Corporate Liquidity Disclosures: An Update

• Published date: 01 November 2013
• Date: 01 November 2013
• DOI: http://doi.org/10.1002/jcaf.21908
• Author: Cathy J. Cole

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© 2013 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.21908

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Cathy J. Cole

Although the liquidity of U.S. companies has

generally been improving since 2008, investors

and creditors are always keenly interested in

this area. And companies must discuss liquidity

in the Management’s Discussion and Analysis

(MD&A) section of reports they file with the U.S.

Securities and Exchange Commission (SEC). To

help companies prepare these liquidity discus-

sions, this article looks at what some Dow Jones

Industrial companies are doing with MD&A. Since

these are some of the country’s most widely

followed companies, examining their common

practices may assist others in preparing MD&A.

© 2013 Wiley Periodicals, Inc.

Corporate Liquidity Disclosures: An Update

INTRODUCTION

While U.S. compa-

nies’ liquidity positions

have been generally

improving since the

2008 financial crisis,

corporate liquidity is

a topic of perennial

interest to investors and

creditors. Consequently,

the U.S. Securities and

Exchange Commis-

sion’s (SEC) basic Man-

agement’s Discussion

and Analysis (MD&A)

rules have long required

a discussion of liquid-

ity in reports filed

with the SEC. While a previous

article by this author, “Corpo-

rate Liquidity Disclosures: A

Review” (Cole, 2012), examined

the SEC’s basic MD&A require-

ments and interpretive guidance,

this article focuses on some

common practices in the recent

liquidity and capital resource

discussions for 26 nonfinancial

companies that are included in

the Dow Jones Industrial Aver-

age (the sample companies).

While these companies are well

established and thus unlikely

to have liquidity deficiencies to

address, given that they are some

of the country’s most widely

followed companies, examin-

ing their common practices

may assist others in preparing

MD&A.

ORGANIZATION OF LIQUIDITY

DISCUSSIONS

The MD&A rules require

that MD&A analyze liquidity

and capital resources includ-

ing off-balance-sheet arrange-

ments and provide a table of

contractual obligations (U.S.

SEC, n.d.). Item 303 of Regu-

lation S-K defines liquidity as

the “ability of an enterprise to

generate adequate amounts of

cash to meet the enterprise’s

needs for cash.”1 All the sample

companies com-

bined the presenta-

tion of liquidity and

capital resources as

is permitted by the

SEC rules due to

the complementary

nature of these top-

ics. The presenta-

tion formats of the

liquidity and capital

resources sections

of MD&A for the

sample companies

tended to fall into

two somewhat dis-

tinct styles. Under

the cash flow state-

ment style, the

liquidity and capital resources

discussion is structured pre-

dominantly around the state-

ment of cash flows classifica-

tions. Approximately 70% of

the sample companies have

discussions focusing on operat-

ing, investing, and financing

activities. These companies usu-

ally also include a discussion

of available financing sources

such as credit facilities and

other borrowing arrangements,

debt covenants, credit ratings,

and related issues often directly

after the discussion of financing

cash flow activities, but in some

cases in a separate section. Sev-

eral of these companies also