As the due date for third quarter 10-Qs quickly approaches for calendar year
accelerated filers (and all other filers), you should consider taking a close
look at your liquidity and capital resources disclosures under management’s
discussion and analysis of financial condition and results of operations. As you
know, under MD&A companies are required to:
Identify any known trends or any known demands, commitments, events or
uncertainties that will result in or that are reasonably likely
to result in the registrant’s liquidity increasing or decreasing in
any material way. If a material deficiency is identified,
indicate the course of action that the registrant has taken or proposes to
take to remedy the deficiency. Also identify and separately describe
internal and external sources of liquidity, and briefly discuss any material
unused sources of liquid assets [Regulation S-K Item 303(a)(1) (emphasis
With respect to capital resources, each company must:
Describe any known material trends, favorable or unfavorable, in the
registrant’s capital resources. Indicate any expected material changes in
the mix and relative cost of such resources. The discussion shall consider
changes between equity, debt and any off-balance sheet financing
arrangements [Regulation S-K Item 303(a)(2(ii) (emphasis added)].
In MD&A for interim periods, companies are required to provide discussion and
analysis of material changes in liquidity and capital resources [Regulation S-K
Item 303(b)]. Thus each
company must carefully consider whether intervening events and developments
require that previous disclosures be updated or expanded.
For purposes of MD&A, the term “liquidity”
refers to the ability of an enterprise to generate adequate amounts
of cash to meet the enterprise’s needs for cash. Except where it is
otherwise clear from the discussion, the registrant shall indicate those
balance sheet conditions or income or cash flow items which the registrant
believes may be indicators of its liquidity condition. Liquidity generally
shall be discussed on both a long-term and short-term basis [Regulation S-K
Item 303(a), Instruction 5 (emphasis added)].
The purpose of this disclosure is to “provide to investors and other users
information relevant to an assessment of the financial condition and results of
operations of the registrant as determined by evaluating the amounts and
certainty of cash flows from operations and from outside sources”
[Regulation S-K Item 303(a), Instruction 2 (emphasis added)].
Additional SEC guidance regarding discussion and analysis of liquidity and
capital resources under MD&A can be found on the SEC’s website at:
In light of the recent “credit crunch” and the general slow down in the
economy, companies should discuss any material effects these developments have
had, or are reasonably likely to have, on their liquidity and capital resources,
including cash from operations, borrowing arrangements and access to capital
markets. For example:
- Have the conditions in the capital markets had, or are they reasonably
likely to have, a material impact on the company’s ability to finance its
- Have traditional sources of capital/liquidity become unavailable or more
- Have expansion plans or planned capital expenditures been cancelled or
delayed as a result?
- Will any such cancellations or delays affect anticipated earnings such
that previous guidance, whether provided in SEC reports or other, less
formal, settings, needs to be updated?
Where material, this discussion also should include indirect impacts on
liquidity related to the company’s customers and suppliers. For example:
- Have changes in credit or payment terms imposed by the company’s
suppliers or vendors had a material impact on liquidity or on how the
company will finance its operations?
- Have credit or liquidity problems experienced by the company’s
vendors/suppliers compromised important sources of supply to the company?
- Has the company’s exposure to counterparty credit risk under
over-the-counter derivative agreements increased substantially as a result
of credit or liquidity problems being experienced by those counterparties?
- Has the payment performance of the company’s customers adversely
affected the company’s cash flow from operations?
- Has the company increased reserves for doubtful accounts in a material
Given the breadth and gravity of the current situation in the capital
markets, companies should carefully consider whether additional discussion may
be required to give investors a complete picture of the “known trends” or “known
demands, commitments, events or uncertainties” that will have or are reasonably
likely to have a material affect on the company’s ability to generate the cash
McGuireWoods LLP regularly assists both large and small public companies in
connection with disclosure and compliance matters under the federal securities
laws, and is actively engaged in monitoring developments in these areas.