Recent SEC Emphasis on Critical Accounting Estimates (MD&A)

Background

In the year ended June 30, 2024, the SEC issued 1,700 comment letters to registrants—the highest volume in recent history. From 2020–2022, the SEC averaged just over 1,000 comment letters per year. Amid this rise in comment letter issuance, Management Discussion and Analysis (MD&A) has emerged as the most frequent comment area.

At least 34% of 2024 comment letter recipients received comments from the SEC about MD&A. Among the letters discussing MD&A, one of the most common subject areas was the use of critical accounting estimates (CAEs) within MD&A. The relevant literature governing MD&A disclosure requirements is Item 303 of Regulation S-K (S-K 303).

MD&A is a central component of financial disclosures. According to S-K 303, “The objective of the discussion and analysis is to provide material information relevant to an assessment of the financial condition and results of operations of the registrant.”MD&A serves to augment shareholders' understanding of the registrant’s results and processes, giving shareholders the opportunity to get direct analysis and comments on financial performance from management's perspective.

The SEC codified its mandate to disclose CAEs in 2020 with Release No. 33-10890. Since then, registrants have been formally required to provide additional insight into their most significant estimates. This article discusses what CAEs are, what disclosures the SEC requires for them and why, and provides real-world examples of SEC correspondence with registrants regarding their CAEs.

Understanding Critical Accounting Estimates

A critical accounting estimate (CAE) is an estimate made in accordance with GAAP that involves a high degree of uncertainty and has had, or is likely to have, a material impact on a firm’s financial results. These estimates often rely on management's assumptions about future conditions andcan significantly affect reported amounts in the financial statements. Because every company has different operations, risks, and accounting policies, what qualifies as a CAE for one registrant may not be considered critical for another. Common example's include estimates related to:

• Credit losses (e.g., allowance for doubtful accounts),
• Goodwill and intangible asset impairments,
• Fixed asset impairments, or
• Fair value measurements.

These and other estimates typically require substantial management judgment, involve inherent estimation uncertainty, and are often material to the financial statements.

Disclosure Requirements

When a company determines that an estimate qualifies as a CAE, Regulation S-K Item 303(b)(3) requires the company to provide enhanced disclosure in the MD&A section of its SEC filings. This disclosure must include both qualitative and quantitative information necessary to help investors understand the uncertainty associated with the estimate and its potential financial impact.

The SEC specifically mandates that public firms must include the following “to the extent the information is material and reasonably available”:

1. Why the estimate is subject to uncertainty
   • What assumptions or external factors make the estimate unreliable or subject to change?
   • For example, a pension liability estimate may depend on future interest rates or mortality rates.
2. Changes in assumptions over time
   • If assumptions (like discount rates or growth projections) changed year over year, companies should quantify and explain those changes.
3. Sensitivity analysis
   • This means showing how adjusting an assumption would change the reported number.
   • For example, a small change in discount rate used in a cash flow model can produce a significantly different estimate of fair value.

Based on the above requirements, the SEC expects public companies to provide specific narrative (qualitative information) and numeric details (quantitative information) for each CAE. These disclosures are intended to give investors deeper insight into where management judgment plays a significant role and how future changes in assumptions could materially affect results.

The SEC encourages registrants to include the quantifiable aspect of CAEs where possible. In its 2020 Final Rule, the SEC indicated that quantifying assumptions could “allow an investor to better understand the degree of estimation uncertainty.” For example, an investor would certainly benefit from a CAE disclosure if it showed quantitatively that a 1% difference in discount rate used in a management estimate would have caused a $250 million impairment loss (assuming this is material). Disclosing this sensitivity not only quantifies the risk but also gives investors a clearer sense of how changes in assumptions could materially affect results. Thus, CAE disclosures can add valuable context that enhances investor decision-making.

How CAEs Differ from Accounting Policies and Estimates in the Footnotes

Companies generally describe significant accounting policies and estimates in the footnotes to their financial statements. However, the SEC makes it clear that CAE disclosures in the MD&A should not duplicate this information. Instead, they should complement the footnotes by providing additional narrative and analytical insight. The CAE section should supplement what investors can read in the notes to the financial statements. The following table compares CAE disclosures with footnote disclosures for accounting policies and estimates:

Examples from SEC Comment Letters

Example 1: When an Estimate Is Not a CAE (Cigna)

Not every complex or judgment-based accounting decision results in a separate CAE disclosure. In one SEC comment letter, the staff questioned Cigna’s decision not to include a CAE disclosure for the process it used to measure “assets and liabilities held for sale and the associated loss on sale.”

Cigna explained that it had already disclosed a detailed CAE related to the valuation of goodwill and intangible assets. Cigna used this analysis, combined with the sale price of the assets and liabilities, to allocate goodwill to the disposal group based on relative fair value. Because the classification of the assets and liabilities as held for sale was based on specific accounting guidance and did not involve new estimation uncertainty, and because the measurement of those assets and liabilities and loss on sale were based on existing valuation work and the sale price, management concluded that a separate CAE disclosure was not required under Item 303(b)(3) of Regulation S-K.

This example illustrates how management must assess not only whether an estimate involves judgment, but also whether it introduces new or material uncertainty that investors need to understand. Even complex decisions may not rise to the level of a CAE if they rely on previously disclosed assumptions and involve no new estimation risk.

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Click here to read Cigna’s correspondence with the SEC

Example 2: SEC Pushes for Specificity (Riot Platforms)

In a 2024 comment letter, the SEC staff criticized a registrant’s CAE section for missing required information. The staff directed the company to enhance its disclosure by including why each estimate is uncertain, how much the assumptions have changed over time, and how sensitive reported amounts are to changes in those assumptions.

The company agreed and provided a revised disclosure as an example. In it, the company discussed estimates related to the impairment of long-lived assets, such as cryptocurrency mining equipment. The updated disclosure included:

• The key assumptions (e.g., future Bitcoin prices and network hash rates),
• How those assumptions involve “significant judgement” (such as when estimating the future price of Bitcoin), and
• A clear statement that if “estimates of useful lives, undiscounted future cash flows, or asset values change, additional and potentially material impairments may be required.”

This exchange illustrates the SEC’s broader message: CAEs must go beyond boilerplate. They should provide investors with a transparent look into management’s judgment, the uncertainties they face, and the real financial impact if estimates change.

Click here to read Riot Platforms’ correspondence with the SEC

Conclusion

The SEC has intensified its focus on the completeness and quality of MD&A, including critical accounting estimates. S-K 303 outlines requirements designed to provide shareholders with meaningful information about estimation uncertainty and potential material effects of estimates and their assumptions on the financial statements. Public entities can view these requirements as opportunities to enhance investor understanding of their significant judgements and the impact of factors that may not be fully captured in the financial statements.

References

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1) EY SEC Reporting Update, Highlights of trends in 2024 SEC staff comment letters
2) Cornell Law School Legal Information Institute, 17 CFR § 229.303 - (Item 303)
3) SEC Final Rule, Release No. 33-10890
4) Cornell Law School Legal Information Institute, 17 CFR § 229.303 - (Item 303)

Deloitte Accounting Research Tool, D.5 MD&A – Critical Accounting Estimates
Deloitte Accounting Research Tool 3.1.4, Critical Accounting Estimates
Accounting Standards Codification 235, Notes to Financial Statements
EY SEC Reporting Update, Highlights of trends in 2023 SEC staff comment letters

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