A Review of 2002 MD&A Disclosures

©June 2003, 59 pages

Discussion about “critical accounting policies” can help investors to appreciate how estimates and assumptions affect financial statements, thereby improving transparency. The Securities and Exchange Commission (SEC) defines critical accounting policies as those policies and estimates that are most important to portraying a company’s results, and that require management’s most difficult, subjective or complex judgments. In December 2001, the SEC encouraged firms to expand their disclosures of critical accounting policies by providing more information about how judgments and uncertainties affect such policies, and by explaining how such policies influence the reported results of operations (FR-60). Furthermore, the SEC has proposed new rules to further expand disclosures about critical accounting estimates and the adoption of new critical accounting policies (Release No. 33-8098). This Executive Report summarizes current and proposed regulations governing disclosures of critical accounting policies, and looks at trends based on a review of 2002 MD&A disclosures from 145 companies. Selected examples of 2002 disclosures of different critical accounting policies are provided.