Haynes and Boone, LLP
  May 20, 2002 - Dallas, Texas

SEC Emphasizes MD&A Disclosures, Proposes Rule for MD&A Disclosure of Critical Accounting Policies
  by Darrel A Rice

To Our Public Company Clients: Partly in response to the recent Enron crisis and related media publicity, the Securities and Exchange Commission has announced its views regarding disclosure that should be considered by companies in the Management’s Discussion and Analysis (“MD&A”) section of Form 10-K, Form 10-Q, and registration statements filed with the SEC. The Commission issued a statement on January 22, 2002 (the “Statement”) emphasizing the need for companies to improve the “quality of information” in MD&A concerning liquidity and capital resources, including off-balance sheet arrangements, trading activities involving non-exchange traded contracts, and the effects of transactions with affiliates. More recently, the Commission on May 10, 2002 announced a proposed MD&A disclosure rule requiring qualitative and quantitative disclosures about a company’s critical accounting policies and accounting estimates. The SEC is proposing required MD&A disclosure by companies of their critical accounting policies, accounting estimates made by the company in applying these policies, and the likelihood of a material change in the company’s financial statements under different conditions or using different assumptions to arrive at these accounting estimates. The Commission has clearly increased its scrutiny of MD&A disclosure. The SEC’s recent pronouncements and proposed rule concerning MD&A disclosure indicate that the Commission is focused on altering the way in which public companies prepare their MD&A discussions. The January 2002 Statement purports to simply reiterate existing legal requirements. However, the Statement appears to expand the scope of MD&A disclosure to cover areas that many public companies may not have previously addressed. The proposed rule would significantly expand the disclosure requirements of accounting policies and accounting estimates. We believe that our public company clients should carefully consider how these recent SEC pronouncements and proposed rule concerning MD&A disclosure may affect their SEC disclosure practices. SEC Reminds Companies of MD&A Disclosure Requirements: An MD&A discussion is included or incorporated by reference in most company reports and registration statements filed with the SEC. The MD&A must discuss all known trends, demands, commitments, events and uncertainties that are reasonably likely to have a material effect on the company’s financial condition, results of operations, liquidity and capital resources. The January 2002 Statement was issued in response to a request by the “Big Five” accounting firms for more definitive guidance on MD&A disclosures. The Statement does not create any new legal requirements, nor does it modify any existing requirements. In the Statement, the SEC suggests steps that companies should consider in meeting their disclosure obligations to “provide such other information that the registrant believes to be necessary to a understanding of its financial condition, changes in financial condition and results of operations.” The SEC called for companies to improve disclosure in three specific areas: liquidity and capital resources, including off-balance sheet arrangements; certain trading activities involving non-exchange traded contracts accounted for at fair value; and relationships and transactions with persons or entities who derive benefits from their non-independent relationship with the registrant or the registrant’s related parties.


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