April 17, 2000
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, N.W.
Washington, DC 20549
Reference: File No. S7-03-00
SEC Release Nos. 33-7793; 34-42354;
Supplementary Financial Information
Dear Mr. Katz:
We are pleased to respond to the Commission's request for comments on the proposed rule on Supplementary Financial Information.
We support the efforts of the Commission and others to address earnings management issues and to promote transparency in financial reporting. We also support the recent guidance published by the staff to address these issues, particularly Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges, Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, and the new rules on audit committee disclosure. We believe that this recent staff guidance together with adherence to the existing requirements of generally accepted accounting principles and SEC rules and regulations, particularly Item 303 of Regulation S-K (Management's Discussion and Analysis), will reduce earnings management issues and improve transparent financial reporting. However, we believe that the additional detailed information on valuation and loss accrual accounts required by this proposal is not necessary. We believe that the existing requirements of generally accepted accounting principles and existing SEC rules and regulations provide investors and other users of financial statements with sufficient information to evaluate and understand a company's results of operations, financial condition, and liquidity.
The Commission has issued SAB 100 and SAB 101 to address reporting and disclosure concerns regarding revenue recognition and restructuring charges. Some of the significant disclosure requirements under this proposal appear to have already been accomplished with the issuance of these SABs. The following discussion illustrates duplicative requirements between that guidance and this proposal.
Due to the Commission's recent issuance of the above guidance and other initiatives aimed at curbing earnings management and improving transparency of financial reporting, additional disclosure requirements would not appear warranted until the Commission has fully and sufficiently evaluated the impact of its recent efforts.
Similarly, the proposal requires detailed disclosures of liabilities for environmental costs and discontinued operations costs although extensive disclosure guidance on these contingencies is provided in Staff Accounting Bulletins and generally accepted accounting principles. Staff Accounting Bulletin No. 92, Accounting and Disclosures relating to Loss Contingencies, and Statement of Position No. 96-1, Environmental Remediation Liabilities already provide extensive guidance on the disclosures that should be provided for environmental liabilities. Staff Accounting Bulletin No. 93, Accounting and Disclosures Regarding Discontinued Operations, and APB Opinion No. 30, Reporting the Results of Operations- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions provide comprehensive guidance on disclosures for material contingent liabilities associated with discontinued operations.
As noted in the proposal, certain information required is duplicative of existing requirements under generally accepted accounting principles. Disclosure of the net change in the valuation allowance recognized for deferred taxes is required by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Accounting Principles Board Opinion No. 12, Omnibus Opinion - 1967, requires disclosure of major classes of depreciable assets, the related accumulated depreciation and amortization account balances, and the method(s) used in computing depreciation of major classes of depreciable assets. Information on the allowance for doubtful accounts and notes receivable and inventory valuation allowances is already provided under the existing requirements of Schedule II. Also, the property, plant and equipment disclosure was previously eliminated because the information was considered to be redundant to information required in the financial statements.
Much of the other information requested by the proposal goes significantly beyond the existing requirements of generally accepted accounting principles. It is not clear that investors and other users of financial statements want or need this detailed information nor do the proposal's recommendations seem to be consistent with the Commission's past efforts to achieve disclosure simplification. Also, the proposal to disclose potentially confidential information on litigation and tax contingencies could be extremely harmful. Further, we are not aware of what earnings management issues the Commission has identified concerning unamortized premium or discount, salvage value, or similar items.
We believe that some of the significant concerns with Schedule II would still exist under the proposed rules. We acknowledge that confusion exists on the definition of a "valuation or reserve account." However, the proposal does not define a "valuation and loss accrual account." Therefore, the same confusion will exist unless the Commission defines a "valuation or loss accrual account" and clarifies what types of liabilities are not loss accruals.
The following discussion indicates our views on specific questions in the proposal.
1. Do you agree that the information to be provided under the proposed disclosure requirements already is collected as part of the financial statement preparation and related independent audit process?
As discussed above, some of the information requested by the Commission's proposal may already be collected as part of the financial statement preparation process in order to comply with existing generally accepted accounting principles and existing SEC rules and regulations. But, we believe that a significant amount of the other required information in the requested level of detail is not routinely collected.
2. Are there other specific loss accrual or valuation accounts that should be added to the list of accounts identified within proposed Item 302(c)?
As we discussed above, we do not believe that the additional detailed information required by this proposal is necessary for investors and other users of financial statements. We believe that existing requirements under generally accepted accounting principles and SEC rules and regulations provide investor and other users with sufficient information. The reasons for the detailed information required under the proposal are not sufficiently explained or supported in the proposal. In response to your specific question, if the proposal does become a rule, we are unable to determine if any other accounts should be added since a definition for "loss accrual or valuation account" is not provided in the proposal.
3. Should specific percentage tests be used to trigger specific account disclosures within the proposed rules? For example, should disclosure of loss accrual account activity be required only when the balance sheet item and change during the period exceeds a certain pre-established numerical threshold (for example, 5% of total assets or 3% of pretax income)? If so, what is an appropriate threshold?
