900 19th Street, NW, Suite 400, Washington, DC 20006
Phone: (202) 857-3100; Fax: (202) 296-8716

May 1, 2000

Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Release Nos. 33-7793 and 34-42354
Proposed Section 229.302 (Item 302) Supplementary Financial Information
File No. S7-03-00

Dear Mr. Katz:

America's Community Bankers appreciates this opportunity to comment on the proposed amendments to Regulation S-K. America's Community Bankers represents the nation's community banks of all charter types and sizes. ACB members pursue progressive, entrepreneurial and service-oriented strategies to benefit their customers and communities.

The proposed amendments would create a new Item 302(c) in Regulation S-K intended to clarify and expand current disclosure with respect to valuation and "loss accrual" accounts. The new item is patterned after the current schedule disclosure for valuation and qualifying accounts and reserves described in Rule 12-09 of Regulation S-X (17 CFR Section 210.12-09). This schedule discloses beginning and ending account balances as well as activity, including adjustments, during the year of individually significant valuation and qualifying accounts and reserves. The proposed amendments would also add a new Item 302(d) to Regulation S-K to provide more information with respect to tangible and intangible long-lived assets and their depreciation, amortization, and depletion schedules.

These proposed amendments are part of a series of actions taken by the Commission to address the problem of "earnings management" by public companies. Specifically, the proposed amendments are intended to increase the transparency of the financial statements with respect to valuation and loss accrual accounts and fixed and intangible assets. ACB is strongly supportive of the Commission's efforts to eliminate misleading and fraudulent earnings manipulation. We also concur that achieving transparency in the financial statements is, as a general matter, a worthy goal, but the Staff's efforts must be weighed against other legitimate concerns of the registrant.

ACB is very concerned that the disclosures being proposed will impose significant cost burdens, particularly on small financial institutions, while providing information that may not be useful to investors, but that may be used by third parties to the detriment of the business. The kind of detailed disclosure that appears to be envisioned under proposed Item 302(c) could be used against the registrant in litigation and other adversarial proceedings with claimants and government agencies. Proposed Item 302(d) requires a disaggregated reporting of goodwill that will add significant filing costs without providing any significant increase in useful investor information. Furthermore, the Financial Accounting Standards Board is currently considering amendments to the financial presentation of these balance sheet items. It would be unfortunate to require two different sets of changes for these components

Proposed Item 302(c)

Currently, Rule 5-04 of Regulation S-X (17 CFR 210.5-04), which is applicable to financial institutions, requires the registrant to file the Rule 12-09 schedule -- as "Schedule II" -- for each period for which an audited income statement is required to be filed. The proposal would clarify, as well as "reposition", disclosure of valuation and loss accrual accounts (including reserves) from a Regulation S-X schedule to a separate item within Regulation S-K, captioned Section 229.302 (Item 302) Supplementary Financial Information. This repositioning is intended to increase transparency because Regulation S-K disclosure is "more conducive to detailed narrative explanation that better communicates the financial reporting effects of changes in facts and assumptions." Proposed Item 302(c) also sets forth a list of loss accrual and valuation accounts for which this kind of explanation must be provided.

ACB objects very strongly to requiring our members being required to provide a detailed narrative discussion on various accounts included in the list. These include: liabilities for environmental remediation; contingent income and franchise tax liabilities; product warranty liabilities; and probable losses from pending litigation. Not only is the valuation of such accounts inherently subjective and difficult to quantify, but a detailed narrative discussion of the assumptions, estimations, and predictions underlying such valuations is inherently dangerous. The literal language of the release and the proposed instructions would require registrants to reveal detailed narrative information that could be against their interests and used against them in controversies with the government or the plaintiff's bar. As a result, it may be that a plaintiff's attorney would be less likely to settle a product liability or environmental remediation case or that an IRS agent may be encouraged to go on a "fishing expedition". ACB firmly believes that registrants have a legitimate right of confidentiality that the proposed disclosures fail to respect.

