The SEC Division of Corporate Finance recently issued guidance to smaller financial institutions concerning Management’s Discussion and Analysis and accounting policy disclosures. The guidance can be found in CF Disclosure Guidance: Topic No. 5, dated April 20, 2012 and amounts to rules to follow for future filings that should not be ignored.

The Division focused on the following areas:

  • Allowance for Loan Losses
  • Charge-off and Nonaccrual Policies
  • Commercial Real Estate
  • Loans Measured for Impairment Based on Collateral Value
  • Credit Risk Concentrations
  • Troubled Debt Restructurings and Modifications
  • Other Real Estate Owned
  • Deferred Taxes
  • Federal Deposit Insurance Corporation Assisted Transactions

The Division made it clear that the guidance is not one-size-fits-all so registrants will need to carefully analyze the guidance and how it may apply to them. While the guidance is too lengthy to summarize here, the Division appears to be focused on making the disclosures in the areas above more transparent and meaningful. For example, the Division wants more disclosure on how a registrant calculates the allowance for loan losses and the components of the allowance. Given the financial difficulties facing financial institutions over the past several years, this guidance is not surprising.

The guidance essentially provides a list of issues for each category above that needs to be addressed in a registrant’s Management’s Discussion and Analysis and accounting policy disclosures. This roadmap will be a useful tool for small financial institutions with their future SEC filings. Make sure to consider it when drafting your next registration statement or periodic report to help avoid comments from the SEC.