July 19, 2002
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
RE: File No. S7-16-02
Dear Mr. Katz:
Microsoft appreciates the opportunity to comment on the proposed rule, "Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies." We support the SEC's goal of enhancing investors' understanding of the application of companies' critical accounting policies and agree with the first element of the proposed disclosure, which includes the identification and description of critical accounting policies, the methodology and assumptions used in the accounting estimates resulting from the application of those policies, and a discussion, if applicable, why the accounting estimate is reasonably likely to change in future periods. However, we disagree with the second and third elements of the proposed disclosure, the requirement for quantitative disclosures to demonstrate sensitivity and the requirement to disclose in Management's Discussion and Analysis whether or not senior management has engaged in discussions with the audit committee about the critical accounting estimates.
We are concerned that a requirement for quantitative disclosures to demonstrate sensitivity could reduce investors' understanding of the application of companies' critical accounting policies. As stated in the proposed rule, "A well-prepared MD&A discussion focuses on explaining a company's financial results and condition by identifying key elements of the business model and the drivers and dynamics of the business, and also addressing key variables." In our opinion, the first element of the proposed disclosure provides the necessary framework for addressing key variables with respect to critical accounting policies and the accounting estimates resulting from their application. On the other hand, a requirement such as having a company disclose the impact of altering at least twice a material assumption underlying each critical accounting estimate will result in a host of "what-if" scenarios.
Microsoft agrees that senior management should discuss the company's critical accounting estimates with the audit committee of its board of directors, however, we believe the proposed requirement to disclose whether or not senior management has engaged in discussions with the audit committee about the critical accounting estimates is duplicative of current requirements and would also place undue emphasis on discussion of this item in relation to the discussion of other items with the audit committee. Item 306(a)(1) of Regulation S-K indicates that the audit committee must state in the audit committee report whether the audit committee has reviewed and discussed the audited financial statements with management. While we concur that this item relates to the financial statements generally, and not Management's Discussion and Analysis particularly, it has been our experience that this discussion inherently includes a discussion concerning the process used by management in formulating particularly sensitive accounting estimates.
If you have any questions, please contact me at (425) 703-6094.
Director, External Reporting