Disclosures About Off-Balance Sheet Arrangements and Contractual Obligations
Release 33-8182 outlines new rules the SEC adopted to implement
Section 401(a) of the Act. The new rules expand the information a company must provide in its MD&A.
The rules require a company to provide:
The new rules define “off-balance sheet arrangements” more
narrowly than had been proposed, and the final definition employs concepts in existing U.S.
accounting literature. Also, the final rules retain the “reasonably likely” disclosure threshold
reflected in the other MD&A rules. This is a higher threshold than had been proposed. In addition,
the disclosure requirements for off-balance sheet arrangements are less prescriptive than had been
proposed. Proposed rules that would have required disclosure of contingent liabilities and
commitments were not adopted in recognition of the U.S. GAAP literature requiring such
- A comprehensive explanation of its
off-balance sheet arrangements in a separately captioned section of MD&A; and
- An overview of its aggregate contractual obligations in a
With the following exceptions, these new disclosure requirements
apply to all issuers, including small business issuers and foreign private issuers. Small business
issuers are not required to provide the tabular disclosure of contractual obligations but are
encouraged to provide this information. Foreign private issuers are subject to all of the
requirements, but are required to provide interim updates only if they file registration statements
that require interim financial statements. The rules do not apply to registered investment
companies. The rules affecting domestic issuers have been added to Item 303 of Regulations S-K and
S-B. Companion rules affecting foreign private issuers have been added to Forms 20-F and
Off-Balance Sheet Arrangements
The new rules require companies to disclose information about
their off-balance sheet arrangements in a separate section of MD&A in quarterly and annual reports
and in Securities Act registration statements. The rules follow current MD&A guidelines, requiring a
company to disclose an off-balance sheet arrangement only if it is reasonably likely that the
arrangement will have an effect on the company that is material to investors.
Definition – The rules use concepts in existing U.S.
accounting literature to define “off-balance sheet arrangements.” Foreign private issuers who do not
prepare their primary financial statements in accordance with U.S. GAAP must nevertheless look to
the U.S. GAAP references in the definitions to identify the types of arrangements they need to
discuss. However, a foreign private issuer’s MD&A should continue to focus on its primary financial
The definition includes the following categories of contractual
Guarantee contracts covered by the new rules are those that
have the characteristics identified in paragraph 3 of FASB Interpretation 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others. This would include contracts such as standby letters of credit,
performance guarantees, indemnification agreements, and keepwell agreements.
- Obligations under certain guarantee
contracts, whether or not they are recorded as liabilities;
- Retained or contingent interests in assets transferred to an
- Obligations under derivative instruments that are classified
as equity; and
- Obligations under material variable interests in
unconsolidated entities that conduct certain activities.
Retained or contingent interests include interests in assets
transferred to an unconsolidated entity or similar arrangement that serve as credit, liquidity, or
market risk support to such entity for such assets.
Obligations under derivatives referred to above relate to
derivatives that are excluded from the scope of FASB Statement 133 (pursuant to paragraph 11a).
Under U.S. GAAP they are accounted for as equity, and subsequent changes in fair value may not be
periodically recognized in the financial statements. Under other GAAP they might be excluded
entirely from the balance sheet. The FASB has been evaluating the accounting for such instruments
and expects to issue a new standard covering this accounting.
Variable interests in unconsolidated entities include those with
the characteristics addressed in FASB Interpretation 46, Consolidation of Variable Interest
Entities. This includes entities that provide financing, liquidity, market risk
or credit risk support to the registrant, or engage in leasing, hedging or research and development
services with the registrant.
Disclosure requirements – Generally, the disclosures
should cover the most recent fiscal year. However, the discussion should address changes from the
previous year where necessary to an understanding of the disclosure.
Observation – The rules do not specifically cover the
interim period MD&A requirements related to off-balance sheet arrangements. The general approach to
interim period MD&As in Item 303(b) of Regulations S-K and S-B is to require registrants to describe
material changes. The Commission took this approach to updating the new contractual obligations
disclosure (discussed below). Therefore, it appears that in interim MD&As registrants need not
repeat the disclosure about off-balance sheet arrangements, but should update it to communicate
A registrant must disclose the following, to the extent necessary
to an understanding of its off-balance sheet arrangements:
To the extent that the information required is included in
the footnotes to the financial statements, the MD&A disclosure may cross-reference to the
- The nature and business purpose of the
- The importance of the arrangements to the registrant for its
liquidity and capital resources, market risk or credit risk support, or other benefits;
- The amounts of revenues, expenses, and cash flows arising from
off-balance sheet arrangements;
- The nature and amounts of any interests retained, securities
issued, and other indebtedness incurred in connection with such arrangements;
- The nature and amounts of any other material obligations or
liabilities (including contingent obligations or liabilities) arising from such arrangements and the
triggering events that could cause them to arise; and
- Any known event, demand, commitment, trend, or uncertainty
that will result in, or is reasonably likely to result in the termination, or material reduction in,
the availability of off-balance sheet arrangements that provide material benefits to the registrant,
and the course of action that will be taken or is planned in response to any such circumstances.
