Responding to a petition by the Big Five accounting firms, the Securities & Exchange Commission (SEC) issued a statement entitled Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations.
The SEC's statement contains suggested steps that public companies should take when preparing disclosures. The steps involve lists of specific types of items that may warrant disclosure, along with suggested tabular formats to help present the data in an orderly and easy-to-understand manner. Companies are urged to consider these steps while preparing year-end and interim financial reports and other disclosures made after the issuance date of the SEC's Release (January 22, 2002). For most companies, this will include their 2001 annual reports.
Designed to help both foreign and U.S. registrants, the SEC's Release zeroes in on three areas that can help users of SEC filings assess the company's financial health and prospects for the future but that have presented formidable disclosure challenges for companies in the past.
The specific areas for improvement:
- Liquidity and capital resources, including off-balance sheet arrangements.
- Certain trading activities that include non-exchange traded contracts accounted for at fair value.
- Effects of transactions with related and certain other parties.
"We need better disclosures about these matters in this reporting system," said SEC Chief Accountant Robert Herdman. The SEC's new guidance in these areas does not create new legal requirements or modify existing requirements. Chief Accountant Herdman says the Commission will continue to study how it can best bring about improvements in the above areas and in other areas of the MD&A as well. But, for now, he says, "Our hope is that public companies will go beyond the minimum requirements and serve investors with the best possible discussion of the company's financial position and operating results."