c/o: Siemens AG
80333 Munich, Germany
July 17, 2002
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Proposed Rule: Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies
Dear Mr. Katz:
The following comments are the result of discussions among corporate accounting executives from the following German companies listed in the U.S.A.:
Daimler Chrysler AG Infineon AG
Deutsche Bank AG SAP AG
Deutsche Telekom AG Schering AG
This group of people (the Group) meets on a regular basis to discuss and respond to accounting pronouncements in the U.S.A. We appreciate the opportunity to provide the Commission with our comments on the Proposed Rule: Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies ("Proposed Rule") Release Nos. 33-8098 and 34-45907.
We certainly do support the Commission's goals and efforts towards improving the transparency of financial disclosures with respect to Critical Accounting Policies and significant accounting estimates. The objective here should be to address accounting estimates that require significant management judgement and that are important to the financial condition and results of operations of a company. This objective was already made clear in Release FR-60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies." However, the Proposed Rule significantly differs from FR-60 in that the Proposed Rule requires disclosure far in excess of that in Release FR-60. The benefits of such additional disclosure to investors must be evaluated against the significant incremental burden and cost to companies.
These additional requirements would also seem to contradict the Commission's objective of accelerated filing deadlines (Release 33-8089, "Acceleration of Periodic Report Filing Dates"), and, in consideration of shortened reporting periods, could jeopardize the quality of the MD&A disclosures.
We would like to discuss our concerns in detail in the following paragraphs:
Accounting Policy Disclosures:
The Proposed Rule would require additional MD&A disclosure specifically regarding the effects of a change from one accounting policy to another acceptable accounting policy under US GAAP. It is our opinion that such additional disclosure is not necessary. APB 20 already requires sufficient disclosure of changes in accounting principles and estimates.
Discussion of alternative accounting policies should not be required with respect to the disclosure of Critical Accounting Policies. Under U.S. GAAP, management is required to use the "best estimate" within a range of alternatives. A discussion of these alternatives could seem to confuse rather than inform investors, and may even result in unwarranted legal liability. The disclosure of Critical Accounting Policies should focus on the adopted policies.
In addition, the new Critical Accounting Policies disclosure should be intended to describe the critical accounting policies and estimates of the company itself but not in comparison to the respective competitive industry. Such a discussion could imply the imperfect application of U.S. GAAP by competitors. APB 22 already requires disclosure on accounting policies that are unique to a company's industry. Again, the additional requirement would considerably expand the MD&A disclosures, especially for companies which operate in a variety of industries.
Disclosures on Critical Accounting Estimates:
Definition of Critical Accounting Estimate
The proposed definition of a critical accounting estimate as it stands in the Proposed Rule is too broad. It should provide more guidance with respect to the interpretation of "highly uncertain". In our opinion, a company would have to make assumptions about highly uncertain matters if such matters are subject to (i) volatility, (ii) external factors that can not be controlled internally, (iii) factors which reach far into the future. The application of the final Critical Accounting Policies definition should only lead to a small amount of Critical Accounting Policies for companies that do not operate in volatile industries and especially for companies that are highly diversified.
We object to requiring a general sensitivity/quantitative analysis in the critical accounting estimate disclosures. There are only few instances where such an analysis could provide useful information. Where management judgment is a critical factor, but such judgment must not be applied to make a clear decision between alternatives, sensitivity analysis is not relevant. In addition, sensitivity analysis can indicate a degree of precision that does not really exist and would therefore mislead investors. A qualitative description of the process involved in making such estimates (instead of a quantitative sensitivity analysis) would better serve investors' understanding of the complexity involved in such estimates. Furthermore, the disclosure of alternative accounting scenarios invites challenges towards results that were disclosed as alternatives but not recorded at the time.
Most estimates are based on a variety of assumptions, some of which may be dependent on others. In many cases it will be difficult to identify one material assumption, and disclosing a range of estimates may in many cases prove to be misleading. If it is not possible to calculate a range, the company would be forced to perform sensitivity analyses for various assumptions of a critical accounting estimate. This can lead to having to continually explain why an estimate or an assumption was not used. Such constant second-guessing of management judgment would only cast more confusion and uncertainty.
