[Federal Register Volume 75, Number 187 (Tuesday, September 28, 2010)]
[Rules and Regulations]
[Pages 59894-59897]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-23744]



[[Page 59893]]

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Part IV





Securities and Exchange Commission





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17 CFR Parts 211, 231, and 241



Commission Guidance on Presentation of Liquidity and Capital Resources 
Disclosures in Management's Discussion and Analysis; Final Rule

Federal Register / Vol. 75, No. 187 / Tuesday, September 28, 2010 / 
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 211, 231, and 241

[Release Nos. 33-9144; 34-62934; FR-83]


Commission Guidance on Presentation of Liquidity and Capital 
Resources Disclosures in Management's Discussion and Analysis

AGENCY: Securities and Exchange Commission.

ACTION: Interpretation.

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SUMMARY: We are providing interpretive guidance that is intended to 
improve discussion of liquidity and capital resources in Management's 
Discussion and Analysis of Financial Condition and Results of 
Operations in order to facilitate understanding by investors of the 
liquidity and funding risks facing the registrant.

DATES: Effective Date: September 28, 2010.

FOR FURTHER INFORMATION CONTACT: Questions about specific filings 
should be directed to staff members responsible for reviewing the 
documents the registrant files with the Commission. For general 
questions about this release, contact Christina L. Padden, Attorney 
Fellow in the Office of Rulemaking, at (202) 551-3430 or Stephanie L. 
Hunsaker, Associate Chief Accountant, at (202) 551-3400, in the 
Division of Corporation Finance; or Wesley R. Bricker, Professional 
Accounting Fellow, Office of the Chief Accountant at (202) 551-5300; 
U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, 
DC 20549.

SUPPLEMENTARY INFORMATION: 

I. Background

    Over the past several years, we have provided guidance and have 
engaged in rulemaking initiatives to improve the presentation of 
information about funding and liquidity risk.\1\ In a companion 
release, we are proposing amendments to enhance the disclosure that 
registrants present about short-term borrowings.\2\ The proposals in 
that release would require a registrant to provide, in a separately 
captioned subsection of Management's Discussion and Analysis of 
Financial Condition and Results of Operations (``MD&A''), a 
comprehensive explanation of its short-term borrowings, including both 
quantitative and qualitative information. The proposed amendments to 
MD&A would be applicable to annual and quarterly reports, proxy or 
information statements that include financial statements, registration 
statements under the Securities Exchange Act of 1934, and registration 
statements under the Securities Act of 1933. We are also proposing 
conforming amendments to Form 8-K so that the Form would use the 
terminology contained in the proposed short-term borrowings disclosure 
requirement. 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, we are also 
providing the following guidance with respect to existing MD&A 
requirements.
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    \1\ See, e.g., Commission Statement About Management's 
Discussion and Analysis of Financial Condition and Results of 
Operations, Release No. 33-8056 (Jan. 22, 2002) [67 FR 3746]; 
Disclosure in Management's Discussion and Analysis About Off Balance 
Sheet Arrangements, Contractual Obligations and Contingent 
Liabilities and Commitments, Release No. 33-8144 (Nov. 4, 2002) [67 
FR 68054]; Disclosure in Management's Discussion and Analysis About 
Off Balance Sheet Arrangements, Contractual Obligations and 
Contingent Liabilities and Commitments, Release No. 33-8182 (Jan. 
28, 2003) [68 FR 5982] (adopting rules for disclosure in MD&A of 
off-balance sheet arrangements and aggregate contractual 
obligations); and Commission Guidance Regarding Management's 
Discussion and Analysis of Financial Condition and Results of 
Operations, Release No. 33-8350 (Dec. 19, 2003) [68 FR 75056] 
(providing interpretive guidance on disclosure in MD&A, including 
liquidity and capital resources).
    \2\ See Short-Term Borrowings Disclosure, Release No. 33-9143 
(the ``Proposing Release'').
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II. Guidance on Presentation of Liquidity and Capital Resources 
Disclosures in Management's Discussion and Analysis

