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The New MD&A Rule: Part Seven – Sequential Quarterly Analysis in Interim MD&As

George Wilson, SEC Institute Director

This is the seventh in a series of articles in which we are diving into the details of the SEC’s Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information Final Rule. This rule was published in the Federal Register on January 11, 2021. It is effective for filings on or after February 10, 2021.

The rule’s transition provisions include a mandatory transition date but also allow voluntary early compliance. The mandatory transition date is each company’s first fiscal year that ends after August 9, 2021, 210 days after the effective date. Companies may voluntarily apply the new rule, on an S-K item-by-item basis, in any filing made on or after the effective date of February 10, 2021.

This means a company that files a Form 10-K on or after February 10, 2021, has the option to early implement this new MD&A (S-K Item 303) guidance. Even if a company does not implement the rule early, it is not too soon to start planning for any required changes. And, hopefully, this exploration can be a possible stepping-off point for a process to review and possibly improve MD&A as a communication document.

In the first article, we overviewed the MD&A changes. The five subsequent articles reviewed and discussed:

This seventh article addresses another change many preparers welcome: the addition of a provision to the interim MD&A requirements that allows companies to use sequential quarterly analysis. With this option, companies can compare the most recent quarter to the immediately preceding quarter rather than to the same quarter in the previous fiscal year. This new option for sequential quarterly analysis may be a more meaningful presentation for companies that do not have significant seasonality in their operations. Under the old rules, a company that thought sequential quarter analysis was a better fit for the business still had to present the quarter this year compared to the quarter last year along with sequential quarter analysis.

In the final rule, the SEC commented:

We continue to believe that the flexibility provided by these amendments will help registrants provide a more tailored and meaningful analysis that is relevant to their specific business cycles while also providing investors with material information to assess quarterly performance. Because not all businesses are seasonal, a comparison to the corresponding quarter of the preceding year may not be as meaningful as a comparison to the preceding quarter. Additionally, by requiring registrants not only to explain the reasons for a change in comparison from prior periods but also to provide both comparisons when there is such a change, we believe investors will benefit from greater insight into a registrant’s decision making and have sufficient disclosure to understand any period-over-period change.

The change was made by adding language to the old MD&A requirement, which was also moved to new paragraph S-K Item 303(c):

(ii) Discuss any material changes in the registrant’s results of operations with respect to either the most recent quarter for which a statement of comprehensive income is provided and the corresponding quarter for the preceding fiscal year or, in the alternative, the most recent quarter for which a statement of comprehensive income is provided and the immediately preceding sequential quarter. If the latter immediately preceding sequential quarter is discussed, then provide in summary form the financial information for that immediately preceding sequential quarter that is subject of the discussion or identify the registrant’s prior filings on EDGAR that present such information. If there is a change in the form of presentation from period to period that forms the basis of comparison from previous periods provided pursuant to this paragraph, the registrant must discuss the reasons for changing the basis of comparison and provide both comparisons in the first filing in which the change is made.

If a company uses sequential quarterly analysis, it must include summary financial information for the preceding quarter or identify the prior filing that contains the earlier quarter. And, if a change in approach is made, the company must discuss the reasons for the change and present both comparisons in the filing where the change is made.

At the most recent meeting of the Center For Audit Quality SEC Regulations Committee, the staff addressed a question for companies that want to change to the sequential quarter approach when they adopt this new guidance. The meeting minutes include the following guidance from the SEC Staff:

…the staff confirmed, that a registrant which elects to revise the quarterly periods being compared upon initial compliance with the New Rules would be required to present the MD&A comparison in both its historic presentation and the new revised presentation. For example and assuming the change in MD&A comparison occurs in the first quarter Form 10-Q, the registrant would disclose both the comparison of the first quarter of the current year with that of the prior year and the comparison of the first quarter of the current year with the fourth quarter of the prior year. It would also disclose the reason for the change.

For an example of a company using this presentation, check out Champion X Corporation’s Form 10-Q.

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