwhile, only eight percent of issuers reported significantly increased information quantity and observing active analyst or investor use of XBRL description of the likely respondents, quality, as measured by analyst following and data.’’). See also letter from Nasdaq, Inc. dated can be found in Section II above, and a forecast accuracy). March 21, 2019 to the Request for Comment on discussion of the economic effects of the 453 A 2018 AICPA pricing survey of 1,032 Earnings Releases and Quarterly Reports, Release final amendments can be found in reporting companies with $75 million or less in No. 33–10588 (Dec. 18, 2018) [83 FR 65601 (Dec. market capitalization found an average cost of 21, 2018)] (providing selected survey results Section IV above. $5,850 per year, a median cost of $2,500 per year, including an average response of $20,000, a median B. Summary of Comment Letters and and a maximum cost of $51,500 per year for fully response of $7,500, and a maximum response of outsourced XBRL creation and filing, representing $350,000 in XBRL costs per quarter). Comment Revisions to PRA Estimates a 45% decline in average cost and a 69% decline letters related to the Request for Comment on In the Proposing Release, the in median cost since 2014. See AICPA, ‘‘XBRL costs Earnings Releases and Quarterly Reports are for small reporting companies have declined 45% available at https://www.sec.gov/comments/s7-26- Commission requested comment on the since 2014,’’ available at https://www.aicpa.org/ 18/s72618.htm. InterestAreas/FRC/AccountingFinancialReporting/ 456 44 U.S.C. 3501 et seq. 457 44 U.S.C. 3507(d); 5 CFR 1320.11.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2122 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

PRA burden hour and cost estimates of comments received. We have revised C. Effects of the Amendments on the and the analysis used to derive such our estimates from the Proposing Collections of Information estimates. We did not receive any Release accordingly, as discussed in The following PRA Table 1 comments that directly addressed the more detail below. summarizes the estimated effects of the PRA analysis of the proposed final amendments on the paperwork amendments. As discussed, above, burdens associated with the affected however, we have made some changes collections of information listed in to the proposed amendments as a result Section V.A.

PRA TABLE 1—ESTIMATED PAPERWORK BURDEN EFFECTS OF THE FINAL AMENDMENTS

Affected collections of Final amendments and effects information Estimated net effect *

Item 301: Selected Financial Data • Elimination of Item 301 requirement to furnish selected financial data for each of • Forms 10, 10–K, S–1, S– • 2 hour net decrease in the registrant’s last five fiscal years because Item 303 already calls for disclosure 4, and S–11. compliance burden per of material trend information, which would decrease the paperwork burden by re- form. ducing repetitive information about a registrant’s historical performance. • Schedule 14A ** ...... • 0.2 hour net decrease in compliance burden per schedule. • Replacing the reference to Item 301 with a reference to Rule 1–02(bb) of Regula- • Form N–2 ± ...... • 0.3 hour net decrease in tion S–X in Items 1112, 1114, and 1115 of Regulation AB would generally result compliance burden per in similar disclosure being presented under these Items, and therefore not affect form. the burden estimate. • No change in compliance • Forms SF–1 and SF–3 ... burden per form. Item 302(a): Supplementary Financial Information • Streamlining Item 302(a) to eliminate disclosure requirement except when there • Forms 10, 10–K, S–1, S– • 2 hour net decrease in are one or more retrospective changes to the statements of comprehensive in- 4, and S–11. compliance burden per come for any of the quarters within the two most recent fiscal years and any sub- form. sequent interim period for which financial statements are included or required to • Schedule 14A ** ...... • 0.2 hour net decrease in be included by Article 3 of Regulation S–X that, individually or in the aggregate, compliance burden per are material. schedule. • Form N–2 ± ...... • 0.3 hour net decrease in compliance burden per form. Item 303(a): Full Fiscal Years Restructuring and Streamlining: • Establishing a new paragraph Item 303(a), to emphasize the purpose of the • Forms 10, 10–K, 10–Q, • 2.1 hour net increase in MD&A section at the outset to clarify and focus registrants is expected to have a S–1, S–4, and S–11. compliance burden per minimal impact on the paperwork burden, as the change would codify existing form. guidance. Estimated burden increase: 0.1 hour per form and per schedule. • Form 1–A∧ ...... • 0.3 hour net increase in compliance burden per form. • Schedule 14A ** ...... • 0.3 hour net increase in compliance burden per schedule. • Amendments to streamline the text of new Item 303 would have no effect on the • Form N–2 ± ...... • 0.5 hour net increase in paperwork burden because these amendments are clarifications of existing re- compliance burden per quirements. form. Liquidity and Capital Resources: • Expanding Item 303(b)(1)(ii) (current Item 303(a)(2)) to also require a discussion of material cash requirements, in addition to commitments for capital expenditures, would increase the paperwork burden. • Clarifying the liquidity and capital resources disclosure requirements of Item 303(b)(1), including to specifically require disclosure of material cash requirements from known contractual and other obligations. Estimated burden increase: 1.5 hour per form and 0.2 hour increase per schedule. Ω Results of Operations—Known Trends or Uncertainties: • Amending Item 303(b)(2)(ii) (current Item 303(a)(3)(ii)) to clarify that a registrant should disclose reasonably likely changes in the relationship between costs and revenues would increase the paperwork burden, although this effect is expected to be minimal because the amendment is consistent with existing guidance. Esti- mated burden increase: 1.0 hour per form and 0.1 hour increase per schedule. Results of Operations—Net Sales, Revenues, and Line Item Changes: • Amending Item 303(b) (current Item 303(a)(3), Item 303(a)(3)(iii) and Instruction 4 to Item 303(a)) to clarify 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 could marginally increase the paperwork burden by requiring a more nuanced discussion consistent with the overall objective of MD&A. Estimated burden increase: 1.0 hour per form and 0.1 hour increase per schedule. Results of Operations—Inflation and Price Changes:

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2123

PRA TABLE 1—ESTIMATED PAPERWORK BURDEN EFFECTS OF THE FINAL AMENDMENTS—Continued

Affected collections of Final amendments and effects information Estimated net effect *

• Eliminating the specific reference to inflation within current Item 303(a)(3)(iv) for issuers should marginally reduce the paperwork burden, although such decrease is expected to be minimal. Estimated burden decrease: 0.5 hours per form and 0.1 hour decrease per schedule. Off-Balance Sheet Arrangements: • Replacing current Item 303(a)(4) with an instruction emphasizing a more principles-based approach with respect to off-balance sheet arrangement disclosures, would reduce duplicative disclosures and decrease the paperwork burden. Esti- mated burden decrease: 1.0 hour per form and 0.1 hour decrease per schedule. • Amending Items 2.03 and 2.04 of Form 8–K to retain the definition of ‘‘off-balance sheet arrangements’’ that is in current Item 303(a)(4) would not result in any changes in reporting obligations under Item 2.03 and Item 2.04 of Form 8–K, and would therefore result in no change in paperwork burden for this form. Contractual Obligations Table: • Eliminating current Item 303(a)(5), the requirement that registrants provide a tabular disclosure of contractual obligations, would reduce duplicative disclosures and decrease the paperwork burden. Estimated burden decrease: 2.0 hour per form and 0.2 hour decrease per schedule. Critical Accounting Estimates: • Adopting Item 303(b)(3) to explicitly require disclosure of critical accounting estimates would provide more clarity on the uncertainties involved in creating an accounting policy and how significant accounting policies of registrants may differ. This would increase the paperwork burden. Estimated burden increase: 2.0 hours per form and 0.2 hour increase per schedule. Item 303(c): Interim Periods • Amending Item 303(c) (current Item 303(b)) to allow for more flexibility in interim • Forms 10, 10–K, 10–Q, • 4.0 hour net decrease in periods compared and eliminating certain instructions and providing cross-ref- S–1, S–4, and S–11. compliance burden per erences to similar instructions to Item 303(b) would decrease the paperwork bur- form. den. • Form 1–A ∧ ...... • 0.4 hour net decrease in compliance burden per form. • Schedule 14A ** ...... • 0.4 hour net decrease in compliance burden per schedule. • Form N–2 ± ...... • 0.7 hour net decrease in compliance burden per form. Current Item 303(c): Safe Harbor for Forward-Looking Information • Eliminating current Item 303(c) as a conforming change would have no effect on the paperwork burden. Current Item 303(d): Accommodations for SRCs • Eliminating current Item 303(d) as a conforming change would have no effect on the paperwork burden. Effect on FPIs • Eliminating Item 3.A and generally conforming Item 5 of Form 20–F to the final • Form 20–F ...... • 2.0 hour net decrease in amendments to Item 303 would reduce the paperwork burden. compliance burden per form. • Eliminating the contractual obligations disclosure requirement and replacing the • Form 40–F ...... • 2.0 hour net decrease in off-balance sheet disclosure requirements in Forms 20–F and 40–F with a prin- compliance burden per ciples-based instruction would reduce the paperwork burden. form. • Amending current Instruction 11 to Item 303 to conform to the hyperinflation dis- • Forms F–1 and F–4 ...... • 3.5 hour net decrease closure requirements of Form 20-F would not affect the paperwork burden. per form.

