As a companion release to the proposed rules on the disclosure of short-term borrowings, the SEC also issued an interpretive release on how existing MD&A disclosure requirements apply with respect to liquidity and funding. The guidance is intended to further improve the discussion of liquidity and capital resources in MD&A in order to facilitate understanding by investors of the liquidity and funding risks facing the registrant. The guidance is is effective immediately.


The release reiterates the SEC’s long-standing MD&A principles as they apply to disclosure of critical liquidity matters, so that MD&A disclosure keeps pace with the increasingly diverse and complex financing alternatives available to companies. The SEC provided examples of important trends and uncertainties relating to liquidity that must be addressed. These include difficulties accessing the 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 general counterparty risk.

The SEC clarified that if a company’s financial statements do not adequately convey the company’s financing arrangements during the reporting period, or the impact of those arrangements on liquidity, the company may be required to add narrative disclosure to enable an understanding of the amounts depicted in the financial statements. For example, if borrowings during the reporting period are materially different than the period-end amounts recorded in the financial statements, current rules require additional disclosure about the intra-period variations.

The SEC noted that companies must consider whether transactions, such as repurchase, securities lending or any other transaction involving the transfer of financial assets with an obligation to repurchase the financial assets that have been accounted for as a sale, are reasonably likely to result in the use of a material amount of cash or other liquid assets. If so, then such transactions must be disclosed, particularly where the company does not otherwise include such information in its discussion of off-balance sheet arrangements or in its contractual obligations table.

Companies must also consider describing cash management and risk management policies that are relevant to an assessment of their financial condition. Companies that maintain or have access to a portfolio of cash and other instruments that are a material source of 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, which could include information about the nature of any limits or restrictions on the company’s ability to use or access those assets to fund its operations.

Leverage Ratios

The SEC noted that if a company chooses to include capital or leverage ratios in its MD&A, such ratios need to be accompanied by a clear explanation of the calculation methodology. The company must either discuss the differences of its measure with a directly comparable measure in the registrant’s industry, or present that comparable measure to avoid the disclosure being misleading. Companies must also consider their reasons for presenting the particular financial measure and include disclosure stating why the measure is useful to understanding its financial condition.

Contractual Obligations Table Disclosures

The SEC noted that divergent practices have developed in connection with the contractual obligations table. The SEC did not provide general guidance since questions that arise are fact-specific. However, the SEC stated that the table permits flexibility, and companies are encouraged to develop a presentation that is clear and reflects the categories of obligations that are meaningful in light of the company’s capital structure and business. Companies should highlight changes in presentation to facilitate period-to-period comparisons. In addition, companies should use footnotes to provide information regarding the timing and amount of the contractual obligations and additional narrative disclosure to explain what the tabular data includes and does not include.