May 8, 2000
Jonathon G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, D.C. 20549-0609
Re: File No. S7-03-00
Dear Mr. Katz:
The purpose of this letter is to comment on the Commission's proposed changes to the schedule information provided concerning valuation and loss accrual accounts and the proposed new additional information concerning tangible and intangible long-lived assets and related accumulated depreciation, depletion, and amortization. I represent Commercial Metals Company, a leading manufacturer, recycler and marketer of steel and metal products and related materials and services. The Company is a registrant on the New York Stock Exchange.
We understand and applaud the Commission's efforts and the progress made in the past few years in addressing the attempts by some registrants to "manage earnings". Accounting abuses have competitively disadvantaged those companies who in good conscience consistently follow generally accepted accounting principles, regardless of the impact on current period results. We have several concerns, however, about the proposals included in your file No. S7-03-00.
The proposed Item 302 (c), while well-intended would not reduce the diversity in practice, nor create a level playing field because the list of accounts is subjective and is still subject to wide interpretation and application. This is exacerbated by the absence of a materiality threshold for disclosure. Additionally, we are concerned about the amount of detail that would have to be disclosed about pending litigation and/or other disputes, including environmental remediation, and contractual dispute (loss contracts) negotiations. We believe such detailed disclosure could potentially compromise a company, increasing the likelihood of an adverse outcome in a particular matter which is still pending or in negotiation for settlement. Also, the ability of a financial statement user to understand and appropriately interpret the information disclosed would in many cases be limited based upon the complexity of the facts and circumstances, as well as the legal premises of a particular situation. For example, in the area of environmental contingencies, environmental enforcement agencies at various federal and state levels have not provided consistent enforcement and interpretation of these regulations, contributing to long lag times and hampering management's ability to estimate a particular outcome for a site. Such accounts are, therefore, most meaningfully evaluated on a global basis rather than detailed case by case.
In our opinion, SFAS 5 more than adequately addresses both the parameters for accrual as well as disclosure for a loss contingency. We would therefore recommend that more emphasis and education (if necessary) be focused on the correct and consistent application of SFAS 5, rather than creating new supplemental disclosure requirements for public companies only. Applying the materiality guidance, which the Commission recently issued in SAB 99 to SFAS 5 should also result in more consistent and better disclosures in the financial statements of registrants.
We are also concerned with the proposed new Item 302 (d) concerning property, plant and equipment and related valuation accounts. Our Company is a manufacturer with a significant portion of our assets invested in fixed assets. In order to provide adequate disclosure in our M D & A, we already discuss the major fixed asset investments, disposals and retirements in the context of discussing our business. We do not believe that the additional information which is being proposed will enhance or improve disclosure. We believe the Commission's action in 1995 to rescind this disclosure was well founded then and now. We have not routinely received any phone calls or inquiries regarding this type of information from our investors or the analysts who follow our stock.
Item 302 (d) also proposes disclosure about the registrant's goodwill account. In circumstances where the account balance results from different acquisitions, individual components with different estimated useful lives must be disclosed. We understand that for some acquisitions with material amounts of goodwill, this may be useful to the reader. However, without a materiality threshold, this requirement will again create useless work and increase the costs of reporting for very little value. Our Company, for example, has over the years, acquired several small companies, for which a minimal amount of goodwill has been recorded. Our disclosure of this information would only be distracting and would unnecessarily increase our costs. Again, we believe that existing generally accepted accounting principles adequately address the disclosure needed for goodwill and other intangible assets.
We appreciate the opportunity to provide our comments and hope that you will find them helpful.
Malinda G. Passmore