Exemption from Earliest-year MD&A Reporting

By Stephen Barlas
March 1, 2018

Numerous business groups, including IMA® (Institute of Management Accountants), have expressed support for the U.S. Securities & Exchange Commission (SEC) staff proposal to clarify the Management’s Discussion and Analysis (Item 303) requirements in Regulation S-K so that period-to-period comparisons in a filing covering three fiscal years are only needed for the two most recent fiscal years. But the SEC proposal for eliminating the discussion of the earliest year applies only if that first year is not material and that discussion is in a prior-year Form 10-K.


IMA’s Financial Reporting Committee’s comment letter argued that a “materiality screen” won’t reduce repetition because it will be too tempting, in consideration of ever-present litigation exposure, to simply repeat disclosures made in the prior year rather than document that the omission is immaterial. The FRC’s letter recommended that the requirement for an earlier-year comparison be deleted, except where the financial statements have been restated, and suggested that a requirement be added to comment on multiyear trends, which would replace a boilerplate with more meaningful disclosure.


Cynthia M. Fornelli, executive director of the Center for Audit Quality, suggested that the SEC provide additional flexibility by allowing a registrant to omit discussion of the earliest of the three years not only if it had been previously filed in its prior Form 10-K but also if it were previously filed in any SEC filing on EDGAR made by that registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934, such as Form S-1, Form S-4, Form 10, and Form 8-K.


Stephen Barlas has covered Washington, D.C., for trade and professional magazines since 1981 and since 1984 for Strategic Finance and its predecessor Management Accounting. You can reach him at sbarlas@verizon.net.
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