January 22, 2002
'On January 22, 2002, the SEC issued Release Nos. 33-8056, 34-45321 and FR-61 (the "Release") in response to the recently-filed petition by the "Big Five" accounting firms concerning expanded disclosure in Management's Discussion and Analysis ("MD&A"). The Release covers the SEC's suggestions for expanded disclosure in three principal areas: (1) liquidity and capital resources, including off-balance sheet arrangements; (2) certain trading activities that include non-exchange traded contracts accounted for at fair value; and (3) relationships and transactions with persons or entities that derive benefits from their non-independent relationship with the registrant or the registrant's related parties.
In a statement essentially adopting and approving the petition of the accounting firms and the AICPA, the SEC noted that,
…we believe the quality of information provided by public companies in the three areas identified in the petition should be improved. Because many companies are currently preparing disclosures for fiscal 2001 annual reports, the Commission believes it is appropriate to issue this statement so that public companies can consider the petition and this statement in preparing year-end and interim financial reports and other disclosures made after the issuance of this release [emphasis added]. While the Commission intends to consider rulemaking regarding the topics addressed in this statement and other topics covered by MD&A, the purpose of this statement is to suggest steps that issuers should consider in meeting their current disclosure obligations [emphasis added] with respect to the topics described. This statement does not create new legal requirements, nor does it modify existing legal requirements.
The Release strongly urges expanded disclosure in MD&A with respect to the following items:
| 1. | Under liquidity and capital resources: | |
| a) | a discussion of sources of funding and factors which could affect these sources, including provisions in financial documents which could trigger early repayments or accelerate the maturity of debt, declines in financial ratios or other financial tests which could limit borrowing capacity, the incurring of guaranties which could affect the availability of credit, and economic downturns which could reduce available cash flows; | |
| b) | a discussion of off-balance sheet arrangements, including relationships with unconsolidated structured finance or other special purpose entities and the potential financial effects of these entities; and | |
| c) | the use of two new tables, one showing contractual cash obligations divided by category, such as capital leases and long-term debt, and the other showing financial commitments, such as lines of credit and guaranties. | |
| 2. | Under certain trading activities that include non-exchange traded contracts accounted for at fair value: | |
| The use of a table breaking down the amounts of contracts by type, including those for which: a) prices are actively quoted; b) prices are provided by other external sources; and c) prices are based on models and other valuation methods. | ||
| 3. | Under transactions with related and certain other parties: Disclosure to cover transactions and relationships with any third party which is clearly not independent of the reporting entity, including a description of the elements of the transaction that are necessary for an understanding of a transaction's business purpose and economic substance, their effects on the financial statements, and the special risks of contingencies arising therefrom. Moreover, registrants are advised to consider the need for disclosure about parties that fall outside the definition of "related parties" but with whom the registrant or its related parties have a relationship that enables the parties to negotiate terms of material transactions that may not be available from other more clearly independent parties on an arm's-length basis, e.g., former members of senior management. You may obtain a copy of the Release at http://www.sec.gov/rules/other/33-8056.htm. We believe our clients should review the Release in-depth and, depending upon particular circumstances, seriously consider expanded disclosure for inclusion in their 2001 annual reports in order to meet the current disclosure requirements. We note that while certain of the suggested disclosures presently appear (to some extent) in parts of reports other than MD&A, the SEC stated that investors will often find the suggested information more meaningful if it is disclosed in a single location rather than presented in a fragmented manner throughout the report. In a particular case, however, it is possible that certain information might be disclosed more clearly, completely or in a more appropriate context if presented elsewhere in the report, but with appropriate cross-reference, discussion and analysis in MD&A. | |
One final note-- we expect the SEC staff to expand the size and scope of its review of annual reports of energy companies.
We will keep you apprised of other SEC disclosure and regulatory developments as they occur.
For more information, please call any of your contact partners or
Thomas J. Igoe, Jr.
William T. Baker, Jr.
Ira H. Jolles
This legal update is published as an information service to clients and friends. Please recognize that the information is general in nature and must not be relied upon as legal advice. The attorneys listed above, or your Thelen attorney contact, would be happy to discuss in greater detail the information in this article and its application to your specific situation.
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