This is the sixth in a series of articles in which we are diving into the details of the SEC’s
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.
This sixth article addresses a change many preparers welcome: eliminating the Contractual Obligations Table . As is frequently the case though, when a disclosure requirement is removed, a new requirement is put in place. The Final Rule expands disclosures about liquidity requirements and capital resources in a new, principles-based requirement. (More about this in the last article in this series.) Thus, the rules-based table is replaced with a broad, principles-based requirement for disclosure about capital resources and related information.
Over the years since the Sarbanes-Oxley Act, when the table was introduced, a multitude of questions has arisen about how to handle situations that did not easily fit the table’s brief instructions. Perhaps the best suggestion about the table was in the
The purpose of the contractual obligations table is to provide aggregated information about contractual obligations and contingent liabilities and commitments in a single location so as to improve transparency of a registrant’s short-term and long-term liquidity and capital resources needs and to provide context for investors to assess the relative role of off-balance sheet arrangements; registrants should prepare the disclosure consistent with that objective. … Registrants should determine how best to present the information that is relevant to their own business in a manner that is clear, consistent with the purpose of the disclosure and not misleading, and should provide additional disclosure where necessary to explain what the tabular data includes and does not include.
This is a very rules-based disclosure, and even this statement of an overall objective for the table did not eliminate questions. In the MD&A Final Rule Release, the SEC commented on eliminating the table:
Our amendments are also intended to address commenters’ concerns about the challenges imposed by the current contractual obligations table. We recognize that, because the current contractual obligations table does not have a materiality threshold, the burdens imposed by the table on registrants can include identifying, evaluating, and aggregating contracts that are not material.
By eliminating the prescriptive requirement to prepare a contractual obligations table and refocusing instead on a principles-based approach that requires a robust discussion of liquidity and capital resources, including a discussion of contractual obligations, our intent is to relieve registrants of these burdens while continuing to provide investors with material information.
In addition, the Final Rule Release makes these important points about the principles-based approach to the discussion of contractual obligations:
We are eliminating Item 303(a)(5) as proposed and, in consideration of comments received, we are also amending Item 303(b) to specifically require disclosure of material cash requirements from known contractual and other obligations as part of a liquidity and capital resources discussion. As discussed in the Proposing Release, the Commission believed that eliminating current Item 303(a)(5) should not result in the loss of material information.
This approach is now built into S-K Item 303 with the following new instruction:
4. For the liquidity and capital resources disclosure, discussion of material cash requirements from known contractual obligations may include, for example, lease obligations, purchase obligations, or other liabilities reflected on the registrant’s balance sheet. Except where it is otherwise clear from the discussion, the registrant must discuss those balance sheet conditions or income or cash flow items which the registrant believes may be indicators of its liquidity condition.
So, along with elimination of the table, we need to delve into the Final Rule’s principles-based expansion of the liquidity and capital resources discussion. With these changes, there is a real opportunity to improve MD&A. The liquidity and capital resources discussion is, unfortunately, frequently poorly written. Part of this is attributed to the lack of clarity and the brevity of the old requirements, but is also due in part to challenges in discussing what is presented in the statement of cash flows. All in all, most companies have a chance to improve this section of their MD&A. Our last article in this series will explore the changes for liquidity and capital resources.
PLI Programs you may be interested in:
Also available from PLI Press:
Please note that the content of this article is intended as practical and useful information. It is provided with the understanding that the SEC Institute and PLI are not engaged in rendering accounting, auditing, legal or other consulting or professional services. If accounting advice or other expert assistance is required, the services of a competent professional should be sought.
To submit an article for consideration, please contact the editor at:
This article is published on PLI PLUS, the online research database of PLI. The entirety of the PLI Press print collection is available on PLI PLUS—including PLI's authoritative treatises, answer books, course handbooks and transcripts from our original and highly acclaimed CLE programs.
Sign up for a free trial of PLI PLUS at