October 5, 2010 NDS 2010-27
New Developments Summary
SEC issues interpretive guidance to improve liquidity
disclosures in MD&A
Also issues Proposed Rule on short-term borrowings disclosures
Summary
The SEC recently issued Interpretive Release, Commission Guidance on Presentation of Liquidity and
Capital Resources Disclosures in Management’s Discussion and Analysis, to improve the transparency of
disclosures on liquidity and funding risks in Management’s Discussion and Analysis of Financial Condition
and Results of Operations (MD&A). This bulletin summarizes the guidance in the Interpretive Release,
which outlines the type of liquidity, leverage ratios, and contractual obligations disclosures within MD&A
that the SEC believes will better inform investors of the liquidity and funding risks facing the registrant.
This bulletin also describes the SEC Proposed Rule, Short-Term Borrowings Disclosure, released in
conjunction with the Interpretive Release. The Proposed Rule would require new disclosures, in a
separately captioned subsection of MD&A, intended to inform investors whether the amounts of shortterm borrowings at the end of a reporting period are consistent with the amounts outstanding throughout
the reporting period. Comments on the Proposed Rule are due on or before November 29, 2010.
Finally, this bulletin includes a section that lists certain SEC resources which registrants may find useful
when preparing their MD&A disclosures.
Contents
A. Overview ................................................................................................................................................. 1
B. Interpretive Release ............................................................................................................................... 2
Liquidity disclosures ............................................................................................................................... 2
Leverage ratio disclosures ...................................................................................................................... 3
Contractual obligations table disclosures ............................................................................................... 3
C. SEC Proposed Rule ............................................................................................................................... 4
D. MD&A resources..................................................................................................................................... 5
A. Overview
The SEC has continuously emphasized the need for registrants to provide transparent disclosures for
liquidity and capital resources in Management’s Discussion and Analysis of Financial Condition and
New Developments Summary
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Results of Operations (MD&A). The SEC believes liquidity and capital resources disclosures are a critical
area of focus for investors, particularly after numerous business failures resulted from liquidity constraints
during the recent financial crisis. In addition, registrants need to improve disclosure to better inform
investors of the liquidity and funding risks that exist. For example, disclosures related to short-term
borrowings center on period-end balances reported in the financial statements, yet the balances of such
credit facilities often vary significantly throughout a reporting period. In addition, the SEC has reported
that some companies might be temporarily reducing the amount of short-term borrowings outstanding at
the end of a reporting period in an attempt to mask their actual liquidity positions. As a result, the SEC
has concluded that investors may not have enough information to fully understand liquidity and funding
risks.
In response to this concern, the SEC issued Interpretive Release, Commission Guidance on Presentation
of Liquidity and Capital Resources Disclosures in Management’s Discussion and Analysis, to outline its
views on how registrants should apply current SEC rules and regulations to the following disclosures:
•
Liquidity and capital resources
•
Capital or leverage ratios
•
Contractual obligations
In addition, the SEC Proposed Rule, Short-Term Borrowings Disclosure, released at the same time as the
Interpretive Release, would require registrants to provide specific disclosures, in a separately captioned
subsection of MD&A, related to short-term borrowings. The proposed disclosures, including both
quantitative and qualitative disclosures, would provide investors with information related to intraperiod
short-term borrowing amounts in addition to the currently required period-end amounts.
B. Interpretive Release
Liquidity disclosures
The guidance in the Interpretive Release related to liquidity disclosures is effective immediately and
mainly serves to supplement other available rules and interpretive guidance in this area (see Section D
for a list of certain existing SEC rules and guidance). In the Interpretive Release, the SEC reemphasizes
the following overriding principles governing registrants’ MD&A liquidity disclosures:
•
Provide transparent disclosures that convey a clear and complete picture of a company’s financial
position
•
Identify and separately describe internal and external sources of liquidity, and briefly discuss any
material unused sources of liquidity
•
Disclose known trends and uncertainties that have impacted historical operating results or are
reasonably likely to impact future periods
•
Describe cash and risk management policies
SEC rules specifically require registrants to disclose debt balances as of the end of the reporting period
and, on a broader level, to provide adequate discussion in the liquidity and capital resources section if the
financial statements do not provide an adequate depiction of the liquidity trends, risks, and uncertainties.
For example, when period-end short-term borrowing balances differ materially from intraperiod balances,
the SEC believes that it might be necessary to disclose the intraperiod balances in order for an investor to
understand the registrant’s liquidity position.
New Developments Summary
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Registrants with repurchase agreements accounted for as sales may need to provide certain disclosures
in the liquidity and capital resource section to the extent that a transaction is reasonably likely to require
the use of a material amount of cash. Such disclosures may include a description of the repurchase
agreements and their historical and potential future impact on the results of operations and liquidity.
Other guidance in the Interpretive Release on liquidity disclosures includes the following:
•
A registrant that maintains, or has access to, a portfolio of cash and investments that is a material
source of liquidity should include a description of assets held and their related market, settlement, or
other risks.
•
Disclosures of relevant cash and risk management policies are particularly relevant to investors of
banks. Banks should consider discussing policies and practices that (1) meet applicable banking
agency guidance on funding and liquidity management and (2) differ from applicable agency
guidance.
Leverage ratio disclosures
The Interpretive Release includes guidance for registrants that choose to include leverage ratios in filings,
particularly when the registrant calculates ratios on a basis other than as commonly defined. To
determine which disclosures would be most appropriate, registrants should first determine if the ratio is a
financial or non-financial measure. The Interpretive Release refers to existing relevant guidance related to
each type of measure, including the following:
•
For non-financial measures, SEC Interpretive Release, Commission Guidance Regarding
Management's Discussion and Analysis of Financial Condition and Results of Operations
(2003 Interpretive Release), provides guidance on disclosure surrounding presentations of industry or
value metrics.
