Guidance Should Be Taken into Account in Upcoming Periodic Reporting

In mid-September, the SEC published interpretive guidance on disclosures in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) relating to liquidity, leverage ratios and contractual obligations. The guidance should be taken into account in upcoming filings, including third quarter 10-Qs to be filed by calendar-year registrants. The guidance was issued simultaneously with proposed amendments to existing MD&A disclosure requirements that would enhance the disclosure that registrants are required to provide concerning short-term borrowings. Action items and considerations arising out of the interpretative guidance are discussed below:


  • Review compliance with the SEC’s 2003 MD&A guidance, which, among other things, covers topics relating to the discussion of cash requirements, cash management and sources and uses of cash, as well as debt instruments, guarantees and related covenants.
  • Consider whether the MD&A sufficiently discusses known trends or any known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, the registrant’s liquidity materially increasing or decreasing. Important trends and uncertainties relating to liquidity might include, for example:
    • Difficulties in accessing debt markets;
    • Reliance on commercial paper or other short-term financing arrangements;
    • Maturity mismatches between borrowing sources and the assets funded by those sources;
    • Changes in terms requested by counterparties;
    • Changes in the valuation of collateral; and
    • Counterparty risk.
  • If a registrant’s financial statements do not adequately convey financing arrangements during the reporting period, or the impact of those arrangements on liquidity, because of a known trend, demand, commitment, event or uncertainty, additional narrative disclosure should be considered and may be required to enable an understanding of the amounts in the financial statements. For example, if borrowings during the period are materially different than period-end amounts, disclosure about intra-period variations may be required to facilitate investor understanding of the registrant’s liquidity position.
  • Consider the adequacy of disclosure relating to repurchase agreements that are accounted for as sales, as well as other types of short-term financings not fully captured in period-end balance sheets. The interpretive release indicates that the absence of specific references in existing disclosure requirements for off-balance sheet arrangements or contractual obligations to repurchase transactions that are accounted for as sales, or to any other transfers of financial assets that are accounted for as sales, does not relieve a registrant from the requirement to discuss these items in the liquidity and capital resources discussion in the MD&A to the extent a known trend, demand, commitment, event or uncertainty will or is reasonably likely to result in a material increase or decrease in the registrant’s liquidity. In evaluating whether MD&A disclosure may be required in connection with a repurchase transaction, securities lending transaction or other transaction involving the transfer of financial assets with a repurchase obligation that has been accounted for as a sale, the registrant should consider whether the transaction is reasonably likely to result in the use of a material amount of cash or other liquid assets.
  • To provide context for exposures identified in the MD&A, a registrant should consider describing cash management and risk management policies that are relevant to an assessment of its financial condition. Banks in particular should consider discussing their policies and practices in meeting applicable banking agency guidance on funding and liquidity risk management, or any policies and practices that differ from applicable agency guidance. A registrant that maintains or has access to a portfolio of cash and other investments that is material to its liquidity should consider providing information about the nature and composition of that portfolio, including a description of the assets held and any related market risk, settlement risk or other risk exposure. This could include, for example, information about the nature of any limits or restrictions and their effect on the registrant’s ability to use or access those assets to fund its operations.

Leverage Ratios

  • Review whether disclosure of capital or leverage ratios complies with existing SEC guidance, including guidance relating to the disclosure of non-financial measures and of debt instruments, guarantees and related covenants and requirements relating to non-GAAP financial measures.
  • Ratios or measures included in the MD&A should in any case be accompanied by a clear explanation of the calculation methodology, including a clear articulation of the treatment of any inputs that are unusual, infrequent or non-recurring or that are otherwise adjusted so that the ratio is calculated differently from directly comparable measures. If the measure differs from other measures commonly used in the registrant’s industry, the registrant should consider whether a discussion of those differences or presentation of those measures is necessary to make the disclosure not misleading. There should also be disclosure indicating why the measure is useful to understanding the registrant’s financial condition.

Contractual Obligations

  • Review the contractual obligations table to ensure that the presentation is clear, understandable and appropriately reflects the registrant’s meaningful categories of obligations in light of its capital structure and business. For example, a registrant may want to consider separating amounts in the table into those that are reflected on the balance sheet and those arising from off-balance sheet arrangements.
  • Changes in presentation in the contractual obligations table should be highlighted so that investors can make period-to-period comparisons.
  • Footnotes should be used to provide information necessary for an understanding of the timing and amount of the specified contractual obligations or a narrative discussion outside of the table should be considered where necessary to promote an understanding of the tabular data.