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Securities Regulation and Corporate Governance > Posts > Considerations Regarding Exclusion of Earliest Year From MD&A in the 10-K
Considerations Regarding Exclusion of Earliest Year From MD&A in the 10-K

Companies preparing their 2019 Form 10-K are mindful that, under the relatively new revision to Instruction 1 to Item 303(a) of Regulation S-K adopted by the SEC in March 2019, a registrant may omit from MD&A a discussion of the earliest of the three years of financials included in the 10-K if such discussion was included in a prior filing with the SEC.  (See our client alert on this here.) On January 24, 2020, the Division of Corporation Finance issued three new Compliance and Disclosure Interpretations (C&DIs) (available here) addressing common questions that have developed regarding Instruction 1 to Item 303(a).

​Question 110.03 reiterates the simple point that a registrant may not omit a discussion of the earliest of three years from its current MD&A if it believes a discussion of that year is necessary to an understanding of its financial condition, changes in financial condition and results of operations.  This is consistent with the adopting release (available here), which stated:  “Although a discussion of the earliest year of the financials could in some circumstances be material, in many cases the entirety of the discussion of the earliest year that was presented in the MD&A of a prior filing would not need to be reiterated if, in management’s view, that discussion is not necessary to understand the financial condition, changes in financial condition, and results of operations.  This is the standard that applies to all of MD&A, and our amendments do not change that standard.” When determining whether to omit the earliest year discussion, a registrant should analyze whether the entirety of the discussion of its financial condition and operating results from three years ago (e.g., 2017 for the 2019 10-K), either as previously reported or updated to reflect trends or developments, is necessary to understand its financial condition, changes in financial condition and results of operations.  If so, that discussion should be included in the 10-K.  If not, a registrant may determine to address only the most recent two years in MD&A and, if necessary, to comment on any specific aspects of its third-year financial results needed to understand its financial condition, changes in financial condition and results of operations, without repeating the entire MD&A for that year.  Notwithstanding the SEC’s expectation that in many cases the entirety of the earliest year discussion would not need to be addressed, in our survey of S&P 500 companies that filed a 10-K between the effective date of the revised instruction and December 31, 2019, 57% have opted to include the earliest year’s discussion in the MD&A.  

Question 110.02 clarifies that when a registrant omits a discussion of the earliest of three years and includes the required statement that identifies the location of such discussion in a prior filing with the SEC, such discussion is not incorporated by reference into the filing unless the registrant expressly states that the information is incorporated by reference.  According to our survey of S&P 500 companies that filed a 10-K between the effective date of the revised instruction and December 31, 2019, no registrants chose to expressly incorporate the prior discussion by reference. 

Question 110.04 applies the principles of Question 110.02 to effective registration statements on file at the time the 10-K is filed.  Because the Form 10-K operates as the Section 10(a)(3) update to the registration statement, once the 10-K is filed without including the MD&A discussion for the earliest year of financials, the effective registration statement does not include the MD&A discussion for the earliest year.  As such, when filing a new registration statement or commencing an offering, a registrant should analyze whether the entirety of the discussion of its financial condition and operating results from three years ago, either as previously reported or updated to reflect trends or developments, is necessary to understand its financial condition, changes in financial condition and results of operations.  While in many cases such information will not be material to a current investment decision, in those cases when such information (or any other earlier information) is necessary, registrants and their counsel should discuss how best to incorporate such information into the offering documents.  ​


 

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