Disclosure about an off-balance sheet arrangement is not required
until an unconditionally binding agreement exists or, if there is no such agreement, when settlement
of the transaction occurs. In analyzing and disclosing off-balance sheet arrangements, those with
common or similar effects should be aggregated to the extent aggregation increases
The new rules require registrants (other than small business
issuers) to provide tabular disclosure of their aggregate contractual obligations. Registrants may
provide the disclosure in any location within MD&A that they deem appropriate. The table should
present information as of the end of the most recent fiscal year. In interim period MD&As,
registrants should update the information by disclosing material changes outside the ordinary course
of business that have taken place since the most recent fiscal year-end.
The tabular disclosure must cover both on- and off-balance sheet
items. It must present aggregate amounts due, by type, for the following types of obligations:
Amounts due in less than one year, one to three years, three
to five years, and more than five years must be provided for each category. Registrants should
provide footnotes that describe provisions that create, increase, or accelerate obligations and
other information necessary to understand the timing and amount of the obligations covered by the
- Long-term debt;
- Capital leases obligations;
- Operating leases;
- Purchase obligations; and
- Other long-term obligations reflected on the balance sheet.
Except for purchase obligations, which are defined in the new
rules, companies that prepare their financial statements in accordance with U.S. GAAP should
identify items to be included in the above categories based on U.S. GAAP. Other companies should
identify these items based on the classifications used in the GAAP they use to prepare their primary
A “purchase obligation” is defined as an agreement to purchase
goods or services that is enforceable and legally binding and specifies all significant terms. If
the purchase obligations are subject to variable pricing provisions, estimates of payments due must
be provided in a footnote to the table. The footnotes to the table should also discuss any material
termination or renewal provisions.
Observations – The rules are not specific regarding the
items to be included in the purchase obligations or the other long-term obligations lines in the
table. We understand that the SEC staff expects each management to use judgment and prepare a table
that best informs readers about the company’s aggregate future cash payment requirements and
believes that a key element of the table will be the footnotes explaining how the table was
Companies should begin to consider the items they should
present in the table and the processes they will need to develop to gather the information. For
- For the purchase obligations line,
companies may need to develop processes to accumulate obligations related to uncompleted contracts,
where no liability has been reflected on the balance sheet.
- For the purchase obligations line, companies will also need
to consider how they should communicate cash payment requirements related to completed contracts,
where liabilities (i.e., accounts payable, accruals, etc.) are reflected on the balance sheet.
Alternatives might range from (1) presenting none of these items in the table and discussing them in
a footnote to (2) including in the table all current liabilities with the attributes reflected in
the definition. In that regard, it should be noted that some liabilities (e.g., deferred revenue,
contingent liabilities) may not meet the definition of a purchase obligation.
- Regarding the other long-term obligations line, companies
should consider the extent to which they have items that they should present on this line and
whether they need to enhance their processes to be able to schedule the payment requirements with
sufficient precision. Examples of such items might include pensions, other postretirement benefits,
and income taxes.
The rules contain a safe harbor which specifies that, except for
historical facts, the disclosures will be deemed to be “forward looking statements” as that term is
defined in the statutory safe harbors. In addition, the “meaningful cautionary statements” element
of the statutory safe harbors will be satisfied if all of the disclosure requirements with respect
to off-balance sheet arrangements are met.
Registrants must comply with the off-balance sheet arrangement
disclosure requirements in registration statements, annual reports, and proxy or information
statements that are required to include financial statements for their fiscal years ending on or
after June 15, 2003. Registrants (other than small business issuers) must include the table of
contractual obligations in registration statements, annual reports, and proxy or information
statements that are required to include financial statements for their fiscal years ending on or
after December 15, 2003.
Until the new disclosures are provided, registrants should follow
the guidance in FRR 61, Commission Statement about Management’s Discussion and Analysis of
Financial Condition and Results of Operations.3
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3This release may be found at http://www.sec.gov/rules/other/33-8056.htm.