Total ...... • Form 1–A ...... • 0.1 hour net decrease per form. • Form 10–Q ...... • 1.9 hour net decrease per form. • Forms 10, 10–K, S–1, S– • 5.90 hour net decrease 4, and S–11. per form. • Schedule 14A ...... • 0.5 hour net decrease per form. • Forms F–1 and F–4 ...... • 3.5 hour net decrease per form. • Form 20–F ...... • 2.0 hour net decrease per form. • Form 40–F ...... • 2.0 hour net decrease per form.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2124 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

PRA TABLE 1—ESTIMATED PAPERWORK BURDEN EFFECTS OF THE FINAL AMENDMENTS—Continued

Affected collections of Final amendments and effects information Estimated net effect *

• Form N–2 ...... • 0.8 hour net decrease per form. * Estimated net effect expressed as an increase or decrease of burden hours on average and derived from Commission staff review of sam- ples of relevant sections of the affected forms and schedules. ** The lower estimated average incremental burden for Schedule 14A reflects the Commission staff estimates that no more than 10% of the Schedules 14A filed annually include Item 301–303 disclosures. ± Form N–2 states that disclosure under Items 301–303 of Regulation S–K is only required if ‘‘the Registrant is regulated as a business development company under the 1940 Act.’’ The estimated average incremental burden for Form N–2 reflects the fact that approximately 13% of registrants are BDCs (of the estimated 765 closed-end funds that could file on Form N–2 as of July 20, 2020, only 99 were BDCs. See Use of De- rivatives by Registered Investment Companies and Business Development Companies, Release No IC–34084 (Nov. 2, 2020) at 273.). The estimated burden has been reduced to adjust for this percentage. ∧ In the preparation of Part II of Form 1–A, Regulation A issuers have the option of disclosing either the information required by (i) the Offering Circular format or (ii) Part I of Forms S–1 or S–11 (except for the financial statements, selected financial data, and supplementary information called for by those forms). The burden associated with Form 1–A is affected only to the extent that an issuer chooses to use Part I of these forms. The Commission staff estimates that 10.6% of Form 1–A filings reflect this election. Ω The estimated burden increase associated with these amendments has been increased from 1.0 hour per form and 0.1 hour per schedule that was reflected in the Proposing Release. See Proposing Release at 12106. The increase has been made to account for amended Item 303(b)(1) (clarifying the liquidity and capital resources disclosure requirements of the item). f The estimated burden decrease has been increased from 1.0 hour per form and 0.2 hours per schedule that was reflected in the Proposing Release. See Proposing Release at 12106. Input from commenters suggested that the original estimate did not sufficiently reflect the amount of time required to produce the table of contractual obligations. See e.g., letters from Eli Lilly; FEI; UnitedHealth; Costco. 3 To the extent that SRCs may face some increased burden as a result of this change, it is reflected in the estimated burden associated with amended Item 303(b)(1).

D. Incremental and Aggregate Burden including the nature of their business. registrant to prepare and review and Cost Estimates for the Final We do not believe that the final disclosure required under the final Amendments amendments would change the amendments. For purposes of the PRA, Below we estimate the incremental frequency of responses to the existing the burden is to be allocated between and aggregate reductions in paperwork collections of information; rather, we internal burden hours and outside burden as a result of the final estimate that the final amendments professional costs. PRA Table 2 below amendments. These estimates represent would change only the burden per sets forth the percentage estimates we the average burden for all registrants, response, as estimated above. typically use for the burden allocation both large and small. In deriving our The burden estimates were calculated for each collection of information. We estimates, we recognize that the burdens by multiplying the estimated number of also estimate that the average cost of will likely vary among individual responses by the estimated average retaining outside professionals is $400 registrants based on a number of factors, amount of time it would take a per hour.458

PRA TABLE 2—STANDARD ESTIMATED BURDEN ALLOCATION FOR SPECIFIED COLLECTIONS OF INFORMATION

Outside Collection of information Internal professionals (%) (%)

Forms 1–A, 10–K, 10–Q, 8–K, Schedule 14A ...... 75 25 Forms S–1, S–4, S–11, F–1, F–4, SF–1, SF–3, and 10 ...... 25 75 Forms 20–F and 40–F ...... 25 75 Form N–2 ...... 25 75

PRA Table 3 below illustrates the compliance burden of affected in costs, as a result of the final incremental change to the total annual collections of information, in hours and amendments. PRA TABLE 3—CALCULATION OF THE INCREMENTAL CHANGE IN BURDEN ESTIMATES OF CURRENT RESPONSES RESULTING FROM THE FINAL AMENDMENTS

Reduction in Reduction in Number of Burden hour Reduction in Reduction in professional professional estimated reduction per burden hours for company hours hours for costs for Collection of Information affected current affected current affected for current current current responses response responses affected affected affected responses responses responses

(A) * (B) (C) = (A) × (B) ** (D) = (C) × 0.25 or (E) = (C) ¥ (D) (F) = (E) × $400 0.75

S–1 ...... 901 5.9 5,316 1,329 3,987 $1,594,800 S–4 ...... 551 5.9 3,251 813 2,438 975,200

458 We recognize that the costs of retaining would be an average of $400 per hour. This estimate registrants in preparing and filing reports with the outside professionals may vary depending on the is based on consultations with several registrants, Commission. nature of the professional services, but for purposes law firms, and other persons who regularly assist of this PRA analysis, we estimate that such costs

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2125

PRA TABLE 3—CALCULATION OF THE INCREMENTAL CHANGE IN BURDEN ESTIMATES OF CURRENT RESPONSES RESULTING FROM THE FINAL AMENDMENTS—Continued

(A) * (B) (C) = (A) × (B) ** (D) = (C) × 0.25 or (E) = (C) ¥ (D) (F) = (E) × $400 0.75

S–11 ...... 64 5.9 378 95 283 113,200 F–1 ...... 63 3.5 221 55 166 66,400 F–4 ...... 39 3.5 137 34 103 41,200 N–2 ...... 298 0.8 238 179 59 23,600 1–A ...... 179 0.1 18 14 4 1,600 10 ...... 216 5.9 1,274 319 955 382,000 10–K ...... 8,137 5.9 48,008 36,006 12,002 4,800,800 10–Q ...... 22,907 1.9 43,523 32,642 10,881 4,352,400 20–F ...... 725 2.0 1,450 363 1,087 434,800 40–F ...... 132 2.0 264 66 198 79,200 Sch. 14A ...... 5,586 0.5 2,793 2,095 698 279,200

Total ...... 39,798 43.8 106,871 74,010 32,861 13,144,400 * The number of estimated affected responses is based on the number of responses in the Commission’s current OMB PRA filing inventory. The OMB PRA filing inventory represents a three-year average. ** The estimated reductions in Columns (C), (D), and (E) are rounded to the nearest whole number.

The following PRA Table 4 reporting burdens and costs, under the summarizes the requested paperwork final amendments. burden, including the estimated total PRA TABLE 4—REQUESTED PAPERWORK BURDEN UNDER THE FINAL AMENDMENTS

Current burden Program change Revised burden Collection of infor- Current Number of Reduction in Reduction in mation Current annual burden Current cost affected company professional Annual Burden hours Cost burden responses hours burden responses hours costs responses

(A) (B) (C) (D) (E) † (F) ‡ (G) = (A) (H) = (B)¥(E) (I) = (C)¥(F)

S–1 ...... 901 147,208 $180,319,975 901 1,329 $1,594,800 901 145,879 $178,725,175 S–4 ...... 551 562,465 677,378,579 551 813 975,200 551 561,652 676,403,379 S–11 ...... 64 12,214 14,925,768 64 95 113,200 64 12,119 14,812,568 F–1 ...... 63 26,692 32,275,375 63 55 66,400 63 26,637 32,208,975 F–4 ...... 39 14,049 17,073,825 39 34 41,200 39 14,015 17,032,625 N–2 ...... 298 94,350 6,269,752 298 179 23,600 298 94,171 6,246,152 1–A ...... 179 98,396 13,111,912 179 14 1,600 179 98,382 13,110,312 10 ...... 216 11,855 14,091,488 216 319 382,000 216 11,536 13,709,488 10–K ...... 8,137 14,198,780 1,895,224,719 8,137 36,006 4,800,800 8,137 14,162,774 1,890,423,919 10–Q ...... 22,907 3,209,558 425,120,754 22,907 32,642 4,352,400 22,907 3,176,916 420,768,354 20–F ...... 725 479,304 576,875,025 725 363 434,800 725 478,941 576,440,225 40–F ...... 132 14,237 17,084,560 132 66 79,200 132 14,171 17,005,360 Sch. 14A 5,586 551,101 73,480,012 5,586 2,095 279,200 5,586 549,006 73,200,812 Total 39,798 19,399,109 3,941,630,388 39,798 74,010 13,144,400 39,798 19,325,099 3,928,485,988 † From Column (D) in PRA Table 3. ‡ From Column (F) in PRA Table 3.

