Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Dear Mr. Katz:
The undersigned wishes to comment on behalf of The Boeing Company (the "Company") on the proposed rule issued by the U.S. Securities and Exchange Commission (the "Commission") on May 10, 2002, entitled "Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies." We appreciate and applaud your efforts to ensure adequate disclosure is contained in financial reports filed with the Commission. However, we wish to convey some concerns about the proposed rule. Our concerns involve (1) the scope of the proposals, (2) lack of clarity in the two criteria that define a critical accounting estimate, (3) quantification of sensitivity measures, (4) required disclosure of items which may result in competitive harm, and (5) MD&A disclosures.
Scope of the Proposals
We believe the proposed rules should not require the comparison of selected accounting methods to other alternative methods, but rather, should focus on the reasons for selection of the chosen methods and rejection of others. The proposed rules seek comment on certain issues surrounding the scope of items subject to disclosure in MD&A. Included in those issues are questions regarding whether disclosure should be required for the impact of alternative accounting policies acceptable under GAAP that were not applied by the company, and more specifically, for the impact of alternative accounting policies used in the company's industry, but not applied by the company. Generally, we believe that when a company has a choice among accounting policies that are acceptable under GAAP and/or industry practice, the company should determine which method is preferred, and apply the preferred policy. Hence, we believe a discussion comparing the impact of the applied method of GAAP to other acceptable alternatives, which are presumably less preferable, is not constructive.
Also, significant difficulties could be encountered in preparing such discussion. Certain industries are comprised of only a handful of participants, and those participants are not necessarily all U.S. registrants. For example, the Company's commercial airplanes business has just one other significant participant in its industry, and that participant does not publicly file its financial reports. Hence, it may not be meaningful or practicable to gather data about accounting methods employed by others in an industry. Further, a company's systems may not be designed to capture and report data on the basis of other accounting methods, and costly system adjustments or manual processes may be necessary.
For these reasons, rather than centering MD&A discussions on a comparison of selected accounting methods to other acceptable alternatives, we believe a more useful discussion would be based on the reasons for selection of the chosen methods, and rejection of other methods.
Lack of Clarity in the Two Criteria that Define a Critical Accounting Estimate
The proposed rule indicates two criteria required to be met for an accounting estimate to be considered "critical." First, it must require assumptions about a matter that is "highly uncertain" at the time the estimate is made. A matter is considered "highly uncertain" if it is dependent on events "remote in time" that may or may not occur, or it is not capable of being readily calculated from "generally accepted methodologies" or derived with "some degree of precision" from available data. We believe the phrases "highly uncertain," "remote in time," "generally accepted methodologies," and "some degree of precision" are vague, and should be clarified. We recommend the issuance of supplemental guidance that would assist a registrant in determining when the above characteristics exist in a particular accounting estimate. Providing examples of accounting estimates that are and are not considered "highly uncertain," with explanations as to why and why not, would be especially helpful.
The second criterion called for in determining whether an accounting estimate is considered "critical" is that the company "reasonably could have used" different estimates for the accounting estimate in the current period, or changes in the accounting estimate are reasonably likely to occur from period to period, and those different estimates or changes would have a material impact on the company's financial condition or results of operations. We believe that companies should have robust, consistently applied processes surrounding the development of significant accounting estimates, and those processes should produce results that are reasonable. In light of this, we believe that the development of reasonable estimates would generally not produce a range of reasonable alternatives that are sufficiently different from one another, such that they could have a material impact.
Quantification of Sensitivity Measures
The proposed rule would require disclosure of a quantitative measure of sensitivity to change for each critical accounting estimate. Recognizing that many critical accounting estimates incorporate the use of multiple assumptions and factors, we believe that compliance with this rule could prove overly burdensome for registrants, and the resulting disclosures may not provide information that is particularly insightful to financial statement readers.
Required Disclosure of Items Which May Result in Competitive Harm
Also contained in the proposed rule are requirements for disclosure of critical accounting estimates and examples of such disclosure. The sample disclosures include many specific details underlying the estimates. For critical accounting estimates that relate to items subject to negotiation (such as asset valuations, litigation accruals, and tax accruals), similarly detailed disclosures would likely result in the publication of sensitive information that may competitively harm the registrant. Accordingly, we suggest that the disclosure requirements be focused more toward the registrant's process for developing critical estimates, as opposed to divulging specific information that could be competitively harmful.
As mentioned above, the proposed rule contains sample disclosure of critical accounting estimates. For each of the three example disclosures provided, the discussion comprises at least one letter-size page of text. According to the proposed rule, each registrant would be expected to have approximately three to five critical accounting estimates requiring disclosure. Hence, MD&A disclosures could reasonably be expected to expand by approximately three to five pages for most registrants. The high volume of information, combined with the meticulous level of detail included therein, may be overwhelming to the typical financial statement reader. Hence, we believe that the sample disclosures in the proposed rule should be revisited to eliminate certain non-critical details, and provide a more streamlined discussion.
Further, we recommend the examples of proposed disclosure be enhanced by the inclusion of additional illustrations, addressing critical accounting estimates applicable to a variety of estimation methods and a variety of industries. Such additional guidance could be provided in a format similar to the question-and-answer format of many Staff Accounting Bulletins ("SAB"), including SAB No. 101 - Revenue Recognition, as an example.
We appreciate your attention to this important matter.
James A. Bell
Vice President and Corporate Controller
The Boeing Company