Topic 9: Management's Discussion and Analysis of Financial Position and Results of Operations (MD&A)

Registrants should discuss and analyze, from management’s perspective:

1. Material information relevant to an assessment of the financial condition and results of operations of the registrant, including an evaluation of the amounts and certainty of cash flows from operations and from outside sources;
2. Material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or of future financial condition; and
3. Matters that have had a material impact on reported operations, as well as matters that are reasonably likely based on management’s assessment to have a material impact on future operations.

9110.2 MD&A should not consist of generic or boilerplate disclosure. Rather, it should reflect the facts and circumstances specific to each individual registrant. S-K 303 is a "principles-based" disclosure requirement. It is intended to provide management with flexibility to describe the financial matters impacting the registrant.

9210.2 Any known trends, or any known demands, commitments, events or uncertainties that will result in, or are reasonably likely to result in, the registrant’s liquidity increasing or decreasing in a material way should be discussed. To the extent a material deficiency is identified, the registrant should disclose the course of action that it has taken or proposes to take to remedy the deficiency. The discussion should also identify and separately describe internal and external sources of liquidity, as well as briefly discuss any material unused sources of liquid assets. [S-K 303(b)(1)(i)]

9210.3 The requirements of the disclosures related to capital resources include a discussion of the registrant’s material cash requirements, including material commitments for capital expenditures, as of the end of the latest fiscal period; the anticipated source of funds needed to satisfy such cash requirements; and the general purpose of such requirements. The registrant should also describe any known material trends, favorable or unfavorable, in the registrant's capital resources and indicate any reasonably likely material changes in the mix and relative cost of such resources. The discussion must consider changes among equity, debt, and any off-balance sheet financing arrangements. [S-K 303(b)(1)(ii)]

9210.4 The liquidity and capital resources discussion should address:

1. Material cash requirements from known contractual obligations, which may include lease obligations, purchase obligations, or other liabilities reflected on the registrant's balance sheet; [Instruction 4 to S-K 303(b)]
2. Commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have or are reasonably likely to have a material current or future effect on a registrant's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources. Commitments or obligations must be provided even when the arrangement(s) results in no obligations being reported in the registrant's consolidated balance sheets. Such off-balance sheet arrangements may include: Guarantees; retained or contingent interests in assets transferred; contractual arrangements that support the credit, liquidity or market risk for transferred assets; obligations that arise or could arise from variable interests held in an unconsolidated entity; or obligations related to derivative instruments that are both indexed to and classified in a registrant's own equity under U.S. GAAP. [Instruction 8 to S-K 303(b)]

9210.5 It may be necessary for the liquidity and capital resources discussion to address debt instruments, guarantees and related covenants. Disclosure is likely to be necessary if:

1. The registrant is, or is reasonably likely to be, in breach of debt covenants or
2. Debt covenants impact the registrant's ability to obtain additional debt or equity financing.

9210.6 Improving Liquidity and Capital Resources

1. Registrants should not simply repeat items reported in the statement of cash flows. Registrants should focus on the primary drivers of and other material factors necessary to an understanding of the registrant's cash flows and the indicative value of historical cash flows.
2. Registrants should describe cash flows from operating, investing and financing activities associated with discontinued operations separately from continuing operations if that information is not apparent from the cash flow statement. Additionally, registrants should describe how the company's liquidity is reasonably likely to be affected by the absence of cash flows (or negative cash flows) associated with discontinued operations. Refer to Section 9830.1.

9220.2 The following disclosures are required by S-K 303(b)(2):

1. Any unusual or infrequent events or transactions or any significant economic changes that materially affected the amount of reported income from continuing operations and in each case, indicate the extent to which income was so affected;
2. Significant components of revenues and expenses that, in the registrant’s judgment, would be material to an understanding of the registrant’s results of operations (e.g., segmental information);
3. Any known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations;
4. If events that are reasonably likely to cause a material change in the relationship between costs and revenues (such as known or reasonably likely future increases in cost of labor or materials or price increases or inventory adjustments), the change in the relationship must be disclosed; and
5. To the extent there are material changes from period to period in net sales or revenue, describe the extent to which such changes are attributable to changes in prices or to changes in the volume or amount of goods or services being sold or to the introduction of new products or services.

9220.3 Where in the registrant's judgment a discussion of segment information and/or of other subdivisions (e.g., geographic areas, product lines) of the registrant's business would be necessary to an understanding of such business, the discussion must focus on each relevant reportable segment and/or other subdivision of the business and on the registrant as a whole. For many registrants, segment analysis is necessary to enable a reader to understand the consolidated amounts, but it should not result in repetitive disclosure that lengthens MD&A unnecessarily, or obscures salient information. The discussion and analysis of segments may be integrated with the discussion of the consolidated amounts to avoid unnecessary duplication. All material components of the registrant’s results of operations, including those that may not be allocated to the segments in determining the segment profit or loss (such as certain corporate overhead items or income taxes for example) should be discussed.