VII. Final Regulatory Flexibility Act We are adopting the amendments as amendments will reduce the paperwork Certification proposed with several minor changes burden for all registrants, including and two substantive changes relating to small entities.461 Although, we In connection with the Proposing Item 302(a), disclosure of selected anticipate that the economic impact of Release, the Commission certified that quarterly financial data of specified the reduction in the paperwork burden the proposals would not, if adopted, operating results, and Item 303, will be modest, the reduction in the have a significant economic impact on disclosure of liquidity and capital burden will be beneficial to all a substantial number of small entities. resources. As discussed above, we registrants, including small entities. The certification, including the factual believe that the impact on small entities Accordingly, the Commission hereby bases for the determination, was as a result of these changes will not be certifies, pursuant to 5 U.S.C. 605(b), published with the Proposing Release in significant.460 We expect the final satisfaction of Section 605(b) of the with the preparation of the contractual obligations 459 Regulatory Flexibility Act (‘‘RFA’’). 460 This includes elimination of current Item table itself, and because we are eliminating that The Commission requested comment on 303(d), which provides, in relevant part, an prescriptive requirement, we do not believe that the the certification and received none. accommodation for SRCs with respect to the elimination of current Item 303(d) will have a contractual obligations table required by current significant impact on SRCs. See Section II.C.11 Item 303(a)(5). Because the basis for current Item supra. 459 5 U.S.C. 601 et seq. 303(d) was a reduction in the burdens associated 461 See supra Section V.D.

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2126 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

that the final amendments will not have summarized information as to the financial information related to the a significant economic impact on a assets, liabilities and results of statements of comprehensive income as substantial number of small entities for operations of the entity for which the specified in § 210.1–02(bb)(1)(ii) of this purposes of the RFA. information is required. Summarized chapter (Rule 1–02(bb)(1)(ii) of financial information shall include the Regulation S–X) and earnings per share VIII. Statutory Authority following disclosures, which may be reflecting such changes. The amendments contained in this subject to appropriate variation to (1) If the financial statements to release are being adopted under the conform to the nature of the entity’s which this information relates have authority set forth in Sections 7, 10, business: been reported on by an accountant, 19(a), and 28 of the Securities Act of * * * * * appropriate professional standards and 1933, as amended, Sections 3(b), 12, 13, (2) Summarized financial information procedures, as enumerated in Auditing 14, 23(a), and 36 of the Securities for unconsolidated subsidiaries and 50 Standards issued by the Public Exchange Act of 1934, as amended, and percent or less owned persons referred Company Accounting Oversight Board Sections 8, 24, 30, and 38 of the to in and required by § 210.10–01(b) for (‘‘PCAOB’’), shall be followed by the Investment Company Act of 1940, as interim periods shall include the reporting accountant with regard to the amended. information required by paragraph disclosure required by this paragraph (bb)(1)(ii) of this section. (a). List of Subjects (2) This paragraph (a) applies to any * * * * * 17 CFR Part 210 registrant, except a foreign private issuer, that has securities registered PART 229—STANDARD Accountants, Accounting, Banks, pursuant to sections 12(b) (15 U.S.C. INSTRUCTIONS FOR FILING FORMS Banking, Employee benefit plans, 78l(b)) (other than mutual life insurance UNDER SECURITIES ACT OF 1933, Holding companies, Insurance companies) or 12(g) of the Exchange Act SECURITIES EXCHANGE ACT OF 1934 companies, Investment companies, Oil (15 U.S.C. 78l(g)) after the registrant’s AND ENERGY POLICY AND and gas exploration, Reporting and initial registration of securities under CONSERVATION ACT OF 1975— recordkeeping requirements, Securities, these sections. Utilities. REGULATION S–K (3) A registrant that qualifies as a smaller reporting company, as defined 17 CFR Parts 229, 239, 240, and 249 ■ 3. The authority citation for part 229 by § 229.10(f)(1), is not required to continues to read as follows: Administrative practice and provide the information required by this procedure, Reporting and recordkeeping Authority: 15 U.S.C. 77e, 77f, 77g, 77h, section. requirements, Securities. 77j, 77k, 77s, 77z–2, 77z–3, 77aa(25), * * * * * 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, Text of the Final Rule and Form 77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78j–3, 78l, ■ 7. Revise § 229.303 to read as follows: Amendments 78m, 78n, 78n–1, 78o, 78u–5, 78w, 78ll, 78 § 229.303 (Item 303) Management’s mm, 80a–8, 80a–9, 80a–20, 80a–29, 80a–30, In accordance with the foregoing, we discussion and analysis of financial 80a–31(c), 80a–37, 80a–38(a), 80a–39, 80b–11 are amending title 17, chapter II of the condition and results of operations. Code of Federal Regulations as follows: and 7201 et seq.; 18 U.S.C. 1350; sec. 953(b), Pub. L. 111–203, 124 Stat. 1904 (2010); and (a) Objective. The objective of the discussion and analysis is to provide PART 210—FORM AND CONTENT OF sec. 102(c), Pub. L. 112–106, 126 Stat. 310 material information relevant to an AND REQUIREMENTS FOR FINANCIAL (2012). assessment of the financial condition STATEMENTS, SECURITIES ACT OF § 229.10 [Amended] and results of operations of the 1933, SECURITIES EXCHANGE ACT ■ registrant including an evaluation of the OF 1934, INVESTMENT COMPANY ACT 4. Amend § 229.10(f) introductory text amounts and certainty of cash flows OF 1940, INVESTMENT ADVISERS ACT in the table by removing entries for from operations and from outside OF 1940, AND ENERGY POLICY AND ‘‘Item 301’’ and ‘‘Item 303’’. sources. The discussion and analysis CONSERVATION ACT OF 1975 § 229.301 [Removed and Reserved] must focus specifically on material ■ 1. The authority citation for part 210 ■ 5. Remove and reserve § 229.301. events and uncertainties known to continues to read as follows: ■ 6. Amend § 229.302 by revising management that are reasonably likely paragraph (a) to read as follows: to cause reported financial information Authority: 15 U.S.C. 77f, 77g, 77h, 77j, not to be necessarily indicative of future 77s, 77z–2, 77z–3, 77aa(25), 77aa(26), § 229.302 (Item 302) Supplementary operating results or of future financial 77nn(25), 77nn(26), 78c, 78j–1, 78l, 78m, financial information. 78n, 78o(d), 78q, 78u–5, 78w, 78ll, 78mm, condition. This includes descriptions 80a–8, 80a–20, 80a–29, 80a–30, 80a–31, 80a– (a) Disclosure of material quarterly and amounts of matters that have had a 37(a), 80b–3, 80b–11, 7202 and 7262, and changes. When there are one or more material impact on reported operations, sec. 102(c), Pub. L. 112–106, 126 Stat. 310 retrospective changes to the statements as well as matters that are reasonably (2012), unless otherwise noted. of comprehensive income for any of the likely based on management’s ■ 2. Amend § 210.1–02 by revising quarters within the two most recent assessment to have a material impact on paragraphs (bb)(1) introductory text and fiscal years or any subsequent interim future operations. The discussion and (bb)(2) to read as follows: period for which financial statements analysis must be of the financial are included or are required to be statements and other statistical data that § 210.1–02 Definitions of terms used in included by §§ 210.3–01 through 210.3– the registrant believes will enhance a Regulation S–X (17 CFR part 210). 20 of this chapter (Article 3 of reader’s understanding of the * * * * * Regulation S–X) that individually or in registrant’s financial condition, cash (bb) * * * the aggregate are material, provide an flows and other changes in financial (1) Except as provided in paragraph explanation of the reasons for such condition and results of operations. A (bb)(2) of this section, summarized material changes and disclose, for each discussion and analysis that meets the financial information referred to in this affected quarterly period and the fourth requirements of this paragraph (a) is part shall mean the presentation of quarter in the affected year, summarized expected to better allow investors to