The release indicates that Schedule II is being replaced by the proposed Item 302(c) because there is a lack of consistency and comparability among filings because of a lack of agreement as to what constitutes a valuation or reserve account and because of varying approaches to combining individually significant account balances. In addition, the Staff believes that the failure of the accounting literature to define the term "reserve" has caused the Schedule II disclosures of reserve activity to lack comparability. It is not clear to ACB, however, why the diversity in current Schedule II reporting cannot be remedied by the less drastic approach of clarifying and expanding, if necessary, the instructions in existing Rule 12-09.

Proposed Item 302(d)

This proposed item would be added to provide detailed information with respect to property, plant, and equipment and intangibles and related depreciation, amortization, and depletion accounts. This information would be provided by means of a schedule similar to that required by proposed Item 302(c) and formerly required to be reported by certain registrants on Schedules V and VI of Rules 12-06 and 12-07, respectively, of Regulation S-X (17 CFR 210.12-06 and 12-07). The staff notes that the use of these schedules was rescinded by Financial Reporting Release No. 44 because it was the view of the majority of commenters that the schedules were duplicative of the information already appearing in the financial statements. It appears to have been only financial analysts that objected to the rescission of the schedules.

The staff, however, has now reconsidered the principal redundancy noted by Financial Reporting Release 44 - the reporting required by APB Opinion 12 with respect to fixed assets and their depreciation and amortization. It is now the view of the Staff that, because the disclosures required by APB 12 may be satisfied with general descriptions, the effect of the rescission of Schedules V and VI has been the "loss of some key analytical data". The issue to be decided with respect to the additional disclosures to be required under proposed Item 302(d) with respect to intangibles, as well as plant and equipment, is whether there is sufficient incremental benefit in the resurrected disclosures to be worth the additional costs to the registrant.

Upon initial review of Schedules V and VI, the Commission decided in Rule 44, having been influenced by the complaints of registrants, that the cost of the additional disclosure was not justified. Upon further review, the Commission has now decided, based to some extent on the complaints of analysts, that the schedules should be reinstated, with the addition of intangibles disclosure. While analysts perform an important function, they are voracious consumers of data, who are willing to spare no expense of the registrant to obtain all minutiae possible. ACB believes that the prior concern of the Commission, stated in Release 33-7055, Financial Statements of Significant Foreign Equity Investees and Foreign Businesses of Domestic Issuers and Financial Schedules (April 26, 1994) [59 FR 21814], which first proposed rescinding Schedules V and VI along with several other schedules to streamline the filings of domestic issuers in conformity with the filings required of foreign private issuers, should be borne in mind with respect to their reinstatement. "While some analysts may use the more disaggregated data that includes retirements, transfers, currency exchange rate effects, and similar activity in the separate accounts, the data does not appear to be sufficiently useful to justify the cost incurred by many registrants in gathering this data and having it audited" (59 FR at 21818).

Potential For Confusion

As noted in the current Release, "the Commission has initiated a series of coordinated actions to address issues related to earnings management." ACB believes that the volume of Commission activity intended to counter earnings management and create financial statement transparency is such that diversity in disclosure may actually result because of the inability of registrants to master it all. For example, it is unusual that three Staff Accounting Bulletins have been issued in the second half of 1999 and all of them address aspects of earnings management: SAB 99, Materiality (August 12, 1999); SAB 100, Restructuring and Impairment Charges (November 24, 1999; SAB 101, Revenue Recognition in Financial Statements (December 3, 1999). In addition, clarification under SAB 101A was published on March 24, 2000.


ACB strongly objects to proposed Item 302(c) because the required disclosure conflicts with the legitimate need of registrants to keep certain information confidential, particularly as it relates to tax disputes and contract and tort litigation. Proposed Item 302(d) is also objectionable because the increased volume of detailed disclosure, particularly with respect to the goodwill account, while it may be meaningful to some professional analysts, will increase costs to registrants without increasing the usefulness of the information provided to investors in general. Given the volume of material published recently by the Commission related to earnings management, it would be prudent to give registrants time to digest it and to see if additional disclosures are, in fact, needed.

ACB is particularly concerned about the burden that the volume of new required disclosures is placing on community institutions. We request the opportunity to work with the Commission to address the needs of the community-based institutions with respect to the issues raised by the proposed amendments. So that ACB may provide additional information or clarification of the issues raised in this submission, please contact the undersigned at 202-857-3125.