In any final rule that the Commission may adopt, we strongly believe that quantitative thresholds should be provided. We suggest you only require disclosure when the individual account balance and associated change exceed at least 10% of total assets or liabilities or stockholders' equity.
We believe that information on property, plant, and equipment and intangible assets described under proposed Item 302(d) should only be provided when individual balances exceed at least 25% of total assets, as required by the old schedules.
4. Should the placement of the proposed data be moved within MD&A or to some other section of the filing to enhance the prominence of the disclosures?
No. We believe that the existing approach to placement of financial statement schedules in the Exhibits and Financial Statement Schedules section of the filing should be continued. Providing this information in other locations could confuse investors as to the importance of this information, particularly since the information would be unaudited. Also we understand that the reason for repositioning the disclosures of valuation and loss accruals is to encourage registrants to provide a better narrative discussion about the assumptions underlying the valuation or loss accrual account and the nature of changes in those assumptions. We do not believe that merely repositioning the data to MD&A or another separate section within S-K will accomplish this goal. Further, the repositioning will remove the audit requirement, which seems inconsistent with the goal of providing investors with higher quality information.
5. Should presentation of the proposed data be limited to the Form 10-K?
Yes. Since only condensed financial information is required on an interim basis and supplemental schedules are not required under the existing Form 10-Q requirements, we see no reason why this detailed information should be provided on an interim basis. Also, the costs of preparing this information would certainly not seem to justify the benefit of providing the information on an interim basis. Further, registrants may not be able to prepare this information within the short quarterly reporting timeframe.
6. Should the disclosure requirements be restricted to those registrants that exceed a certain size or meet some other threshold? If so, what would be the appropriate threshold?
Since supplemental financial statement schedules are not currently required under Regulation S-B, we believe that small business issuers should continue to be exempt from these disclosure requirements. Also, if any final rule applies to foreign private issuers (both Item 17 and Item 18) as contemplated in the current proposal, we believe that the final rule should clarify that the disclosures can be provided in the foreign generally accepted accounting principles of the primary financial statements or United States generally accepted accounting principles, similar to existing financial statement schedules. If foreign generally accepted accounting principles are used, we do not believe that this information should be reconciled to United States generally accepted accounting principles, since this would significantly expand the current reconciliation requirements. For your information, the reference to "contingent income and franchise liabilities recorded pursuant to FASB Statement 5" in proposed Item 8C of Form 20-F may not be appropriate for foreign filers who provide the supplementary financial information in accordance with foreign generally accepted accounting principles.
7. Are there circumstances where registrants may appropriately exclude disclosure about loss accruals related to litigation because of concerns about confidentiality while still conforming with GAAP? If so, please describe such circumstances in detail.
Due to confidentiality surrounding tax and litigation accruals, we believe these contingencies should not be included in any final rule that the Commission may adopt. We believe that the current requirements of generally accepted accounting principles (SFAS No. 5 and No. SFAS 109) and Regulations S-X and S-B provide investors with sufficient information to evaluate the risks and uncertainties of these contingencies.
8. Should the disclosures concerning valuation and loss accrual account activity be required when interim financial statements are presented?
No. See response to No. 5.
9. Should the disclosures concerning changes in property, plant, equipment, and intangible assets and related accumulated depreciation, depletion, and amortization be required when interim financial statements are presented?
No. See response to No. 5.
10. We request data to quantify the costs and value of the benefits identified. In particular, we request data and analysis on whether the new proposal would result in a major increase in costs or prices for consumers or individual industries, or significant adverse effects on competition, investment, productivity, innovation, or small business.
We have not surveyed our clients to obtain information related to the cost of preparing this information. We have recommended that they respond to you directly with their cost-benefit analysis. But, we are concerned that the information used in the proposal from one diversified, multi-divisional registrant may not be representative of other registrants' varied experience. We would encourage you to undertake a more extensive study to more completely estimate the costs of this proposal if the comment process does not provide this information.
In any final rule that the Commission may adopt, appropriate transition guidance should be provided. We believe that any disclosures required should begin with annual reports filed after December 31, 2000 and that the information to be disclosed should begin only for years ending after December 15, 2000.
In summary, we do not believe that the additional detailed information required by this proposal is necessary for investors and other users of financial statements. We believe that the existing requirements of generally accepting accounting principles combined with the SABs recently issued by the Commission and previously existing SEC rules, regulations, and guidance, provide appropriate and sufficient requirements regarding disclosures for the valuation and loss accrual accounts noted in the proposal. Also, the proposal did not provide clear support that financial statement users want or need the additional information required by this proposal. Notwithstanding our views, if the Commission nonetheless determines to proceed with a final rule, we urge you to seriously consider the following points in adopting the rule:
We would be pleased to discuss our comments with you. Please call Robert Kueppers at (203) 761-3579.
Deloitte & Touche LLP