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2127

view the registrant from management’s requirements and the general purpose of each estimate and/or assumption has perspective. such requirements. changed over a relevant period, and the (b) Full fiscal years. The discussion of (B) Describe any known material sensitivity of the reported amount to the financial condition, changes in financial trends, favorable or unfavorable, in the methods, assumptions and estimates condition and results of operations must registrant’s capital resources. Indicate underlying its calculation. provide information as specified in any reasonably likely material changes Instructions to paragraph (b): 1. paragraphs (b)(1) through (3) of this in the mix and relative cost of such Generally, the discussion must cover the section and such other information that resources. The discussion must consider periods covered by the financial the registrant believes to be necessary to changes among equity, debt, and any statements included in the filing and the an understanding of its financial off-balance sheet financing registrant may use any presentation that condition, changes in financial arrangements. in the registrant’s judgment enhances a condition and results of operations. (2) Results of operations. (i) Describe reader’s understanding. A smaller Where the financial statements reflect any unusual or infrequent events or reporting company’s discussion must material changes from period-to-period transactions or any significant economic cover the two-year period required in in one or more line items, including changes that materially affected the §§ 210.8–01 through 210.8–08 of this where material changes within a line amount of reported income from chapter (Article 8 of Regulation S–X) item offset one another, describe the continuing operations and, in each case, and may use any presentation that in underlying reasons for these material indicate the extent to which income was the registrant’s judgment enhances a changes in quantitative and qualitative so affected. In addition, describe any reader’s understanding. For registrants terms. Where in the registrant’s other significant components of providing financial statements covering judgment a discussion of segment revenues or expenses that, in the three years in a filing, discussion about information and/or of other registrant’s judgment, would be material the earliest of the three years may be subdivisions (e.g., geographic areas, to an understanding of the registrant’s omitted if such discussion was already product lines) of the registrant’s results of operations. included in the registrant’s prior filings (ii) Describe any known trends or business would be necessary to an on EDGAR that required disclosure in uncertainties that have had or that are understanding of such business, the compliance with § 229.303 (Item 303 of reasonably likely to have a material discussion must focus on each relevant Regulation S–K), provided that favorable or unfavorable impact on net reportable segment and/or other sales or revenues or income from registrants electing not to include a subdivision of the business and on the continuing operations. If the registrant discussion of the earliest year must registrant as a whole. knows of events that are reasonably include a statement that identifies the (1) Liquidity and capital resources. likely to cause a material change in the location in the prior filing where the Analyze the registrant’s ability to relationship between costs and revenues omitted discussion may be found. An generate and obtain adequate amounts (such as known or reasonably likely emerging growth company, as defined of cash to meet its requirements and its future increases in costs of labor or in § 230.405 of this chapter (Rule 405 of plans for cash in the short-term (i.e., the materials or price increases or inventory the Securities Act) or § 240.12b-2 of this next 12 months from the most recent adjustments), the change in the chapter (Rule 12b–2 of the Exchange fiscal period end required to be relationship must be disclosed. Act), may provide the discussion presented) and separately in the long- (iii) If the statement of comprehensive required in paragraph (b) of this section term (i.e., beyond the next 12 months). income presents material changes from for its two most recent fiscal years if, The discussion should analyze material period to period in net sales or revenue, pursuant to Section 7(a) of the cash requirements from known if applicable, describe the extent to Securities Act of 1933 (15 U.S.C. 77g(a)), contractual and other obligations. Such which such changes are attributable to it provides audited financial statements disclosures must specify the type of changes in prices or to changes in the for two years in a Securities Act obligation and the relevant time period volume or amount of goods or services registration statement for the initial for the related cash requirements. As being sold or to the introduction of new public offering of the emerging growth part of this analysis, provide the products or services. company’s common equity securities. information in paragraphs (b)(1)(i) and (3) Critical accounting estimates. 2. If the reasons underlying a material (ii) of this section. Critical accounting estimates are those change in one line item in the financial (i) Liquidity. Identify any known estimates made in accordance with statements also relate to other line trends or any known demands, generally accepted accounting items, no repetition of such reasons in commitments, events or uncertainties principles that involve a significant the discussion is required and a line-by- that will result in or that are reasonably level of estimation uncertainty and have line analysis of the financial statements likely to result in the registrant’s had or are reasonably likely to have a as a whole is neither required nor liquidity increasing or decreasing in any material impact on the financial generally appropriate. Registrants need material way. If a material deficiency is condition or results of operations of the not recite the amounts of changes from identified, indicate the course of action registrant. Provide qualitative and period to period if they are readily that the registrant has taken or proposes quantitative information necessary to computable from the financial to take to remedy the deficiency. Also understand the estimation uncertainty statements. The discussion must not identify and separately describe internal and the impact the critical accounting merely repeat numerical data contained and external sources of liquidity, and estimate has had or is reasonably likely in the financial statements. briefly discuss any material unused to have on financial condition or results 3. Provide the analysis in a format sources of liquid assets. of operations to the extent the that facilitates easy understanding and (ii) Capital resources. (A) Describe the information is material and reasonably that supplements, and does not registrant’s material cash requirements, available. This information should duplicate, disclosure already provided including commitments for capital include why each critical accounting in the filing. For critical accounting expenditures, as of the end of the latest estimate is subject to uncertainty and, to estimates, this disclosure must fiscal period, the anticipated source of the extent the information is material supplement, but not duplicate, the funds needed to satisfy such cash and reasonably available, how much description of accounting policies or

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2128 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

other disclosures in the notes to the are both indexed to and classified in a also must be discussed. If discussions of financial statements. registrant’s own equity under U.S. changes from both the end and the 4. For the liquidity and capital GAAP. corresponding interim date of the resources disclosure, discussion of 9. If the registrant is a foreign private preceding fiscal year are required, the material cash requirements from known issuer, briefly discuss any pertinent discussions may be combined at the contractual obligations may include, for governmental economic, fiscal, discretion of the registrant. example, lease obligations, purchase monetary, or political policies or factors obligations, or other liabilities reflected that have materially affected or could (2) Material changes in results of on the registrant’s balance sheet. Except materially affect, directly or indirectly, operations. (i) Discuss any material where it is otherwise clear from the its operations or investments by United changes in the registrant’s results of discussion, the registrant must discuss States nationals. The discussion must operations with respect to the most those balance sheet conditions or also consider the impact of recent fiscal year-to-date period for income or cash flow items which the hyperinflation if hyperinflation has which a statement of comprehensive registrant believes may be indicators of occurred in any of the periods for which income is provided and the its liquidity condition. audited financial statements or corresponding year-to-date period of the 5. Where financial statements unaudited interim financial statements preceding fiscal year. presented or incorporated by reference are filed. See § 210.3–20(c) of this (ii) Discuss any material changes in in the registration statement are chapter (Rule 3–20(c) of Regulation S– the registrant’s results of operations required by § 210.4–08(e)(3) of this X) for a discussion of cumulative with respect to either the most recent chapter (Rule 4–08(e)(3) of Regulation inflation rates that may trigger the quarter for which a statement of S–X) to include disclosure of requirement in this instruction 9 to this comprehensive income is provided and restrictions on the ability of both paragraph (b). the corresponding quarter for the consolidated and unconsolidated 10. If the registrant is a foreign private subsidiaries to transfer funds to the issuer, the discussion must focus on the preceding fiscal year or, in the registrant in the form of cash dividends, primary financial statements presented alternative, the most recent quarter for loans or advances, the discussion of in the registration statement or report. which a statement of comprehensive liquidity must include a discussion of The foreign private issuer must refer to income is provided and the immediately the nature and extent of such the reconciliation to United States preceding sequential quarter. If the restrictions and the impact such generally accepted accounting latter immediately preceding sequential restrictions have had or are reasonably principles and discuss any aspects of quarter is discussed, then provide in likely to have on the ability of the the difference between foreign and summary form the financial information parent company to meet its cash United States generally accepted for that immediately preceding obligations. accounting principles, not discussed in sequential quarter that is subject of the 6. Any forward-looking information the reconciliation, that the registrant discussion or identify the registrant’s supplied is expressly covered by the believes are necessary for an prior filings on EDGAR that present safe harbor rule for projections. See 17 understanding of the financial such information. If there is a change in CFR 230.175 [Rule 175 under the statements as a whole, if applicable. the form of presentation from period to Securities Act], 17 CFR 240.3b-6 [Rule 11. The term statement of period that forms the basis of 3b-6 under the Exchange Act], and comprehensive income is as defined in comparison from previous periods Securities Act Release No. 6084 (June § 210.1–02 of this chapter (Rule 1–02 of provided pursuant to this paragraph, the 25, 1979). Regulation S–X). registrant must discuss the reasons for 7. All references to the registrant in (c) Interim periods. If interim period changing the basis of comparison and the discussion and in this section mean financial statements are included or are provide both comparisons in the first the registrant and its subsidiaries required to be included by 17 CFR 210.3 filing in which the change is made. consolidated. [Article 3 of Regulation S–X], a 8. Discussion of commitments or management’s discussion and analysis Instructions to paragraph (c): 1. If obligations, including contingent of the financial condition and results of interim financial statements are obligations, arising from arrangements operations must be provided so as to presented together with financial with unconsolidated entities or persons enable the reader to assess material statements for full fiscal years, the that have or are reasonably likely to changes in financial condition and discussion of the interim financial have a material current or future effect results of operations between the information must be prepared pursuant on a registrant’s financial condition, periods specified in paragraphs (c)(1) to this paragraph (c) and the discussion changes in financial condition, revenues and (2) of this section. The discussion of the full fiscal year’s information must or expenses, results of operations, and analysis must include a discussion be prepared pursuant to paragraph (b) of liquidity, cash requirements or capital of material changes in those items this section. Such discussions may be resources must be provided even when specifically listed in paragraph (b) of combined. Instructions 2, 3, 4, 6, 8, and the arrangement results in no this section. 11 to paragraph (b) of this section apply obligations being reported in the (1) Material changes in financial to this paragraph (c). registrant’s consolidated balance sheets. condition. Discuss any material changes 2. The registrant’s discussion of Such off-balance sheet arrangements in financial condition from the end of material changes in results of operations may include: Guarantees; retained or the preceding fiscal year to the date of must identify any significant elements contingent interests in assets the most recent interim balance sheet of the registrant’s income or loss from transferred; contractual arrangements provided. If the interim financial continuing operations which do not that support the credit, liquidity or statements include an interim balance arise from or are not necessarily market risk for transferred assets; sheet as of the corresponding interim representative of the registrant’s ongoing obligations that arise or could arise from date of the preceding fiscal year, any business. variable interests held in an material changes in financial condition unconsolidated entity; or obligations from that date to the date of the most ■ 8. Amend § 229.914 by revising related to derivative instruments that recent interim balance sheet provided paragraph (a) to read as follows:

