One of the more common comments the SEC staff issues in its reviews of periodic reports and registration statements in the Management’s Discussion and Analysis (MD&A) section relates to asking the company to quantify each material factor driving period-to-period changes in financial statement line items. While the comment is relatively straightforward and pulled from Item 303 of Regulation S-K, the reality is that it is often impracticable for companies to quantify certain factors. Since the SEC staff is currently analyzing Regulation S-K for potential reforms at the Chairman’s direction, we offer a simple fix for one of the most common MD&A comments.
A. Background and Recent SEC Comment
Item 303(b) of Regulation S-K currently provides:
“Where the financial statements reflect material changes from period-to-period in one or more line items, including where material changes within a line item offset one another, describe the underlying reasons for these material changes in quantitative and qualitative terms.”
In practice, the SEC staff frequently relies on this language to ask companies to quantify the impact of each factor identified as contributing to a material change in a financial statement line item. For example, see this recent comment issued by the staff in connection with a 10-K review:
“In the Results of Operations section, when you describe two or more factors that contributed to a material change in a financial statement line item between periods, please quantify in future filings, where possible, the extent to which each factor contributed to the overall change in that line item. This disclosure should be provided for each significant income statement line item as well as for the segment discussion. As an example, your discussion on page 26 of the $221.8 million decrease in Operating income only quantifies asset impairment charges of $53.6 million and higher restructuring and restructuring-related charges of $67.8 million, without similar quantification provided for the other drivers identified. Please revise accordingly. Refer to Item 303(b)(2) of Regulation S-K and SEC Release No. 33-8350 for guidance.”
In the above comment example, the registrant responded as follows (in the proposed disclosure, the registrant’s additions are underlined and deletions are struck through):
“We acknowledge the Staff’s comment, and confirm that, in future filings, the Company will quantify all factors that we believe materially impact changes in financial statement line items and are reasonably practicable to quantify. We also confirm that disclosures based on that standard will be provided for each significant income statement line item, as outlined in the example disclosure below, as well as for the segment discussion.
“In certain instances, the Company refers to factors that are not reasonably practicable to quantify. In some cases, but not all, multiple interrelated factors — such as pricing, volume, and mix — cannot be reliably isolated, and the Company does not have a mechanism to separately track the impact of each component. As a result, management is unable to quantify the specific impact (or range of impacts) of each driver with reasonable certainty. In these instances, the Company cites qualitative information that is based on management’s best judgment, even though the underlying factors do not lend themselves to quantification. For example, in the Company’s discussion of consolidated operating income in its Annual Report on Form 10-K for the fiscal year ended December 27, 2025 (the “2025 Form 10-K”), the Company could not quantify the productivity gains attributable to strategic sourcing initiatives and manufacturing efficiencies, but the Company knew with certainty that it experienced productivity gains.
“In future filings, where two or more factors contribute to material changes in financial statement line items, the Company will enhance its qualitative discussion of material drivers and provide quantification of material drivers where reasonably practicable.
“Please see below an example of how the Company would revise future filings based on the disclosure from page 26 of the 2025 Form 10-K:
“Operating income decreased by $221.8 million, or 30.1%, primarily due to a decrease in net sales of $145.8 million primarily due to lower sales volume, material cost inflation of $80.3 million primarily due to tariffs and commodity price increases, asset impairment charges of $53.6 million, higher distribution costs of $11.6 million, and higher restructuring and restructuring-related charges of $67.8 million,. These factors are partially offset by lower incentive compensation of $51.7 million year over year, as well as continued productivity gains across the segments supported by strategic sourcing initiatives and manufacturing efficiencies as well as reductions to incentive compensation.”
Notably, in response to the comment, the registrant was able to quantify most of the drivers it identified, including the change in net sales, material cost inflation, distribution costs and incentive compensation. But it explained that certain factors are not susceptible to reliable quantification because multiple drivers may be interrelated, and the company may not separately track the effect of each component. For example, productivity gains attributable to strategic sourcing initiatives and manufacturing efficiencies are not easily quantifiable. In those situations, management may know that a factor affected results without being able to isolate its precise dollar impact with reasonable certainty.
Note also that the comment asks for such quantification “where possible,” whereas the company’s response commits to quantifying factors that are material and “reasonably practicable to quantify.” From a drafting perspective, the latter standard is preferable since a “where possible” standard would likely impose a higher expectation on the company to make assumptions to produce a quantified outcome, which could push towards false precision.
