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December 10, 2014
Management Discussion and Analysis — “Known Uncertainties” Disclosures
The third quarter of 2014 brought a reminder that registrants must take care when considering disclosure in MD&A relating to “known uncertainties.” In August 2014 the SEC settled a civil suit with Bank of America arising from its alleged failure to disclose known uncertainties regarding potential increased costs related to mortgage loan repurchase claims resulting from mortgage loan sales from ’04 through ’08 by the bank and certain entities that it had acquired.
Annual MD&A requires disclosure of, and quarterly MD&A calls for disclosure of material changes in, among other things, “any known trends or any known demands, commitments, events or uncertainties” that are reasonably likely to result in material changes to the registrant’s liquidity and “any known trends or uncertainties” that have had or that the registrant reasonably expects will have a material impact on net sales, revenues or income. The real-time determination of whether an uncertainty is reasonably likely to have a material impact can be highly subjective, as it requires interpretation of ambiguous terms and often the assessment of a multitude of potential variables. MD&A disclosures are subject to subsequent scrutiny that has the benefit of hindsight, which militates in favor of erring on the side of caution in “known uncertainty” MD&A disclosure.
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