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2129

§ 229.914 (Item 914) Pro forma financial minimum provide a narrative 20%, provide summarized financial statements: selected financial data. description of all material variations in information, as defined by § 210.1– (a) In addition to the information accounting principles, practices and 02(bb) of this chapter (Rule 1–02(bb) of required by § 229.302 (Item 302 of methods used in preparing the non-U.S. Regulation S–X), for such entity or Regulation S–K), for each partnership GAAP financial statements used as a group of affiliated entities for each of proposed to be included in a roll-up basis for the summarized financial the last three fiscal years (or the life of transaction provide: cash and cash information from those accepted in the the entity or group of affiliated entities equivalents, total assets at book value, U.S. and any predecessors, if less). total assets at the value assigned for * * * * * * * * * * purposes of the roll-up transaction (if ■ 10. Amend § 229.1114 by revising applicable), total liabilities, general and paragraph (b)(2)(i) and Instruction 4a. to PART 230—GENERAL RULES AND limited partners’ equity, net increase paragraph (b) to read as follows: REGULATIONS, SECURITIES ACT OF (decrease) in cash and cash equivalents, 1933 net cash provided by operating § 229.1114 (Item 1114) Credit enhancement activities, distributions; and per unit and other support, except for certain ■ 12. The authority citation for part 230 data for net income (loss), book value, derivatives instruments. continues to read in part as follows: value assigned for purposes of the roll- * * * * * Authority: 15 U.S.C. 77b, 77b note, 77c, up transaction (if applicable), and (b) * * * 77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z–3, 77sss, distributions (separately identifying (2) * * * 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o–7 note, distributions that represent a return of (i) If any entity or group of affiliated 78t, 78w, 78ll(d), 78mm, 80a–8, 80a–24, 80a– capital). This information must be entities providing enhancement or other 28, 80a–29, 80a–30, and 80a–37, and Pub. L. provided for the previous two fiscal support described in paragraph (a) of 112–106, sec. 201(a), sec. 401, 126 Stat. 313 (2012), unless otherwise noted. years. Additional or other information this section is liable or contingently must be provided if material to an liable to provide payments representing * * * * * understanding of each partnership 10% or more, but less than 20%, of the Sections 230.400 to 230.499 issued under secs. 6, 8, 10, 19, 48 Stat. 78, 79, 81, and 85, proposed to be included in a roll-up cash flow supporting any offered class as amended (15 U.S.C. 77f, 77h, 77j, 77s). transaction. of the asset-backed securities, provide * * * * * * * * * * summarized financial information, as ■ 13. Amend § 230.419 by revising (f)(1) ■ defined by § 210.1–02(bb) of this 9. Amend § 229.1112 by revising to read as follows: paragraph (b)(1) and Instruction 3.a. to chapter (Rule 1–02(bb) of Regulation S– paragraph (b) to read as follows: X), for each such entity or group of § 230.419 Offering by blank check affiliated entities for each of the last companies. § 229.1112 (Item 1112) Significant obligors three fiscal years (or the life of the entity * * * * * of pool assets. or group of affiliated entities and any (f) * * * * * * * * predecessors, if less). (1) Furnish to security holders (b) * * * * * * * * audited financial statements for the first (1) If the pool assets relating to a Instruction 4 to Item 1114(b). *** full fiscal year of operations following significant obligor represent 10% or a. If the summarized financial consummation of an acquisition more, but less than 20%, of the asset information required by paragraph (b)(1) pursuant to paragraph (e) of this section, pool, provide summarized financial of this section is presented on a basis of together with the information required information, as defined by § 210.1– accounting other than U.S. GAAP or by § 229.303(b) of this chapter (Item 02(bb) of this chapter (Rule 1–02(bb) of IFRS as issued by the IASB, then 303(b) of Regulation S–K), no later than Regulation S–X), for the significant present a reconciliation to U.S. GAAP 90 days after the end of such fiscal year; obligor for each of the last three fiscal and 17 CFR part 210 (Regulation S–X), and years (or the life of the significant pursuant to Item 17 of Form 20–F. If a * * * * * obligor and its predecessors, if less), reconciliation is unavailable or not provided, however, that for a significant obtainable without unreasonable cost or PART 239—FORMS PRESCRIBED obligor under § 229.1101(k)(2) (Item expense, at a minimum provide a UNDER THE SECURITIES ACT OF 1933 1101(k)(2) of Regulation AB), only net narrative description of all material operating income for the most recent variations in accounting principles, ■ 14. The authority citation for part 239 fiscal year and interim period is practices and methods used in continues to read in part as follows: required. preparing the non-U.S. GAAP financial Authority: 15 U.S.C. 77c, 77f, 77g, 77h, * * * * * statements used as a basis for the 77j, 77s, 77z–2, 77z–3, 77sss, 78c, 78l, 78m, Instructions to Item 1112(b): *** summarized financial information from 78n, 78o(d), 78o–7 note, 78u–5, 78w(a), 78ll, 3. * * * those accepted in the U.S. 78mm, 80a–2(a), 80a–3, 80a–8, 80a–9, 80a– a. If the summarized financial * * * * * 10, 80a–13, 80a–24, 80a–26, 80a–29, 80a–30, and 80a–37; and sec. 107, Pub. L. 112–106, information required by paragraph (b)(1) ■ 11. Amend § 229.1115 by revising 126 Stat. 312, unless otherwise noted. of this section is presented on a basis of paragraph (b)(1) to read as follows: accounting other than U.S. GAAP or Sections 239.31, 239.32 and 239.33 are also International Financial Reporting § 229.1115 (Item 1115) Certain derivatives issued under 15 U.S.C. 78l, 78m, 78o, 78w, Standards (IFRS) as issued by the instruments. 80a-8, 80a-29, 80a-30, 80a-37 and 12 U.S.C. International Accounting Standards * * * * * 241. Board (IASB), then present a (b) * * * * * * * * reconciliation to U.S. GAAP and 17 CFR (1) If the aggregate significance ■ 15. Amend Form S–1 (referenced in part 210 (Regulation S–X), pursuant to percentage related to any entity or group § 239.11) by: Item 17 of Form 20–F. If a reconciliation of affiliated entities providing derivative ■ a. Removing and reserving Item 11(f) is unavailable or not obtainable without instruments contemplated by this of Part I—Information Required in unreasonable cost or expense, at a section is 10% or more, but less than Prospectus;

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2130 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