9220.4 Registrants should consider discussing and analyzing the tax implications related to material transactions, trends and other important items impacting their business as disclosed elsewhere in MD&A.

A discussion of the nature and impact of significant tax rate reconciling items should also be considered. For example, discuss the tax rate reconciling item resulting from a change in assumptions related to an unrecognized tax benefit or a different final resolution related to the unrecognized benefit. Similarly, when uncertain tax positions are a critical accounting estimate,, MD&A should address why the assumptions were changed or why the actual resolution differed from management’s assumption. (Last updated: 9/30/2010)

9220.5 Registrants should address the underlying reasons for changes in the price versus volume mix. For example, if sales declined because the volume of goods sold decreased by 20%, but this was offset by a 10% increase in price, the discussion in MD&A should not stop once it identifies the price and volume components. In this example, the underlying factors that contributed to the decline in volume as well as the increase in selling prices should also be discussed. In addition, discussions about changes in the price vs. volume mix should consider changes in foreign currency fluctuations.

9220.6 The results of operations may not always be prepared on a consistent basis. This will occur, for example, when there has been a change in basis in the underlying financial statements. This might occur in the following situations:

1. When there has been a material acquisition (either the acquisition of a business that is significant to the registrant or predecessor/successor step-up in basis) during the period;
2. When pushdown accounting has been applied; or
3. When the registrant has adopted fresh-start accounting upon its emergence from bankruptcy.

9220.7 When events such as those described in 9220.6 occur, registrants should consider whether the discussion of the results of operations and financial condition set forth in the audited financial statements included in the filing should be supplemented by a discussion based upon pro forma information. This supplemental discussion may be meaningful in the case of a material acquisition, but generally would not be appropriate in the case of fresh-start accounting. A determination as to whether a discussion of the audited financial statements should be supplemented by a discussion based on pro forma information should take into consideration all of the facts and circumstances surrounding the transaction, the nature of the pro forma adjustments made, and the overall meaningfulness of any such supplemental pro forma discussion.

9220.8 If it is determined that a supplemental discussion in MD&A based on pro forma information is appropriate, then the pro forma information may be presented in a format consistent with S-X Article 11. Other formats, such as the footnote pro forma information specified by ASC 805, may also be appropriate depending on the particular facts and circumstances. It would be inappropriate to merely combine information for the pre-and post-transaction periods without reflecting all relevant pro forma adjustments required by S-X Article 11. Pro forma financial information should only be prepared for the most recent fiscal year and interim period prior to the transaction occurring. However, the staff will not object to the registrant providing (i) a pro forma statement of comprehensive income for the corresponding prior interim period or (ii) pro forma revenue and cost of revenue information for the prior fiscal year if meaningful for the discussion of trends in MD&A, as further discussed in the note below.

If pro forma results are discussed in MD&A, they should not be discussed in isolation. Supplemental discussions based on S-X Article 11 pro forma financial information should not be presented with greater prominence than the discussion of the historical financial statements required by S-K 303.

For example, assume a material acquisition occurs on August 31, 20X7, and the registrant is a calendar year-end company. In accordance with the Form 8-K requirements, pro forma financial information prepared in accordance with S-X Article 11 is prepared for the year ended December 31, 20X6 and the interim period ended June 30, 20X7 and filed on the Form 8-K. When preparing its MD&A for the Form 10-K for the year ended December 31, 20X7, the registrant could elect to supplement the discussion of its historical results with a discussion based on S-X Article 11 pro forma financial information for the year ended December 31, 20X7 that gives effect to the August 31, 20X7 acquisition. The pro forma financial information for the year ended December 31, 20X7 information would then be compared to the pro forma financial information for the year ended December 31, 20X6 previously filed via a Form 8-K. This discussion would be in addition to a comparison of the audited financial statements, which would reflect the acquisition occurring in mid-20X7. A supplemental discussion based on pro forma financial information for the year ended December 31, 20X5, if deemed relevant, should be limited to revenues and costs of revenues. The comparison of results of operations and financial condition for the year ended December 31, 20X5 to December 31, 20X6 would be on an as reported (and audited) basis and would not reflect any impact of the acquisition. In its Form 10-K for the year ended December 31, 20X8, the registrant may carry forward the discussion of the pro forma results for the year ended December 31, 20X6 and 20X7 as a supplement to the discussion of the audited financial statements. No adjustments would be appropriate or necessary to the year ended December 31, 20X8 as the acquisition would be reflected in the audited financial statements for the entire year.

