Companies will soon have some explaining to do in their management discussion and analysis regarding how they manage their short-term debt and liquidity.

The Securities and Exchange Commission is proposing some new disclosure requirements that would compel companies to better describe how they manage their short-term borrowing throughout a financial reporting period. The idea is to give investors a better understanding of how a company manages its liquidity throughout a quarter or a fiscal year instead of leaving them to rely on the period-end closing numbers.

The SEC took a hard look at how companies manage liquidity and how that is reported to investors after the Lehman Brothers’ postmortem unveiled a $50 billion shell game with repurchase agreements to dress up the balance sheet. The SEC’s proposal “would shed greater light on a company’s short-term borrowings, including a practice some refer to as balance sheet window dressing,” said SEC Chairman Mary Schapiro during an open meeting to issue the proposals. “Under these proposals, investors would have better information about a company’s financing activities during the course of a reporting period, not just a period-end snapshot.”

The proposed disclosure requirements would focus on financing arrangements that generally mature in a year or less, such as commercial paper, repurchase agreements, letters of credit, promissory notes, and factoring. Because such arrangements can fluctuate significantly throughout a reporting period, the amounts reported at the end of a period don’t necessarily reflect what took place throughout the period, the SEC said.

Companies currently are required to disclose short-term borrowings at the end of a period, but only bank holding companies are required to disclose some average and maximum figures to give a sense for what took place throughout the period, the SEC said. The proposed additional disclosures would not only give a better understanding of funding needs and financing activities, but would also address concerns that companies may mask their actual leverage by reducing short-term borrowings before financial reporting dates.

In addition to the proposed new disclosures, the SEC is also published an interpretive release that reminds companies of what they’re already required to say in MD&A about liquidity and funding. The release makes it clear that companies are not allowed to use financing structures, whether on or off the balance sheet, to mask the true financial condition of the company. The release also emphasizes that leverage ratios and other financial measures in filings must be calculated and presented in a way that doesn’t obscure the company’s leverage profile or reported results.

Schapiro said the SEC is not suggesting companies are wrong to engage in legitimate measures to manage liquidity. “Indeed, they may reflect the best financing alternatives available to a company,” she said. “But investors should have the tools to better understand how companies finance their businesses and how much risk they take on through borrowings that, simply because of timing, do not show up on the balance sheet.”

The SEC will collect comments on the proposals for at least 60 days.