■ b. Revising paragraphs (f) and (g) of Item 7. Financial Statements. UNITED STATES SECURITIES AND Instruction 1 under ‘‘Instructions as to EXCHANGE COMMISSION Include financial statements meeting Summary Prospectus’’; and the requirements of Regulation S–X [17 Washington, DC 20549 ■ c. Adding paragraph (h) of Instruction CFR 210] and the supplementary 1 under ‘‘Instructions as to Summary FORM F–1 financial information specified by Item Prospectus’’. 302 of Regulation S–K [17 CFR 229.302]. REGISTRATION STATEMENT UNDER The revisions and additions read as THE SECURITIES ACT OF 1933 follows: Item 8. Undertakings. * * * * * Note: The text of Form S–1 does not, and Furnish the following undertakings: INSTRUCTIONS AS TO SUMMARY this amendment will not, appear in the Code 1. The undersigned registrant hereby PROSPECTUSES of Federal Regulations. undertakes to file a post-effective amendment, not later than 120 days 1. * * * UNITED STATES SECURITIES AND after the end of each fiscal year (c) * * * EXCHANGE COMMISSION subsequent to that covered by the (v) As to Item 4, a brief statement of Washington, DC 20549 financial statements presented herein, the general character of the business done and intended to be done and a FORM S–1 containing financial statements meeting the requirements of Regulation S–X [17 brief statement of the nature and present REGISTRATION STATEMENT UNDER CFR part 210] and the supplementary status of any material pending legal THE SECURITIES ACT OF 1933 financial information specified by Item proceedings; (vi) Subject to appropriate variation to 302 of Regulation S–K [17 CFR 229.302]. * * * * * conform to the nature of the registrant’s INSTRUCTIONS AS TO SUMMARY * * * * * business, provide summarized financial PROSPECTUSES ■ 17. Amend Form S–4 (referenced in information defined by § 239.25) by: Rule 1–02(bb)(1)(i) and (ii) of Regulation 1. * * * (f) As to Item 11, a brief statement of Note: The text of Form S–4 does not appear S–X (§ 210.1–02(bb) of this chapter) in the general character of the business in the Code of Federal Regulations. comparative columnar form for the periods for which financial statements done and intended to be done and a ■ a. Removing and reserving paragraphs are required by Item 8.A. of brief statement of the nature and present (d), (e), and (f) of Item 3 (‘‘Risk Factors, Form 20–F. If interim period financial status of any material pending legal Ratio of Earnings to Fixed Charges and statements are included, the proceedings; Other Information’’) and the related summarized financial information (g) A tabular presentation of notes subparagraphs in their entirety and should be updated for that interim payable, long term debt, deferred removing the Instruction to paragraph period, which may be unaudited, credits, minority interests, if material, (e) and (f) under Part I, Section A provided that fact is stated. If and the equity section of the latest (‘‘Information About the Transaction’’); summarized financial data for interim balance sheet filed, as may be ■ b. Removing and reserving paragraph periods is provided, comparative data appropriate; and (b)(3)(iii) of Item 12 (‘‘Information with from the same period in the prior (h) Subject to appropriate variation to respect to S–3 Registrants’’) under Part financial year shall also be provided, conform to the nature of the registrant’s I, Section B (‘‘Information About the except that the requirement for business, provide summarized financial Registrant’’); comparative balance sheet data is information defined by Rule 1– ■ c. Removing and reserving paragraph satisfied by presenting the year-end 02(bb)(1)(i) and (ii) of Regulation S–X (a)(3)(iii) of Item 13 (‘‘Incorporation of balance sheet information. (§ 210.1–02(bb) of this chapter) in Certain Information by Reference’’) * * * * * comparative columnar form for the under Part I, Section B (‘‘Information periods for which financial statements ■ 19. Amend Form F–4 (referenced in About the Registrant’’); § 239.34) by: are required by Regulation S–X (17 CFR ■ d. Removing and reserving paragraph part 210). (f) of Item 14 (‘‘Information with Note: The text of Form F–4 does not appear * * * * * Respect to Registrants Other Than S–3 in the Code of Federal Regulations. ■ 16. Amend Form S–20 (referenced in Registrants’’ under Part I, Section B ■ a. Removing and reserving paragraphs § 239.20) by revising Item 7 and (‘‘Information About the Registrant’’); (d), (e), and (f) of Item 3 (‘‘Risk Factors, paragraph (1) to Item 8 to read as and Ratio of Earnings to Fixed Charges and follows: ■ e. Removing and reserving paragraphs Other Information’’) and the related subparagraphs in their entirety and Note: The text of Form S–20 does not, and (b)(3) and (4) of Item 17 (‘‘Information this amendment will not, appear in the Code with Respect to Companies Other Than removing the Instruction to paragraph of Federal Regulations. S–3 Companies’’) under Part I, Section (e) and (f) under Part I, Section A C (‘‘Information About the Company (‘‘Information About the Transaction’’); ■ UNITED STATES SECURITIES AND Being Acquired’’). b. Removing and reserving paragraph (b)(3)(v) of Item 12 (‘‘Information With EXCHANGE COMMISSION ■ 18. Amend Form F–1 (referenced in Respect to F–3 Registrants’’) under Part Washington, DC 20549 § 239.31) by: I, Section B (‘‘Information About the ■ a. Revising the paragraph 1(c)(v) FORM S–20 Registrant’’); under ‘‘Instructions as to Summary ■ c. Removing and reserving paragraph REGISTRATION STATEMENT UNDER Prospectuses’’; and (f) of Item 14 (‘‘Information With THE SECURITIES ACT OF 1933 ■ b. Adding paragraph 1(c)(vi). Respect to Foreign Registrants Other * * * * * The revision and addition read as Than F–3 Registrants’’) under Part I, follows: Section B (‘‘Information about the PART II INFORMATION NOT Registrant’’); and REQUIRED IN PROSPECTUS Note: The text of Form F–1 does not, and this amendment will not, appear in the Code ■ d. Removing and reserving paragraph * * * * * of Federal Regulations. (b)(3) of Item 17 (‘‘Information With

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2131

Respect to Foreign Companies Other ■ f. In Item 11(b), removing the financial condition, changes in financial Than F–3 Companies’’) under Part I, reference ‘‘small business issuers’’ and condition and results of operations. Section C (‘‘Information About the adding in its place the term ‘‘smaller A. Operating results. Provide Company Being Acquired’’). reporting companies’’. information regarding significant The revision reads as follows: factors, including unusual or infrequent PART 240—GENERAL RULES AND events or new developments, materially REGULATIONS, SECURITIES Note: The text of Form 20–F does not, and affecting the company’s income from EXCHANGE ACT OF 1934 this amendment will not, appear in the Code operations, indicating the extent to of Federal Regulations. which income was so affected. Describe ■ 20. The authority citation for part 240 any other significant component of continues to read in part as follows: UNITED STATES SECURITIES AND revenue or expenses necessary to Authority: 15 U.S.C. 77c, 77d, 77g, 77j, EXCHANGE COMMISSION understand the company’s results of 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, Washington, DC 20549 operations. 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 1. If the statement of comprehensive 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, FORM 20–F income presents material changes from 78n, 78n–1, 78o, 78o–4, 78o-10, 78p, 78q, * * * * * period to period in net sales or revenue, 78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll, if applicable, describe the extent to 78mm, 80a–20, 80a–23, 80a–29, 80a–37, Item 5. Operating and Financial Review which such changes are attributable to 80b–3, 80b–4, 80b–11, and 7201 et seq., and and Prospects 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); changes in prices or to changes in the volume or amount of products or 18 U.S.C. 1350; Pub. L. 111–203, 939A, 124 The purpose of this standard is to Stat. 1376 (2010); and Pub. L. 112–106, sec. services being sold or to the provide management’s explanation of 503 and 602, 126 Stat. 326 (2012), unless introduction of new products or factors that have materially affected the otherwise noted. services. company’s financial condition and * * * * * 2. If the currency in which financial Sections 240.14a–1, 240.14a–3, 240.14a– results of operations for the historical statements are presented is of a country 13, 240.14b–1, 240.14b–2, 240.14c–1, and periods covered by the financial that has experienced hyperinflation, 240.14c–7 also issued under secs. 12, 15 statements, and management’s disclose the existence of such inflation, U.S.C. 781, and 14, Pub. L. 99–222, 99 Stat. assessment of factors and trends which a five year history of the annual rate of 1737, 15 U.S.C. 78n; are anticipated to have a material effect inflation and a discussion of the impact * * * * * on the company’s financial condition of hyperinflation on the company’s and results of operations in future § 240.14a–3 [Amended] business. periods. A discussion and analysis that 3. Provide information regarding the ■ 21. Amend § 240.14a–3 by removing meets these requirements is expected to impact of foreign currency fluctuations and reserving paragraph (b)(5)(i). better allow investors to view the on the company, if material, and the registrant from management’s § 240.14a–101 [Amended] extent to which foreign currency net perspective. Discuss the company’s investments are hedged by currency ■ 22. Amend § 240.14a–101 under Item financial condition, changes in financial borrowings and other hedging 14 by removing and reserving condition and results of operations for instruments. paragraphs (b)(8) through (10), the each year and interim period for which 4. Provide information regarding any instructions to paragraphs (b)(8), (b)(9), financial statements are required. The governmental economic, fiscal, and (b)(10), and paragraph (d)(6). discussion must include a quantitative monetary or political policies or factors and qualitative description of the that have materially affected, or could PART 249—FORMS, SECURITIES reasons underlying material changes, materially affect, directly or indirectly, EXCHANGE ACT OF 1934 including where material changes the company’s operations or within a line item offset one another, to ■ investments by host country 23. The authority citation for part 249 the extent necessary for an continues to read in part as follows: shareholders. understanding of the company’s B. Liquidity and capital resources. Authority: 15 U.S.C. 78a et seq. and 7201 business as a whole. Information Analyze the registrant’s ability to et seq.; 12 U.S.C. 5461 et seq.; 18 U.S.C. 1350; provided also must relate to all separate generate and obtain adequate amounts Sec. 953(b), Pub. L. 111–203, 124 Stat. 1904; segments and/or other subdivisions of cash to meet its requirements and its Sec. 102(a)(3), Pub. L. 112–106, 126 Stat. 309 (e.g., geographic areas, product lines) of (2012); Sec. 107, Pub. L. 112–106, 126 Stat. plans for cash in the short-term (i.e., the 313 (2012), and Sec. 72001, Pub. L. 114–94, the company. The discussion must next 12 months from the most recent 129 Stat. 1312 (2015), unless otherwise include other statistical data that the fiscal period end required to be noted. company believes will enhance a presented) and separately in the long- * * * * * reader’s understanding of the company’s term (i.e., beyond the next 12 months). Section 249.310 is also issued under secs. financial condition, cash flows and The discussion should analyze material 3(a), 202, 208, 302, 406 and 407, Pub. L. 107– other changes in financial condition, cash requirements from known 204, 116 Stat. 745. and results of operations. The contractual and other obligations. Such * * * * * discussion and analysis must also focus disclosures must specify the type of ■ 24. Amend Form 20–F (referenced in specifically on material events and obligation and the relevant time period § 249.220f) by: uncertainties known to management for the related cash requirements. As ■ a. Removing and reserving General that would cause reported financial part of this analysis, provide the Instruction G(c); information not to be necessarily following information: ■ b. Removing and reserving Item 3.A; indicative of future operating results or 1. Information regarding the ■ c. Removing Instructions to Item 3.A; of future financial condition. Provide company’s liquidity including: ■ d. Revising Item 5; the information specified below as well (a) A description of the internal and ■ e. In Instruction 3 of Instructions to as such other information that is external sources of liquidity and a brief Item 8.A.2, removing the final sentence; necessary for an investor’s discussion of any material unused and understanding of the company’s sources of liquidity. Include a statement