A. Liquidity Disclosure

    As discussed in the Proposing Release, companies have expanded the 
types of funding methods and cash management tools they use. We remind 
registrants that Item 303(a)(1) of Regulation S-K requires them to 
``identify and separately describe internal and external sources of 
liquidity, and briefly discuss any material unused sources of 
liquidity.'' Accordingly, as the financing activities undertaken by 
registrants become more diverse and complex, it is increasingly 
important that the discussion and analysis of liquidity and capital 
resources provided by registrants meet the objectives of MD&A 
disclosure.
    In 2003, the Commission issued interpretive guidance relating to 
MD&A disclosures of liquidity and capital resources, as well as MD&A 
generally.\3\ We encourage registrants to review that guidance when 
preparing their MD&A, as it covers topics relating to the discussion of 
cash requirements, cash management, sources and uses of cash, as well 
as a registrant's debt instruments, guarantees and related covenants, 
that continue to be relevant to investors.
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    \3\ See Commission Guidance Regarding Management's Discussion 
and Analysis of Financial Condition and Results of Operations, 
Release No. 33-8350 (Dec. 19, 2003) [68 FR 75056] (the ``2003 
Interpretive Release'').
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    As we have stated in the past, MD&A requires companies to provide 
investors with disclosure that facilitates an appreciation of the known 
trends and uncertainties that have impacted historical results or are 
reasonably likely to shape future periods.\4\ This disclosure should 
both discuss and analyze the company's business from the perspective of 
management.\5\ In the context of liquidity, Item 303(a)(1) of 
Regulation S-K requires disclosure of 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 
increasing or decreasing in any material way.\6\ In past guidance, the 
Commission has highlighted a number of issues for management to 
consider when identifying trends, demands, commitments, events and 
uncertainties that require disclosure in MD&A.\7\ Some additional 
important trends and uncertainties relating to liquidity might include, 
for example, 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,

