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What To Know When Issuing Liquidity And Capital Resource Disclosures

Last month’s SEC guidance on liquidity and capital resources disclosures and Management’s Discussions and Analysis of Financial Condition and Results of Operations (MD&A) is meant to help investors better understand a registrant’s liquidity and funding risks.

The guidance (FR-83) concentrates on liquidity, leverage ratios and the contractual obligations table. While the guidance offers no new additions to the current SEC rules on the subject, it is definitely something to consider for your company’s next SEC filing.

The SEC has amended its MD&A rules to improve disclosure about funding and liquidity several times over the last decade. The changes centered on commercial commitments and the effects of transactions, off-balance sheet disclosures and the preparation, format and content of MD&A.

The latest issuance encouraged the early involvement of top-level management in identifying the key disclosure themes and items that should be included in MD&A, and provided guidance on the overall presentation of MD&A, the focus and content of MD&A, the discussion of liquidity and capital resources and critical accounting estimates.

The FR-83 guidance takes a look at MD&A discussions around cash requirements and management, sources and uses of cash and debt instruments, guarantees and related covenants. It also adds to the MD&A discussion of liquidity and capital resources outlined in the SEC’s earlier guidance.

The SEC’s interpretive guidance defines the risks around liquidity by specifying the following trends and uncertainties that might require MD&A disclosure:

  • Difficulties accessing the debt markets
  • Reliance on commercial paper or other short-term financing arrangements
  • Maturity mismatches between borrowing sources and the assets funded by those sources
  • Changes in borrowing terms requested by counterparties
  • Changes in the valuation of collateral
  • Counterparty risk

There are additional guidelines for disclosure concerning registrant’s financing arrangements during certain periods, or the effect of those arrangements on liquidity. Obligations to repurchase assets are also discussed, and the guidance states that disclosures about the repurchase obligation may be required in the MD&A discussion of liquidity.

Cash management and risk management policies also need to be disclosed when they relate to a risk management policy. This applies to banks as well as other company with a portfolio of cash and other investments that provides a material source of liquidity. Each entity should disclose the nature and composition of the portfolio and any limits or restrictions on the company’s ability to use or access the assets.

When disclosing leverage ratios, companies should divulge any ratio or measure included in an SEC filing with a clear explanation of the calculation methodology. Decide whether the capital or leverage financial measure is a non-GAAP financial measure and follow the applicable SEC presentation and disclosure requirements.

By rule, companies are required to provide a tabular presentation of known contractual obligations as of the end of the most recent fiscal year, but there is some flexibility here. You can custom tailor this presentation to best fit your business, with the goal being a clear, accurate presentation around capital structure and business.

Make sure your table is clearly labeled with proper footnotes. As far as any questions you may have about relevant information that doesn’t fit in your table, the guidance recommends a narrative disclosure of all pertinent data.