7.3 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 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.
Changing Lanes
When adopting the recently issued ASU 2023-07,
registrants will need to consider which incremental disclosures, if any,
need to be incorporated into MD&A to comply with Regulation S-K, Item
303(b). For instance, since ASU 2023-07 requires significant segment
expenses and other segment items to be disclosed within the notes to the
financial statements (see Chapter 6), registrants should consider whether
incorporating a discussion of such items within MD&A is necessary to
provide “material information relevant to an assessment of the financial
condition and results of operations of the registrant” as outlined in
Regulation S-K, Item 303.
Before the adoption of ASU 2023-07, ASC 280 precludes
registrants from disclosing more than one measure of segment profit or loss
in the notes to the financial statements. Therefore, any additional non-GAAP
measures of profit or loss that are used by the CODM can only be presented
as non-GAAP measures outside the financial statements (e.g., within
MD&A), provided that they comply with the SEC’s non-GAAP rules and
regulations. Because ASU 2023-07, once adopted, permits public entities to
disclose multiple measures of profit or loss that are used by the CODM, it
is unclear whether a registrant will be permitted or otherwise required to
discuss more than one segment measure of profit or loss within MD&A (see
Section 7.4
for additional considerations related to SEC guidance on non-GAAP measures).
In the absence of further interpretive guidance from the SEC, registrants
should consider consulting with their auditors and SEC counsel before
adopting the ASU to determine the impact it will have on the discussion of
the results of operations in MD&A, including any incremental disclosures
deemed necessary.
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 their 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. As noted in Section 7.5, a registrant may need to
retrospectively revise its financial statements and other affected financial
information for certain recastable events, such as a retrospective change in
reportable segments. Registrants should consider the total mix of available
information, including the impact of any recastable events 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 current macroeconomic conditions, such as the impacts
of higher levels of inflation and interest rate and liquidity risks. To improve the
usefulness of their disclosures, registrants may wish to identify the specific
segments affected by such macroeconomic conditions. Further, SEC 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 of the
market risks for each 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).