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changes in terms requested by counterparties, changes in the valuation 
of collateral, and counterparty risk.
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    \4\ See Disclosure in Management's Discussion and Analysis About 
Off Balance Sheet Arrangements, Contractual Obligations and 
Contingent Liabilities and Commitments, Release No. 33-8182 (Jan. 
28, 2003) [68 FR 5982] (the ``OBS Adopting Release''), at 5982 
(``MD&A also provides a unique opportunity for management to provide 
investors with an understanding of its view of the financial 
performance and condition of the company, an appreciation of what 
the financial statements show and do not show, as well as important 
trends and risks that have shaped the past and are reasonably likely 
to shape the future.'').
    \5\ ``MD&A should be a discussion and analysis of a company's 
business as seen through the eyes of those who manage that business. 
Management has a unique perspective on its business that only it can 
present. As such, MD&A should not be a recitation of financial 
statements in narrative form, or an otherwise uninformative series 
of technical responses to MD&A requirements, neither of which 
provides this important management perspective.'' See 2003 
Interpretive Release, supra note 3, at 75056.
    \6\ ``The scope of the discussion should thus address liquidity 
in the broadest sense, encompassing internal as well as external 
sources, current conditions as well as future commitments and known 
trends, changes in circumstances and uncertainties.'' See Commission 
Statement About Management's Discussion and Analysis of Financial 
Condition and Results of Operations, Release No. 33-8056 (Jan. 22, 
2002) [67 FR 3746] (the ``2002 Interpretive Release''), at 3748 
n.11.
    \7\ See 2002 Interpretive Release, supra note 5, at 3748.
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    In addition, in the context of liquidity and capital resources, if 
the registrant's financial statements do not adequately convey the 
registrant's financing arrangements during the 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 depicted in the financial statements. For example, 
depending on the registrant's circumstances, if borrowings during the 
reporting period are materially different than the period-end amounts 
recorded in the financial statements, disclosure about the intra-period 
variations is required under current rules to facilitate investor 
understanding of the registrant's liquidity position.
    Moreover, the Commission's staff has noted that there may be 
confusion on the part of registrants about how to address disclosure of 
certain repurchase agreements that are accounted for as sales, as well 
as other types of short-term financings that are not otherwise fully 
captured in period-end balance sheets.\8\ Again, disclosure is required 
in MD&A where a known commitment, event or uncertainty will result in 
(or is reasonably likely to result in) the registrant's liquidity 
increasing or decreasing in a material way.\9\ 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 registrants 
from the disclosure requirements of Item 303(a)(1).\10\ Further, as 
stated in the 2002 Interpretive Release, legal opinions regarding 
``true sale'' issues do not obviate the need for registrants to 
consider whether disclosure is required.\11\ In evaluating whether 
disclosure in MD&A may be required in connection with a repurchase 
transaction, securities lending transaction, or any other transaction 
involving the transfer of financial assets with an obligation to 
repurchase financial assets, that has been accounted for as a sale 
under applicable accounting standards, 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. Disclosure may be 
required in the discussion of liquidity and capital resources, 
particularly where the registrant does not otherwise include such 
information in its off-balance sheet arrangements or its contractual 
obligations table. A registrant may determine where in its MD&A this 
information would be most informative based on the type of obligation 
and potential exposure involved, with an emphasis on providing 
disclosure that is clear and not misleading.
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    \8\ In its 2005 OBS Report, the Commission's staff identified 
transfers of assets with continuing involvement as one of the 
principal areas in need of improvement in disclosure of off-balance 
sheet arrangements. See Staff of the U.S. Securities and Exchange 
Commission, Report and Recommendations Pursuant to Section 401(c) of 
the Sarbanes-Oxley Act of 2002 On Arrangements with Off-Balance 
Sheet Implications, Special Purpose Entities and Transparency of 
Filings by Issuers (June 2005), available at http://www.sec.gov/news/studies/soxoffbalancerpt.pdf. See also, the Division of 
Corporation Finance, Sample Letter Sent to Public Companies Asking 
for Information Related to Repurchase Agreements, Securities Lending 
Transactions, or Other Transactions Involving the Transfer of 
Financial Assets (Mar. 2010), available at http://www.sec.gov/divisions/corpfin/guidance/cforepurchase0310.htm., and the Division 
of Corporation Finance, Sample Letter Sent to Public Companies That 
Have Identified Investments in Structured Investment Vehicles, 
Conduits or Collateralized Debt Obligations (Off-balance Sheet 
Entities) (Dec. 2007) available at http://www.sec.gov/divisions/corpfin/guidance/cfoffbalanceltr1207.htm.
    \9\ See Item 303(a)(1) [17 CFR 229.303(a)(1)].
    \10\ We also note that, in 1986, the Commission adopted changes 
to Rule 4-08 of Regulation S-X to require financial statement 
footnote disclosure of the nature and extent of a registrant's 
repurchase and reverse repurchase transactions and the degree of 
risk involved. See Disclosure Amendments to Regulation S-X Regarding 
Repurchase and Reverse Repurchase Agreements, Release No. 33-6621 
(Jan. 22, 1986) [51 FR 3765]. These requirements focus on disclosure 
of risk of loss due to counter-party default. See Rule 4-08(m) of 
Regulation S-X [17 CFR 210.4-08m]. However, the adopting release 
indicates that the requirements do not affect obligations under MD&A 
requirements to discuss ``any material impact on liquidity or 
operations and risk resulting from involvement with repurchase and 
reverse repurchase agreements.''
    \11\ See 2002 Interpretive Release, supra note 5, at 3749.
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    To provide context for the exposures identified in MD&A, companies 
should also consider describing cash management and risk management 
policies that are relevant to an assessment of their 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. In addition, a company 
that maintains or has access to a portfolio of cash and other 
investments that is 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. This could include 
information about the nature of any limits or restrictions and their 
effect on the company's ability to use or to access those assets to 
fund its business operations.
    Transparent financial reporting that conveys a complete and 
understandable picture of a company's financial position reduces 
uncertainty in our markets. Surprises to investors can be reduced or 
avoided when a company provides clear and understandable information 
about known trends, events, demands, commitments and uncertainties, 
particularly where they are reasonably likely to have a current or 
future material impact on that company. The economic environment is not 
static. Circumstances and risks change and, as a result, disclosure 
about those circumstances and risks must also evolve. As we stated in 
the 2003 Interpretive Release, if prior disclosure ``does not 
adequately foreshadow subsequent events, or if new information that 
impacts known trends and uncertainties becomes apparent * * * 
additional disclosure should be considered and may be required.'' \12\ 
This principle is equally applicable in the context of liquidity and 
capital resources disclosure.
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    \12\ See 2003 Interpretive Release, supra note 3, at 75061, and 
Management's Discussion and Analysis of Financial Condition and 
Results of Operations; Certain Investment Company Disclosures, 
Release No. 33-6835 (May 18, 1989) [54 FR 22427] (the ``1989 
Interpretive Release''). The 1989 Interpretive Release clarifies 
that material changes to items disclosed in MD&A in annual reports 
should be discussed in the quarter in which they occur. The 2003 
Interpretive Release states that ``there may also be circumstances 
where an item may not be material in the context of a discussion of 
annual results of operations but is material in the context of 
interim results.''
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B. Leverage Ratio Disclosures