9220.9 Disclosure should be provided to explain how the pro forma presentation was derived, why management believes the presentation to be useful, and any potential risks associated with using such a presentation (the potential that such results might not necessarily be indicative of future results for example, depending on how the information has been prepared, and the period that it covers). Typically, the presentation of complete pro forma financial information (reflecting the adjustments) in MD&A will be necessary in order to facilitate an understanding of the basis of the information being discussed. (In the circumstances described in the example in Section 9220.8, this presentation would include both 20X6 and 20X7.) However, there may be situations where the pro forma adjustments are limited in number and easily understood so that narrative disclosure of the adjustments alone will be sufficient.

9220.10 MD&A should fully explain the results of operations. For example, MD&A should not merely state that the increase in revenues and costs of revenues is due to a significant acquisition. Rather, the contribution of the recent acquisition to total revenues should be quantified to the extent possible, and any increase or decrease in the underlying revenues of the pre-existing business should then be addressed.

9220.11 [Reserved]

Consideration should also be given to whether there are estimates or assumptions underlying the metric (or its calculation) that should be disclosed in order for the metric to not be materially misleading.

9230.2 If a company changes the method by which it calculates or presents the metric from one period to another or otherwise, the company should consider the need to disclose, to the extent material:

• the differences in the way the metric is calculated or presented compared to prior periods,
• the reasons for such changes,
• the effects of any such change on the amounts or other information being disclosed and on amounts or other information previously reported, and
• such other differences in methodology and results that wouldreasonably be expected to be relevant to an understanding of thecompany’s performance or prospects.

Depending on the significance of the change(s) in methodology and results, the company should consider whether it is necessary to recast prior metrics to conform to the current presentation and place the current disclosure in an appropriate context.

If a known trend, demand, commitment, event or uncertainty would reasonably be likely to have a material effect on the registrant’s future results or financial condition, disclosure is required. Known trends, demands, commitments, events, or uncertainties that are not remote or where management cannot make an assessment as to the likelihood that they will come to fruition, and that would be reasonably likely to have a material effect on the registrant’s future results or financial condition, were they to come to fruition, should be disclosed if a reasonable investor would consider omission of the information as significantly altering the mix of information made available in the registrant’s disclosures. [Release No. 33-10890]

9240.2 [Reserved]

9240.3 [Reserved]

9240.4 [Reserved]

9240.5 [Reserved]

9240.6 [Reserved]

9240.7 [Reserved]

9240.8 [Reserved]

9250.2 Management’s discussion and analysis for interim periods must include a discussion of material changes in:

• financial condition from the end of the preceding fiscal year to the date of the most recent interim balance sheet provided. If the interim financial statements include an interim balance sheet as of the corresponding interim date of the preceding fiscal year, any material changes in financial condition from that date to the date of the most recent interim balance sheet must also be discussed. Such discussions may be combined.
• results of operations with respect to the most recent fiscal year-to-date period for which a statement of comprehensive income is provided and the corresponding year-to-date period of the preceding fiscal year.
• results of operations with respect to either the most recently completed quarter’s results of operations to either the corresponding quarter of the preceding fiscal year or the immediately preceding sequential quarter. If the latter quarter is discussed, then a registrant must provide in summary form the financial information for that immediately preceding sequential quarter that is subject of the discussion or identify the registrant's prior filings on EDGAR that present such information. If there is a change in the form of presentation from period to period that forms the basis of comparison from previous periods provided pursuant to this paragraph, the registrant must discuss the reasons for changing the basis of comparison and provide both comparisons in the first filing in which the change is made.

9250.3 In preparing the interim discussion, the registrant may presume that the reader has access to the discussion and analysis required by S-K 303(b) for the preceding fiscal year. The focus should therefore be on material changes in financial condition and results of operations. Further discussion of known trends, demands, commitments, events or uncertainties may be required in interim periods where subsequent events have occurred or if new information is available that impacts a known trend, demand, commitment, event or uncertainty.

9250.4 There may also be circumstances where information was not material in the context of the annual results of operations but is material in the context of the interim results, and therefore that information should be discussed (e.g. seasonal aspects of the business).

9270.2 EGCs should also follow Section 10230.3.

9410.2 The requirements of Item 5 of Form 20-F are as follows:

1. Operating results — Item 5.A.
2. Liquidity and capital resources — Item 5.B.
3. Research and development, patents and licenses, etc. — Item 5.C.
4. Trend information — Item 5.D.
5. Critical Accounting Estimates – Item 5.E.