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2132 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

by the company that, in its opinion, the Critical accounting estimates. Critical i. An indication of the items or class working capital is sufficient for the accounting estimates are those estimates of items to which the exception was company’s present requirements, or, if made in accordance with generally applied; and not, how it proposes to provide the accepted accounting principles that ii. A description of what accounting additional working capital needed. involve a significant level of estimation principle was used and how it was (b) an evaluation of the sources and uncertainty and have had or are applied; amounts of the company’s cash flows, reasonably likely to have a material b. Include, where material, qualitative including the nature and extent of any impact on the financial condition or disclosure of the impact on financial legal or economic restrictions on the results of operations of the registrant. condition, changes in financial ability of subsidiaries to transfer funds Provide qualitative and quantitative condition and results of operations that to the company in the form of cash information necessary to understand the the treatment specified by IFRS would dividends, loans or advances and the estimation uncertainty and the impact have had absent the election to rely on impact such restrictions have had or are the critical accounting estimate has had the exception. reasonably likely to have on the ability or is reasonably likely to have on the 5. An issuer filing financial of the company to meet its cash registrant’s financial condition or results statements that comply with IFRS as obligations. of operations to the extent the issued by the IASB must, in providing 2. Information regarding the type of information is material and reasonably information in response to paragraphs of this Item 5 that refer to pronouncements financial instruments used, the maturity available. This information should of the FASB, provide disclosure that profile of debt, currency and interest include why each critical accounting satisfies the objective of the Item 5 rate structure. The discussion also must estimate is subject to uncertainty and, to disclosure requirements. In responding include funding and treasury policies the extent the information is material to this Item 5, an issuer need not repeat and objectives in terms of the manner in and reasonably available, how much information contained in financial which treasury activities are controlled, each estimate and/or assumption has statements that comply with IFRS as the currencies in which cash and cash changed over a relevant period, and the sensitivity of the reported amounts to issued by the IASB. equivalents are held, the extent to 6. Generally, the discussion must which borrowings are at fixed rates, and the material methods, assumptions and estimates underlying its calculation. cover the periods covered by the the use of financial instruments for financial statements and the registrant hedging purposes. Instructions to Item 5: 1. Refer to the Commission’s may use any format that in the 3. Information regarding the interpretive releases (No. 33–6835) registrant’s judgment enhances a company’s material cash requirements, dated May 18, 1989, (No. 33–8056) reader’s understanding. For registrants including commitments for capital dated January 22, 2002, (No. 33–8350) providing financial statements covering expenditures, as of the end of the latest dated December 19, 2003, (No. 33–9144) three years in a filing, a discussion of financial year and any subsequent dated September 17, 2010, and (No. 33– the earliest of the three years may be interim period and an indication of the 10751) dated January 30, 2020 for omitted if such discussion was already general purpose of such requirements guidance in preparing this discussion included in any other of the registrant’s and the anticipated sources of funds and analysis by management of the prior filings on EDGAR that required needed to satisfy such requirements. company’s financial condition and disclosure in compliance with Item 5 of C. Research and development, patents results of operations. Form 20–F, provided that registrants and licenses, etc. Provide a description 2. The discussion must focus on the electing not to include a discussion of of the company’s research and primary financial statements presented the earliest year must include a development policies for the last three in the document. You should refer to statement that identifies the location in years. the reconciliation to U.S. GAAP, if any, the prior filing where the omitted D. Trend information. The company and discuss any aspects of the discussion may be found. must identify material recent trends in differences between foreign and U.S. 7. Discussion of commitments or production, sales and inventory, the GAAP, not otherwise discussed in the obligations, including contingent state of the order book and costs and reconciliation, that you believe are obligations, arising from arrangements selling prices since the latest financial necessary for an understanding of the with unconsolidated entities or persons year. The company also must discuss, financial statements as a whole. that have or are reasonably likely to for at least the current financial year, 3. We encourage you to supply have a material current or future effect any known trends, uncertainties, forward-looking information, but that on a registrant’s financial condition, demands, commitments or events that type of information is not required. changes in financial condition, revenues are reasonably likely to have a material Forward-looking information is covered or expenses, results of operations, effect on the company’s net sales or expressly by the safe harbor provisions liquidity, cash requirements or capital revenues, income from continuing of Section 27A of the Securities Act and resources must be provided even when operations, profitability, liquidity or Section 21E of the Exchange Act. the arrangement results in no capital resources, or that would cause Forward-looking information is different obligations being reported in the reported financial information not than presently known data which will registrant’s consolidated balance sheets. necessarily to be indicative of future have an impact on future operating Such off-balance sheet arrangements operating results or financial condition. results, such as known future increases may include: Guarantees; retained or E. Critical Accounting Estimates in costs of labor or materials. You are contingent interests in assets A registrant that does not apply in its required to disclose this latter type of transferred; contractual arrangements primary financial statements IFRS as data if it is material. that support the credit, liquidity or issued by the IASB must discuss 4. To the extent the primary financial market risk for transferred assets; information about its critical accounting statements reflect the use of exceptions obligations that arise or could arise from estimates. This disclosure should permitted or required by IFRS 1, the variable interests held in an supplement, not duplicate, the issuer must: unconsolidated entity; or obligations description of accounting policies in the a. Provide detailed information as to related to derivative instruments that notes to the financial statements. the exceptions used, including: are both indexed to and classified in a