•
For financial measures, the SEC’s rules and guidance on non-GAAP measures should be applied if
the registrant determines the measure falls outside GAAP. If the ratio is presented in connection with
a covenant related to a debt instrument, registrants should consider the relevant guidance in the
2003 Interpretive Release.
Both non-financial and financial measures should be accompanied by a detailed explanation of the
method used to calculate the ratio. In addition, the explanation should highlight any adjustments for
unusual, infrequent, or non-recurring items that render the ratio different from directly comparable GAAP
or industry measures.
Contractual obligations table disclosures
The Interpretive Release states that practice varies with regard to the presentation of certain items in the
contractual obligations table, such as interest payments, repurchase agreements, tax liabilities, synthetic
leases, and obligations that arise from off-balance sheet arrangements. The Interpretive Release
emphasizes that the presentation of such items should be consistent with the objective of the table—to
provide aggregated information related to contractual obligations, contingent liabilities, and commitments
in a single location aimed at (1) improving the transparency of a registrant’s short- and long-term liquidity
and capital resources needs and (2) providing a context for investors to assess off-balance sheet
arrangements.
The SEC further encourages registrants to utilize footnotes to the table when necessary to provide
investors with a better understanding of the amounts presented and the timing of such payments. The
Interpretive Release also states that any change in presentation should be highlighted to provide
investors with enough information to make accurate comparisons from period to period.
New Developments Summary
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Grant Thornton commentary
The SEC does not take a formal position in the Interpretive Release on whether items such as
interest payments, repurchase agreements, tax liabilities, synthetic leases, and obligations that
arise under off-balance sheet arrangements should be included in the table, since relevant facts
and circumstances vary widely from one registrant to another. Based, though, on comments the
SEC staff has issued in recent years related to the table, we believe that the staff generally
expects registrants either to include such items in the table or in a footnote to the table, or to
provide, at a minimum, an explanation of why such items were not included.
C. SEC Proposed Rule
The Proposed Rule, if adopted, would create a new section in MD&A related to liquidity and capital
resources that would provide disclosure of each specified category of short-term borrowings at the end of
the reporting period and the weighted-average interest rate on those borrowings. In addition, the
Proposed Rule would require the following:
•
Quantitative disclosures of intraperiod short-term borrowing amounts for each category, such as the
average and largest amount of short-term borrowings outstanding during the period
•
Qualitative disclosures for each category, such as the reason for material differences between the
average and period-end amounts of short-term borrowings
The Proposed Rule would apply to all SEC registrants with short-term borrowings; however, the methods
used to determine the average and maximum amounts of short-term borrowings outstanding would vary,
depending on whether the registrant meets the definition of a “financial company.” According to the
Proposed Rule, “financial companies” include broker-dealers and registrants involved in the businesses of
lending, deposit-taking, insurance underwriting, or providing investment advice. Registrants that meet the
definition of a “financial company” would be required to both
•
Use the amount outstanding at the end of each day to calculate the average amount of short-term
borrowings outstanding during a reporting period
•
Disclose the largest amount outstanding at the end of any day during the reporting period
All other registrants would be permitted to determine the average and maximum amounts outstanding
using month-end balances.
The Proposed Rule would also permit registrants engaged in both financial and non-financial businesses
to provide separate short-term borrowings disclosures for financial operations using daily amounts and for
non-financial businesses using monthly amounts.
Comments on the Proposed Rule are due on or before November 29, 2010.
New Developments Summary
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D. MD&A resources
The following is a list of certain existing SEC rules and guidance related to MD&A disclosures:
•
Final Rules:
−
Final Rule, Conditions for Use of Non-GAAP Financial Measures (FR 65)
−
Final Rule, Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet
Arrangements and Aggregate Contractual Obligations (FR 67)
Grant Thornton commentary
In addition to summarizing the changes to its regulations, SEC final rules provide interested
parties with a view into the SEC’s decision making process. This includes discussions of why
the SEC proposed the new rule, a summary of other alternative rules the SEC considered, an
explanation of why the SEC selected the final rule as the best alternative, and other
background information.
•
•
•
Interpretive Releases:
−
Interpretive Release: Management's Discussion and Analysis of Financial Condition and Results
of Operations; Certain Investment Company Disclosures (FR 36)
−
Interpretive Release: Commission Guidance Regarding Management's Discussion and Analysis
of Financial Condition and Results of Operations (FR 72)
Other Releases:
−
Release: Cautionary Advice Regarding Disclosure About Critical Accounting Policies (FR 60)
−
Release: Commission Statement about Management's Discussion and Analysis of Financial
Condition and Results of Operations (FR 61)
“Dear CFO” Letters:
−
August 2009 – “Sample Letter Sent to Public Companies on MD&A Disclosure Regarding
Provisions and Allowances for Loan Losses”
−
September 2008 – “Sample Letter Sent to Public Companies on MD&A Disclosure Regarding the
Application of SFAS 157 (Fair Value Measurements)”
−
March 2008 – “Sample Letter Sent to Public Companies on MD&A Disclosure Regarding the
Application of SFAS 157 (Fair Value Measurements)”
−
December 2007 – “Sample Letter Sent to Public Companies That Have Identified Investments in
Structured Investment Vehicles, Conduits or Collateralized Debt Obligations (Off-balance Sheet
Entities)”
New Developments Summary
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This Grant Thornton LLP bulletin provides information and comments on current SEC reporting issues
and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to
provide accounting or other advice or guidance with respect to the matters addressed in the bulletin. All
relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to
arrive at conclusions that comply with matters addressed in this bulletin.