B. The ABA’s Federal Regulation of Securities Committee Has Raised the Same Concern
The above-referenced comment exchange isn’t an isolated incident, and a version of this comment is issued frequently. In its May 1, 2026, comment letter responding to the SEC’s request for input on reforming Regulation S-K, the Federal Regulation of Securities Committee of the American Bar Association’s Business Law Section noted that, based on its research, the staff issued a similar MD&A quantification comment to 22 companies in 2025 and 204 companies over the prior three years. (See footnote 53 in the Committee’s comment letter.)
The Committee went on to explain why the current standard creates problems:
“Item 303 of Regulation S-K requires registrants to explain material changes in financial statement line items, including by describing the underlying drivers of those changes in both qualitative and quantitative terms, where appropriate. While this standard reflects the Commission’s broader objective that MD&A provide investors with a view of the company ‘through the eyes of management,’ the rule does not clearly delineate when narrative explanations must be supplemented with quantified impacts. In practice, this ambiguity has resulted in inconsistent disclosure. Staff has issued comment letters requesting that registrants quantify the relative contribution of identified factors to period-over-period changes, signaling an expectation that numerical attribution is often necessary to satisfy Item 303. At the same time, many registrants do not provide such quantification absent a direct Staff comment, suggesting that the current principles-based framework leaves substantial room for interpretation. The result is a disclosure regime in which similarly situated companies present different levels of detail regarding the same types of operational drivers.
“We also note that it may be very difficult or impossible for companies to accurately quantify certain drivers, particularly those based on outside events or macroeconomic conditions.”
“Although the Commission has acknowledged that isolating and quantifying individual drivers of financial performance can be difficult — particularly where factors are interrelated — it has not established a consistent standard for when such quantification is required versus when qualitative disclosure alone is sufficient. The absence of clear guidance has effectively shifted the determination to the comment letter process, creating a reactive rather than predictable disclosure regime.”
The Committee’s letter recommends that the Commission clarify the circumstances under which drivers of financial results must be quantified. We agree, and as discussed below, the fix may require only a few words.
C. A Potential Fix?
As the SEC considers potential changes to Regulation S-K, there may be a relatively straightforward way to address this issue. The Commission could revise the relevant sentence in Item 303(b) to read:
“Where the financial statements reflect material changes from period-to-period in one or more line items, including where material changes within a line item offset one another, describe the underlying reasons for these material changes in quantitative terms, if known or reasonably available, and qualitative terms.” (Emphasis added.)
“If known” and similar qualifiers (such as “if reasonably practicable to quantify,” or “if available”) already appear throughout Regulation S-K. The proposed language also reflects the same principle embodied in Securities Act Rule 409 and Exchange Act Rule 12b-21, which generally provide that required information need be given only insofar as it is known or reasonably available to the registrant. In fact, the SEC cited Rule 409 and Rule 12b-21 in its adopting release amending the MD&A rules (Release No. 33-10890), at footnote 115, when discussing this quantification issue. However, a condition of these rules is that the company can omit such information only if it includes “a statement either showing that unreasonable effort or expense would be involved or indicating the absence of any affiliation with the person within whose knowledge the information rests and stating the result of a request made to such person for the information.” Therefore, reliance on such rules isn’t practical in most cases.
In the SEC’s 2021 MD&A adopting release, the SEC stated, “We acknowledge, as suggested by some commenters, that isolating reasons for specific material changes, and quantifying such isolated reasons, can sometimes be challenging because they can be highly interrelated. In such circumstances, we encourage registrants to acknowledge this fact, and to explain such interrelated circumstances to the extent possible.” In other words, the Commission has already recognized the problem and suggested a solution based on enhanced disclosures. In hindsight, the “acknowledge and explain” approach has struggled to prove workable. As the Committee’s data show, the staff continues to issue quantification comments, and because the reasons a driver cannot be isolated are often self-evident, explaining them tends to produce boilerplate rather than useful disclosure.
To be clear, such a change would not eliminate the expectation that companies quantify material drivers when reasonably practicable to do so. A company could not rely on the qualifier to withhold amounts it tracks or can readily derive, as illustrated by the drivers the registrant quantified in the example above. Instead, it would recognize the practical reality that certain drivers cannot reliably be separated or quantified and would reduce the incentive to manufacture artificial precision simply to address a potential staff comment. It also would provide companies with a clearer rule at the drafting stage.
Given how frequently the issue arises, this appears to be an area where a few additional words in Item 303 could provide meaningful clarity for registrants without reducing the usefulness of MD&A disclosure to investors.
