The current economic environment calls for a robust discussion of liquidity in MD&A disclosure, including the material terms of financing covenants, according to Shelley Parratt, Deputy Director of Disclosure Operations in the Division of Corporation Finance. This year, the staff is also very likely to ask companies about their ability to raise capital and about reserves and loan losses. Parratt discussed the Division’s filings review operations and offered a few tips for preparing MD&A at a recent securities regulation conference hosted by Practising Law Institute.

More than 10,000 companies report to the SEC, and each of the past three years the staff has reviewed the filings of 5,000 companies, she said. The Sarbanes-Oxley Act requires the Commission to review each company at least once every three years, so the staff is exceeding the law’s mandate, she noted.

Parratt said that the staff first looks at a company’s Form 10-K and evaluates the disclosure. The staff will dig further if it finds critical disclosure that appears to conflict with other public information or with accounting standards, or is deficient in content or clarity, she said.

The staff’s review is primarily focused on the financial statements, and includes MD&A, she noted. If it decides to broaden its examination of a company, the staff might do a full cover-to-cover review that includes non-financial disclosure, she added.

MD&A is a focal point of the review because it is where a company tells its story, she said. She advised companies to be sure that their MD&A disclosure includes a story that can stand on its own. The staff does not want to have to go to various Web sites or other locations to be able to piece together a complete picture of a company’s operations, she said.

Companies also need to ensure that their MD&A is consistent with the rest of their disclosure, according to Parratt. Preparers of the disclosure should not cut and paste from other areas of the filing, she said, because the information needs to fit within the context of other MD&A disclosure. Companies also should consider providing an MD&A overview to give readers some context for the disclosure that follows, she said.

Parratt said that the staff looks closely at goodwill and the impairment of assets. If indicators of an impairment appear to exist and the company did not take a charge for it in the prior year, the staff will inquire about it, she noted. The staff also will ask companies to disclose the methods they used to determine fair value and the risks to their key assumptions.

Catherine Dixon of Weil, Gotshal & Manges said that companies must disclose in MD&A the potential impact of having to adopt and comply with new accounting standards. She advised companies not to wait for auditors to raise these issues. Read the PCAOB’s audit alerts, she said, and they will provide an early warning that there will be heightened scrutiny in those areas.

Martin Dunn of O’Melveny & Myers said that when drafting MD&A disclosure, companies should think about words first and numbers second. Numbers matter, but it is a good idea to start with the story when preparing MD&A disclosure, he said.

Dunn also advised companies to pay attention to what their competitors are doing. The staff in the Division of Corporation Finance is arranged by industry groups, he noted, so the examiners have expertise in particular business sectors and will be aware of what a company’s peers have disclosed.

The financial crisis has created a situation where companies have more to say in their MD&A disclosure about what risks still apply to them and which do not, he said. He advised companies not to simply mark-up last year’s disclosure. These are interesting economic times that should give rise to specific stories, he said.