SEC Posts New Interpretive Release on MD&A Disclosure

First reported: February 19, 2004

The Securities and Exchange Commission ("SEC") has posted a new interpretive release on Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") disclosure which can be read in its entirety on the SEC's website at http://www.sec.gov/rules/interp/33-8350.htm . On a global level, there are no surprises here; however, the release contains a fair amount of detailed guidance and several useful illustrations that should be helpful in improving companies' analyses. The release will be effective when published in the Federal Register. The Division of Corporation Finance will continue to review MD&A and keep the Commission apprised of whether disclosure has improved or whether additional action is required.

The release reiterates that the purpose of MD&A is to provide information "necessary to an understanding of [a company's] financial condition, changes in financial condition and results of operations." The MD&A requirements are intended to satisfy three principal objectives:

1) to provide a narrative explanation of a company's financial statements that enables investors to see the company through the eyes of management;

2) to enhance the overall financial disclosure and provide the context within which financial information should be analyzed; and

3) to provide information about the quality of, and potential variability of, a company's earnings and cash flow, so that investors can ascertain the likelihood that past performance is indicative of future performance.

Picking up on a theme from the SEC's 1989 MD&A release, the SEC reiterates that MD&A should be a discussion and analysis of a company's business "as seen through the eyes of those who manage that business." The SEC's additional guidance is in the following areas:

(Source: 2005 The State Bar of California)

 

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