    Where a registrant includes capital or leverage ratio disclosure in 
its filings with the Commission, and there are no regulatory 
requirements prescribing the calculation of that ratio, or where a 
registrant includes capital or leverage ratios that are calculated 
using a methodology that is modified from its prescribed form, we 
remind registrants of our long-standing approach to disclosure of 
financial measures and non-financial measures in MD&A. First, the 
registrant should determine whether the measure is a financial measure. 
If the measure is not a financial measure, registrants should refer to 
the guidance we provided in 2003 for disclosures relating to non-
financial measures, such

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as industry metrics or value metrics.\13\ If the measure is a financial 
measure, the registrant should next determine whether the measure falls 
within the scope of our requirements for non-GAAP financial measures, 
and if it is, the registrant would need to follow our rules and 
guidance governing the inclusion of non-GAAP financial measures in 
filings with the Commission.\14\
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    \13\ See 2003 Interpretive Release, supra note 3, at 75060.
    \14\ See Conditions for Use of Non-GAAP Financial Measures, 
Release No. 33-8176 (Jan. 22, 2003) [68 FR 4820] and Item 10(e) of 
Regulation S-K [17 CFR 229.10(e)(5)]. We note that existing rules 
and guidance governing the inclusion of non-GAAP financial measures 
in filings with the Commission do not apply to financial measures 
that are ``required to be disclosed by GAAP, Commission rules, or a 
system of regulation of a government or governmental authority or 
self-regulatory organization that is applicable to the registrant.
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    In any event, any ratio or measure included in a filing should be 
accompanied by a clear explanation of the calculation methodology. The 
explanation would need to clearly articulate 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. Similar to our guidance for the 
disclosure of non-financial measures, if the financial measure 
presented differs from other measures commonly used in the registrant's 
industry, the registrant would need to consider whether a discussion of 
those differences or presentation of those measures would be necessary 
to make the disclosures not misleading. Finally, a registrant would 
need to consider its reasons for presenting the particular financial 
measure, and should include disclosure clearly stating why the measure 
is useful to understanding its financial condition. Where the ratio is 
being presented in connection with disclosure on debt instruments and 
related covenants, registrants should also consult our past guidance on 
disclosure of debt instruments, guarantees and related covenants.\15\
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    \15\ See 2003 Interpretive Release, supra note 3, at 75064.
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C. Contractual Obligations Table Disclosures