Past Material Changes
The Proposed Rule would require specific disclosure regarding past changes in critical accounting estimates. The members of the Group except for one member believe that APB 20 already provides sufficient guidance for the accounting and disclosure of changes in accounting estimates. Under the Proposed Rule, companies would have to include the proposed discussion of material changes in accounting estimates during the last three years. A three-year period may not be appropriate to the extent that it would include potentially irrelevant information that is associated with specific transactions that have already been closed.
The Group members except for one member believe that disclosure of Critical Accounting Policies should be limited to the most important estimates affecting results of operations and financial positions on a company-wide basis. Additional discussion on a segment level could result in excessive qualitative and quantitative disclosure which does not benefit the investor. A company with a large number of segments conducting business in different markets and technologies should not be forced to provide disclosure by segments; such a company will have fewer Critical Accounting Policies since it benefits from a diversified business risk portfolio, but would be forced to provide voluminous disclosures.
As an example: A company that has five critical accounting policies that affect two segments differently, and each segment has two material but different assumptions, would be required to provide twenty separate sensitivity analyses on a segment level alone, in addition to those required on a consolidated level. It is doubtful that such disclosure will benefit the investor, especially since he/she has no knowledge of any interdependencies when attempting to aggregate the quantitative information.
Especially in cases where a sensitivity analysis results in a wide range of outcomes, disclosure of such information, especially when broken down by segments, could prove harmful to registrants by undermining negotiating power and providing sensitive information to competitors.
Initial Adoption of Accounting Policies:
We do not believe that additional disclosures should be required in the Proposed Rule. Current disclosure requirements already address this matter. Differentiating between disclosures in the notes to the financial statements concerning material accounting principles and additional disclosures in the MD&A of the reason for and the impact of initially adopting critical accounting policies would only lead to confusion for the reader and unnecessarily expand the MD&A.
This is also true of disclosing alternative accounting policies that were not adopted. Additionally, such comparison would only lead to unwarranted pro forma disclosure and seems to contradict the "Cautionary Advice Regarding the Use of "Pro Forma" Financial Information" issued by the SEC in FR 59.
Foreign Private Issuers:
The proposed rule would require foreign companies reconciling from local GAAP to US GAAP to consider critical accounting estimates in connection with both its primary financial statements and its reconciliation to US GAAP. The investor would be required to look simultaneously at both the discussion of the primary effects and the reconciliation and would have to analyze the effects on a combined basis. In particular, the discussion regarding the reconciling items would probably be rather difficult to understand for an investor because it focuses only on differences.
The reconciliation was originally intended to reduce the burden of filing for foreign issuers. However, the Proposed Rules imposes significantly more requirements on foreign issuers that reconcile to US GAAP compared to US companies. For those foreign private registrants, the requirements of the Proposed Rule would have to be performed once for the primary financial statements and again for the US GAAP reconciliation. This may result in excessive information which could be confusing and misleading to investors.
Foreign private issuers are allowed to provide quarterly reports in scope and content as dictated in their home country. The proposed rule generally would not require interim updates for foreign private issuers (but they are encouraged to do so voluntarily). However, if interim information is included in a registration statement, an update becomes mandatory. Despite of the intention that the process should be less burdensome for foreign private issuers, we anticipate that there will be a strong pressure towards a de facto interim update duty.
The Proposed Rule would require disclosure in the MD&A as to whether or not the critical accounting estimates have been discussed between senior management and the audit committee (or else a committee performing equivalent functions.) Such a statement concerning one isolated or specific part of the MD&A could lead to the misunderstanding that the MD&A in total was not presented to the committee.
Independent Auditor Examination
The SEC is asking for comments with respect to independent auditor examination of the proposed disclosures comparable to that under AT §701. Generally, the MD&A should be treated as one document and should not be separated into sections with different treatment by the auditors. A selection of individual topics from the MD&A for auditor examination may lead to the conclusion that the remaining sections of the MD&A are not being reviewed. One member of the Group disagreed with the Group's position that an isolated examination of the proposed disclosures should not be recommended.
Thank you for your consideration of these comments.
on behalf of the aforementioned companies on page 1