On January 30, 2020, the Securities and Exchange Commission (SEC) proposed amendments to Regulation S-K that would eliminate Item 301 (Selected Financial Data) and Item 302 (Supplementary Financial Information), because these are largely duplicative of other disclosure requirements, as well as update the disclosure requirements in Item 303 (Management’s Discussion and Analysis (MD&A)). The SEC press release announcing the proposed changes is available here and the proposed rule release is available here.

More specifically, the proposed amendments would amend Item 303 (MD&A) of Regulation S-K to, among other things:

  • Add a new Item 303(a), Objective, to state the principal objectives of MD&A;

  • Replace Item 303(a)(4), Off-balance sheet arrangements, with an instruction to prompt registrants to discuss such obligations in the broader context of MD&A;

  • Eliminate Item 303(a)(5), Tabular disclosure of contractual obligations, given the overlap with information required in the financial statements and to promote the principles-based nature of MD&A;

  • Add a new disclosure requirement to Item 303, Critical accounting estimates, to clarify and codify existing SEC guidance in this area; and

  • Revise the interim MD&A requirement in Item 303(b) to provide flexibility by allowing companies to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter.

The proposal also includes certain parallel amendments to Forms 20-F and 40-F.

The public comment period on the proposed amendments will remain open for 60 days following publication of the proposed rule release in the Federal Register.

Concurrently with the proposed rule release, the SEC also issued companion guidance in the form of an SEC interpretive release regarding key performance indicators and metrics disclosed in the MD&A. While the amendments discussed above are, at least for the moment, merely proposed changes, the interpretive release is intended to provide guidance to companies now.

The interpretive release noted that key performance indicators and metrics are those key variables and other qualitative and quantitative factors that are peculiar to and necessary for an understanding and evaluation of the individual registrant, and provided the following non-exclusive list of examples of indicators and metrics intended to be covered by the guidance:

  • operating margin;

  • same store sales;

  • sales per square foot;

  • total customers/subscribers;

  • average revenue per user;

  • daily/monthly active users/usage;

  • active customers;

  • net customer addition;

  • total impressions;

  • number of memberships;

  • traffic growth;

  • comparable customer transactions increase;

  • voluntary and/or involuntary employee turnover rate;

  • percentage breakdown of workforce (e.g., active workforce covered under collective bargaining agreements);

  • total energy consumed; and

  • data security measures (e.g., number of data breaches or number of account holders affected by data breaches).

The interpretive release reminds companies that, when including performance metrics in their disclosure, they should “consider existing MD&A requirements and the need to include such further material information, if any, as may be necessary in order to make the presentation of the metric, in light of the circumstances under which it is presented, not misleading.” For example, the guidance provides that the SEC would generally expect, based on the facts and circumstances, the following disclosures to accompany a performance metric:

  • A clear definition of the metric and how it is calculated;

  • A statement indicating the reasons why the metric provides useful information to investors; and

  • A statement indicating how management uses the metric in managing or monitoring the performance of the business.

The interpretive release also provides guidance on what disclosure may be appropriate in the event that a company changes the method by which it calculates or presents a performance metric from one period to another. The interpretive release is available here.

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