    As an aid to understanding other liquidity and capital resources 
disclosures in MD&A, the contractual obligations tabular disclosure 
should be prepared with the goal of presenting a meaningful snapshot of 
cash requirements arising from contractual payment obligations. The 
Commission's staff has observed that divergent practices have developed 
in connection with the contractual obligations table disclosure, with 
registrants drawing different conclusions about the information to be 
included and the manner of presentation. The requirement itself permits 
flexibility so that the presentation can reflect company-specific 
information in a way that is suitable to a registrant's business. 
Accordingly, registrants are encouraged to develop a presentation 
method that is clear, understandable and appropriately reflects the 
categories of obligations that are meaningful in light of its capital 
structure and business. Registrants should highlight any changes in 
presentation that are made, so that investors are able to use the 
information to make comparisons from period to period.
    Since the adoption of Item 303(a)(5), registrants and industry 
groups have raised questions to our staff about how to treat a number 
of items under the contractual obligations requirement, including: 
interest payments, repurchase agreements, tax liabilities, synthetic 
leases, and obligations that arise under off-balance sheet 
arrangements. In addition, a variety of questions has been raised with 
our staff in the context of purchase obligations. Because the questions 
that arise tend to be fact-specific and closely related to a 
registrant's particular business and circumstances, we have not issued 
general guidance as to how to treat these items or other questions 
regarding the presentation of the contractual obligations table. 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; \16\ registrants should prepare the 
disclosure consistent with that objective. Uncertainties about what to 
include or how to allocate amounts over the periods required in the 
table should be resolved consistent with the purpose of the disclosure. 
To that end, footnotes should be used to provide information necessary 
for an understanding of the timing and amount of the specified 
contractual obligations, as indicated in the instructions contained in 
Item 303(a)(5)(i), or, where necessary to promote understanding of the 
tabular data, additional narrative discussion outside of the table 
should be considered. 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.\17\
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    \16\ See OBS Adopting Release, supra note 4, at 5990.
    \17\ As an example, if useful to a clear understanding of the 
information presented, a registrant might consider separating 
amounts in the table into those that are reflected on the balance 
sheet and those arising from off-balance sheet arrangements, 
particularly where such a distinction helps to tie the information 
to financial statement disclosure and other MD&A discussion.
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III. Codification Update

    The ``Codification of Financial Reporting Policies'' announced in 
Financial Reporting Release 1 (April 15, 1982) [47 FR 21028] is updated 
by adding new Section 501.03.a.i, captioned ``Additional Guidance on 
Presentation of Liquidity and Capital Resources Disclosures'' to the 
Financial Reporting Codification and under that caption including the 
text in Section II of this release.
    The Codification is a separate publication of the Commission. It 
will not be published in the Federal Register/Code of Federal 
Regulations.

List of Subjects in 17 CFR Parts 211, 231 and 241

    Securities.

Amendments to the Code of Federal Regulations

0
For the reasons set forth above, under the authority at Sections 6, 7, 
10 and 9(a) of the Securities Act and Sections 12, 13, 14, 15(d) and 
23(a) of the Exchange Act, the Commission is amending title 17, chapter 
II of the Code of Federal Regulations as set forth below:

PART 211--INTERPRETATIONS RELATING TO FINANCIAL REPORTING MATTERS

0
1. Part 211, subpart A, is amended by adding Release No. FR-83 to the 
list of interpretive releases as follow:

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                 Subject                     Release No.                         Date                                 Fed. Reg. vol. and page
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                                                                      * * * * * * *
Commission Guidance on Presentation of               FR-83  September 17, 2010...........................  75 FR [FR PAGE PAGE NUMBER].
 Liquidity and Capital Resources
 Disclosures in Management's Discussion
 and Analysis.
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PART 231--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES ACT OF 
1933 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
2. Part 231 is amended by adding Release No. 33-9144 to the list of 
interpretive releases as follow:

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                 Subject                     Release No.                         Date                                 Fed. Reg. vol. and page
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                                                                      * * * * * * *
Commission Guidance on Presentation of             33-9144  September 17, 2010...........................  75 FR [FR PAGE PAGE NUMBER].
 Liquidity and Capital Resources
 Disclosures in Management's Discussion
 and Analysis.
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PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES 
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
3. Part 241 is amended by adding Release No. 34-62934 to the list of 
interpretive releases as follow:

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                 Subject                     Release No.                         Date                                 Fed. Reg. vol. and page
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                                                                      * * * * * * *
Commission Guidance on Presentation of            34-62934  September 17, 2010...........................  75 FR [FR PAGE PAGE NUMBER].
 Liquidity and Capital Resources
 Disclosures in Management's Discussion
 and Analysis.
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    Dated: September 17, 2010.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-23744 Filed 9-27-10; 8:45 am]
BILLING CODE 8010-01-P