Very truly yours,

James E. O'Connor
Tax Counsel and Accounting Specialist


America's Community Bankers

Responses to Requests for Comments in
Releases Nos. 33-7793 and 34-42354 File No. S7-03-00

Question 1: Are there other specific loss accrual or valuation accounts that should be added to the list of accounts identified within proposed Item 302(c)?

Response: ACB's view is that no additions should be made to the list of accrual and valuation accounts. It appears to us that the proposed list can be read to include almost any liability. Instead, as indicated in our comments, the goals of the Commission could be better achieved, without the burdens on registrants that the proposed amendment would create, within the context of current Schedule II. The issues raised in the release would be better resolved by clarifying the instructions to the current Schedule II rather than requiring that they be addressed under a new form of disclosure.

Question 2: 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?

Response: As the Commission has expressed in other contexts (e.g., SAB No. 99), although the use of triggering percentages provides some certainty for the registrant, they may not reduce the diversity or enhance the clarity of financial statements. Nevertheless, if the Commission does reposition Regulation S-X disclosure to Regulation S-K, the existing GAAP minimum percentages should remain applicable. For example, the five percent threshold that must be met before an individual component is required to be broken out within a caption should be retained.

Question 3: 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?

Response: Provided the proposed data is material, it is currently being reported in MD&A. Nevertheless, the most sensible placement for required reporting of the proposed data would be in a schedule, identified as unaudited, reported under Article 12 of Regulation S-X. If the proposed data is to be reported as an item under Regulation S-K, however, it should not be required to be included in any of the following: Part I of the registration statement; a periodic report required to be filed under the Securities Exchange Act of 1934; a report required to be included in a proxy solicitation.

Question 4: Should presentation of the proposed data be limited to the Form 10-K?

Response: Presentations should be limited to the Form 10-K. Moving to the Form 10-Q statement would automatically multiply the compliance burden.

Question 5: 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?

Response: ACB believes that the proposed disclosure, if adopted, should be restricted to financial institutions with total assets of $500 million or more. This would provide symmetry with other provisions that use this dollar floor to determine whether a financial institution qualifies for various kinds of relief as a "small bank". For example, under FDIC regulations insured depository institutions with less than $500 million of total assets are not required to have their financial statements audited by an independent public accountant. (12 CFR Section 363.1). Under the Internal Revenue Code banks with assets whose total adjusted bases do not exceed $500 million are permitted to use the reserve method of tax accounting (Section 585(c)(2)).

Question 6: 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.

Response: ACB strongly requests that disclosures about loss accruals related to litigation and tax matters be dropped from the proposed Item 302(c). As stated in our comments, ACB is very concerned that the detail of the proposed disclosures with respect to litigation and tax matters will harm financial institutions. With respect to matters in litigation, guidance on the appropriate level of disclosure has been provided in FASB 5, Accounting for Contingencies; FASB Interpretation 14, Reasonable Estimation of the Amount of a Loss; and Item 103 of Regulation S-K. The fact that registrants typically record minimum litigation liabilities under the authority of FASB Interpretation 14 is necessary to avoid compromising their litigating position. The proposed disclosure could make it appear that a company is conceding an issue or willing to settle at an inflated amount and, thus, reduce the likelihood of a favorable settlement to any legal controversy.

With respect to tax accruals, extensive disclosure is required by FASB No.109, Accounting for Income Taxes, as well as Rule 4-08(h) of Regulation S-X. In fact, current financial statement disclosure, when reconciled with the tax return, often provides a road map for IRS agents. The proposed disclosure could eliminate all guesswork for an agent by requiring narrative discussions of the judgments that are permitted to be made under FASB No.109 with respect to deferred tax asset valuation allowances

Question 7: Should the disclosures concerning valuation and loss accrual account activity be required when interim financial statements are presented?

Response: The kind of detailed disclosure required by the proposed amendments is at odds with the format and level of disclosure otherwise provided in interim financial statements. Only material changes occurring in the interim period should be required to be disclosed.

Question 8: 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?

Response: For the reasons given in response to question 7, the proposed disclosures under Item 302(d) should not be required to be made in interim financial statements.