9410.3 The discussion must focus on the primary financial statements in the document. Refer to the reconciliation to U.S. GAAP and discuss any aspects of the difference between home-country GAAP and U.S. GAAP (not discussed in the reconciliation) that are necessary for an understanding of the financial statements as a whole, if applicable. [Instruction 10 to S-K 303(b); Instruction 2 to Item 5 of Form 20-F]

9410.4 An issuer filing financial statements that comply with IFRS as issued by the IASB must, in providing information in response to the paragraphs of Item 5 that refer to pronouncements of the FASB, provide disclosure that satisfies the objective of the Item 5 disclosure requirements. [Instruction 5 to Item 5 of Form 20-F]

9410.5 Instruction 1 to Item 5 of Form 20-F refers to the SEC’s interpretive releases No. 33-6835, No. 33-8056, No. 33-8350, No. 33-9144, and No. 33-10751 for guidance in preparing the discussion and analysis by management of the company’s financial condition and results of operations.

9410.6 The requirement under Item 5.C. of Form 20-F is the only one that does not have a direct correlation to the requirements in S-K 303. For research and development (R&D), disclosure should be provided in Form 20-F of the R&D policies over the last three years.

9510.2 Estimates related to goodwill impairment testing are commonly considered critical accounting estimates by registrants. As a result, the staff has developed the guidance below regarding these disclosures with the objective of ensuring that investors are provided with information that allows for an assessment of the probability of a future material impairment charge. Registrants should consider providing the disclosures outlined in Section 9510.3 in order to comply with S-K 303(b)(3).

9510.3 Registrants should consider providing the following disclosures for each reporting unit that is at risk of failing the quantitative impairment test (defined in ASC 350):

1. The percentage by which fair value exceeded carrying value as of the date of the most recent test;
2. The amount of goodwill allocated to the reporting unit;
3. A description of the methods and key assumptions used, how the key assumptions were determined, and how the key assumptions have changed over a relevant period;
4. A discussion of the degree of uncertainty associated with the key assumptions. The discussion regarding uncertainty should provide specifics to the extent possible (e.g., the valuation model assumes recovery from a business downturn within a defined period of time); and
5. A description of potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions.

9510.4 A registrant need not provide these disclosures if the registrant asserts and discloses that material goodwill does not exist at reporting units that are at risk of failing step the quantitative impairment testone or that no reporting units are at risk. Registrants should consider disclosing the supporting rationale if material goodwill is allocated to a reporting unit that is at risk, but disclosure is deemed unnecessary.

Companies may cross-reference to the extent that this, or other material information relevant to share-based compensation, is provided elsewhere in the prospectus.

9520.2 The staff may issue comments asking companies to explain the reasons for valuations that appear unusual (e.g., unusually steep increases in the fair value of the underlying shares leading up to the IPO). These comments are generally intended to elicit analyses that the staff can review to assist it in confirming the appropriate accounting for the share-based compensation, and are not necessarily for the purpose of requesting changes to disclosure in the MD&A or elsewhere in the prospectus.

9520.3 The staff will also consider other MD&A requirements related to share-based compensation, including known trends or uncertainties including, but not limited to, the expected impact on operating results and taxes.

9610.2 Disclosure of the following may be necessary, where related party transactions are material:

1. The business purpose of the arrangement;
2. Identification of the related parties transacting business with the registrant;
3. How transaction prices were determined by the parties;
4. If disclosures represent that transactions have been evaluated for fairness, a description of how the evaluation was made; and
5. Any ongoing contractual or other commitment as a result of the arrangement.

9610.3 Consideration should also be given to whether disclosure is necessary about parties that fall outside of the definition of “related parties” set forth in ASC Master Glossary, but with whom the registrant has a relationship that enables the parties to negotiate terms of material transactions that may not be available for other, more clearly independent, parties on an arm’s-length basis. An example of this type of entity might be a company established and operated by former management of the registrant.

Disclosure should be provided when an investor might not be able to understand the registrant's reported results of operations without a clear explanation of these arrangements and relationships.

9820.2 If separate financial statements of an issuer or guarantor are filed because it does not qualify for relief under S-X 3-10, then MD&A is required.

9830.2 Similarly, registration and proxy statements that include annual financial statements that have been retroactively revised to reflect revised segment reporting, with the revision taking place after the year-end balance sheet date, should include a revised MD&A based on the revised segment footnote disclosure. MD&A should address the change in segment presentation, and explain why the chief operating decision maker has changed how they make decisions about the allocation of resources or the assessment of performance. The registrant should discuss the results of operations on a segmental basis and related trends based on the revised segmental disclosures included in the restated financial statements.

9830.3 Registration and proxy statements that include annual financial statements that have been retroactively revised to reflect the application of a different accounting principle in accordance with ASC 250 should also include a revised MD&A if the changes are material to the previously reported results of operations.

9910.2 The staff has retained the additional guidance references above as they generally remain applicable. However, registrants should be aware that some components of the references above may not be relevant to the extent they have been subsequently superseded. For example, the guidance for off-balance sheet arrangements, the table of contractual obligations, and critical accounting policies has been superseded.