6.3 MD&A of Financial Condition and Results of Operations (SEC Regulation S-K, Item 303)
SEC Regulation S-K, Item 303(b), provides guidance on MD&A of financial
condition and results of operations. It states, in part:
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.
To meet the objective of this guidance, a registrant will often provide
disclosures that are consistent with those of its reportable segments.
Paragraph
9220.3 of the SEC Financial Reporting Manual (FRM) states:
In order to comply with the requirement to discuss
significant components of revenue and expenses, registrants will often
provide a discussion along segmental lines (as determined under SFAS 131
[ASC 280]). Segment analysis is usually 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.
The discussion and analysis should be comprehensive. All components of the
registrant’s results of operations, including those that may not be
allocated to the segments in determining the segmental profit or loss (such
as certain corporate overhead items or income taxes for example) should be
discussed.
As outlined in footnote 28 of Section 501.06.a of the Codified Financial Reporting Releases, when a company presents a segment measure of profit or loss that is determined on a basis that differs from consolidated operating profit as defined by U.S. GAAP, the discussion of the registrant’s results of operations at the segment level may need to address the segment measure as well as the applicable reconciling items: “For example, if a material charge for restructuring or impairment relates to a specific segment, but is not included in management’s measure of the segment’s operating profit or loss, registrants would be expected to discuss in Management’s Discussion and Analysis the applicable portion of the charge, the segment to which it relates and the circumstances of its incurrence.”
Registrants that present three years of financial statements may
omit discussion of the earliest year of changes in financial condition and results
of operations if such discussion was already included in any of the registrants’
prior EDGAR filings that required such information. Registrants electing to omit
such discussion must disclose, in the current filing, the location of such
discussion in the prior filing. Registrants should consider the total mix of
available information, including the impact of any recastable events (e.g., a
retrospective accounting change such as a change in reportable segments) on the
prior-period MD&A, when determining whether to omit discussion of the earliest
year and the most appropriate form of presentation. If a registrant concludes that
it is necessary to discuss operations related to the earliest period presented, it
may limit the discussion to the information that has changed or has been determined
to be significant to its operations or financial condition.
In addition, the SEC has encouraged registrants to evaluate their
disclosures in MD&A about certain matters that the Commission has identified as
complex and evolving, such as the impacts of COVID-19, Russia’s invasion of Ukraine,
climate change, and cybersecurity risks. To improve the usefulness of their
disclosures, registrants may wish to identify the specific segments affected.
Further, Regulation S-K, Item 305, requires registrants to provide quantitative and
qualitative disclosures about market risks such as interest rates or commodity
prices. Registrants may also elect (but are not required) to present separate
quantitative disclosures for each different business segment. However, according to
an SEC staff Q&A1 on market risk disclosures, “the presentation should not prevent a reader from
understanding the aggregate market risk inherent in each . . . exposure” (e.g.,
interest rate, commodity price).