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations 2133

registrant’s own equity, or not reflected ■ c. Removing the Instructions Note: The text of Form 8–K does not, and in the statement of financial position. following General Instruction B.(13). this amendment will not, appear in the Code 8. For the Liquidity and Capital The revision reads as follows: of Federal Regulations. Resources disclosure, discussion of Note: The text of Form 40–F does not, and material cash requirements from known UNITED STATES SECURITIES AND this amendment will not, appear in the Code EXCHANGE COMMISSION contractual obligations may include, for of Federal Regulations. example, lease obligations, purchase Washington, DC 20549 obligations, or other liabilities reflected UNITED STATES SECURITIES AND FORM 8–K on the registrant’s balance sheet. Except EXCHANGE COMMISSION where it is otherwise clear from the * * * * * Washington, DC 20549 discussion, the registrant must indicate INFORMATION TO BE INCLUDED IN those balance sheet conditions or FORM 40–F THE REPORT income or cash flow items which the * * * * * registrant believes may be indicators of * * * * * its liquidity condition. B. Information To Be Filed on This Form Item 2.03 Creation of a Direct Financial 9. Provide the analysis in a format * * * * * Obligation or an Obligation under an that facilitates easy understanding and (11) Off-balance sheet arrangements. Off-Balance Sheet Arrangement of a that supplements, and does not To the extent not discussed in Registrant. duplicate, disclosure already provided management’s discussion and analysis in the filing. * * * * * Instruction to Item 5.A: that is provided pursuant to General (c) For purposes of this Item 2.03, 1. You must provide the information Instruction B.(3) of this form, discuss direct financial obligation means any of required by Item 5.A.2 with respect to the commitments or obligations, the following: hyperinflation if hyperinflation has including contingent obligations, arising (1) a long-term debt obligation means occurred in any of the periods for which from arrangements with unconsolidated a payment obligation under long-term you are required to provide audited entities or persons that have or are borrowings referenced in FASB ASC financial statements or unaudited reasonably likely to have a material paragraph 470–10–50–1 (Debt Topic) as interim financial statements in the current or future effect on a registrant’s may be modified or supplemented); document. See Rule 3–20(c) of financial condition, changes in financial (2) a finance lease obligation means a Regulation S–X for a discussion of condition, revenues or expenses, results payment obligation under a lease that cumulative inflation rates that trigger of operations, liquidity, cash would be classified as a finance lease this requirement. requirements or capital resources must pursuant to FASB ASC Topic 842, be provided even when the arrangement Leases, as may be modified or * * * * * results in no obligations being reported supplemented; Item 8. Financial Information in the registrant’s consolidated balance (3) an operating lease obligation sheets. Such off-balance sheet means a payment obligation under a * * * * * Instructions to Item 8.A.2: arrangements may include: Guarantees; lease that would be classified as an retained or contingent interests in assets operating lease pursuant to FASB ASC * * * * * transferred; contractual arrangements Topic 840, as may be modified or In initial registration statements, if the that support the credit, liquidity or supplemented; or financial statements presented pursuant market risk for transferred assets; (4) a short-term debt obligation that to Item 8.A.2 are prepared in accordance obligations that arise or could arise from arises other than in the ordinary course with U.S. generally accepted accounting variable interests held in an of business. principles, the earliest of the three years unconsolidated entity; or obligations (d) For purposes of this Item 2.03, off- may be omitted if that information has related to derivative instruments that balance sheet arrangement means any not previously been included in a filing are both indexed to and classified in a transaction, agreement or other made under the Securities Act of 1933 registrant’s own equity, or not reflected contractual arrangement to which an or the Securities Exchange Act of 1934. in the statement of financial position. entity unconsolidated with the * * * * * (12) To the extent not discussed in registrant is a party, under which the Item 11. Quantitative and Qualitative management’s discussion and analysis registrant has: Disclosures About Market Risk that is provided pursuant to General (1) Any obligation under a guarantee Instruction B.(3) of this form, analyze contract that has any of the * * * * * material cash requirements from known characteristics identified in FASB ASC (e) Smaller reporting companies. contractual and other obligations. Such paragraph 460–10–15–4 (Guarantees Smaller reporting companies, as defined disclosures must specify the type of Topic), as may be modified or in § 230.405 of this chapter and obligation and the relevant time period supplemented, and that is not excluded § 240.12b–2 of this chapter, need not for the related cash requirements. from the initial recognition and provide the information required by this Discussion of material cash measurement provisions of FASB ASC Item 11, whether or not they file on requirements from known contractual paragraphs 460–10–15–7, 460–10–25–1, forms specially designated as smaller obligations may include, for example, and 460–10–30–1. reporting company [or small business lease obligations, purchase obligations, (2) A retained or contingent interest in issuer] forms. or other liabilities reflected on the assets transferred to an unconsolidated * * * * * registrant’s balance sheet. entity or similar arrangement that serves ■ 25. Amend Form 40–F (referenced in (13) [Reserved] as credit, liquidity or market risk § 249.240f) by: support to such entity for such assets; ■ a. Revising General Instruction B.(11) * * * * * (3) Any obligation, including a and (12); ■ 26. Amend Form 8–K (referenced in contingent obligation, under a contract ■ b. Removing and reserving General § 249.308) by revising Item 2.03(c) and that would be accounted for as a Instructions B.(13); and 2.03(d) to read as follows: derivative instrument, except that it is

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3 2134 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations

both indexed to the registrant’s own ■ a. Removing and reserving General PART 274— FORMS PRESCRIBED stock and classified in stockholders’ Instruction J.(1)(g); UNDER THE INVESTMENT COMPANY equity in the registrant’s statement of ■ b. Revising General Instruction ACT OF 1940 financial position, and therefore I.(2)(a); and excluded from the scope of FASB ASC ■ c. Removing and reserving Item 6 ■ 29. The general authority citation for Topic 815, Derivatives and Hedging, (‘‘Selected Financial Data’’) of Part II. part 274 continues to read as follows: pursuant to FASB ASC subparagraph The revision reads as follows: 815–10–15–74(a), as may be modified or Authority: 15 U.S.C. 77f, 77g, 77h, 77j, supplemented; or Note: The text of Form 10–K does not, and 77s, 78c(b), 78l, 78m, 78n, 78o(d), 80a–8, (4) Any obligation, including a this amendment will not, appear in the Code 80a–24, 80a–26, 80a–29, and Pub. L. 111– contingent obligation, arising out of a of Federal Regulations. 203, sec. 939A, 124 Stat. 1376 (2010), unless variable interest (as defined in the FASB otherwise noted. UNITED STATES SECURITIES AND ASC Master Glossary), as may be * * * * * EXCHANGE COMMISSION modified or supplemented) in an ■ 30. Amend Form N–2 (referenced in unconsolidated entity that is held by, Washington, DC 20549 referenced in §§ 239.14 and 274.11a–1) and material to, the registrant, where FORM 10–K by revising paragraph 2 of Item 4 to read such entity provides financing, as follows: liquidity, market risk or credit risk ANNUAL REPORT PURSUANT TO support to, or engages in leasing, SECTION 13 OR 15D OF THE Note: The text of Form N–2 does not, and hedging or research and development SECURITIES EXCHANGE ACT OF 1934 this amendment will not, appear in the Code of Federal Regulations. services with, the registrant. GENERAL INSTRUCTIONS * * * * * * * * * * UNITED STATES SECURITIES AND ■ 27. Amend Form 10 (referenced in 2. * * * EXCHANGE COMMISSION § 249.310) by revising Item 2 (‘‘Financial Information’’) to read as follows: (a) Such registrants may omit the Washington, DC 20549 information called for by Item 7, Note: The text of Form 10 does not, and Management’s Discussion and Analysis FORM N–2 this amendment will not, appear in the Code of Financial Condition and Results of of Federal Regulations. REGISTRATION STATEMENT UNDER Operations provided that the registrant THE SECURITIES ACT OF 1933 includes in the Form 10–K a UNITED STATES SECURITIES AND * * * * * EXCHANGE COMMISSION management’s narrative analysis of the results of operations explaining the Part A—INFORMATION REQUIRED IN Washington, DC 20549 reasons for material changes in the A PROSPECTUS FORM 10 amount of revenue and expense items between the most recent fiscal year * * * * * GENERAL FORM FOR presented and the fiscal year REGISTRATION OF SECURITIES Item 4. * * * immediately preceding it. Explanations Pursuant to Section 12(b) or (g) of The of material changes should include, but 2. Business Development Companies. Securities Exchange Act of 1934 not be limited to, changes in the various If the Registrant is regulated as a * * * * * elements which determine revenue and business development company under expense levels such as unit sales the Investment Company Act, furnish in INFORMATION REQUIRED IN volume, prices charged and paid, a separate section the information REGISTRATION STATEMENT production levels, production cost required by Items 302 and 303 of * * * * * variances, labor costs and discretionary Regulation S–K. spending programs. In addition, the * * * * * Item 2. Financial Information. analysis should include an explanation By the Commission. Furnish the information required by of the effect of any changes in Items 303 and 305 of Regulation S–K accounting principles and practices or Dated: November 19, 2020. (§§ 229.303 and 229.305 of this chapter). method of application that have a Vanessa A. Countryman, * * * * * material effect on net income as Secretary. ■ 28. Amend Form 10–K (referenced in reported. [FR Doc. 2020–26090 Filed 1–8–21; 8:45 am] § 249.310) by: * * * * * BILLING CODE 8011–01–P

VerDate Sep<11>2014 23:27 Jan 08, 2021 Jkt 253001 PO 00000 Frm 00056 Fmt 4701 Sfmt 9990 E:\FR\FM\11JAR3.SGM 11JAR3 jbell on DSKJLSW7X2PROD with RULES3