July 24, 2002

By e-mail: rule-comments @ sec. gov

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Attention: Jonathan G. Katz, Secretary

Re: Disclosure in Management's Discussion and Analysis About the Application of Critical
Accounting Policies - File No. S7-16-02

Ladies and Gentlemen:

We welcome the opportunity to comment on Release Nos. 33-8098 and 34-45097 and International Series 1258 (the "Proposing Release"), which would require disclosure about critical accounting policies and estimates and related information and the initial adoption of accounting policies in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").

These comments have been prepared by members of the Committee on Federal Regulation of Securities and the Committee on Law and Accounting, Section of Business Law of the American Bar Association. A draft of this letter was circulated for comment among members of the Committee on Law and Accounting and the Chairs and Vice Chairs of the Subcommittees and Task Forces of the Federal Regulation of Securities Committee, the officers of the Committee, the members of the Advisory Committee of the Committee and the officers of the Section. A substantial majority of those members of the Committees who have reviewed the letter in draft form have indicated their general agreement with the views expressed. However, this does not represent the official position of the American Bar Association, the Section or the Committees, nor does it necessarily reflect the views of all of those who have reviewed it.

Summary

We share the Commission's goal of improving the transparency of companies' financial disclosure and that full and effective disclosure is a benefit to investors. We also support the Commission's goals of providing more transparent and useful disclosure, to support the needs of analysts and other users of financial disclosures. However, as discussed in our letter, we believe that the burdens that the proposals in their current form would impose on preparers and, in some instances, users of financial information, would outweigh some of the envisioned benefits and present difficult compliance problems.

We have summarized below what we believe are our more important conclusions.

Critical Accounting Estimates. We believe that certain basic information about critical accounting estimates would advance the Commission's goals, but that some of the information proposed to be required would be overly burdensome to prepare and difficult for investors to digest, in part, due to the overly broad definition of "accounting estimate."

Presentation. We suggest that the Commission consider an alternative of requiring certain disclosure about critical accounting estimates in the footnotes to the financial statements rather than in the MD&A.

Initial Adoption of Accounting Policies. We generally agree with the Commission's proposals for disclosure about the initial adoption of accounting policies. However, we generally do not agree that the Commission should require disclosure about the impact of alternative accounting policies that a company could have adopted under GAAP.

Past Changes in Estimates. We believe that disclosure about past changes in estimates - both quantitative and qualitative may be more confusing than helpful to investors.

Senior Management's Discussions With the Audit Committee. We agree with the Commission's proposal in this regard.

Disclosure Relating to Segments. While we are in general agreement with the Commission's proposal to require disclosure of the impact of critical accounting estimates on a company's business segments, we believe that some modifications in the proposals would be appropriate to alleviate the complexity and compliance burdens that the proposals would require in their present form.

Auditor Examination of MD&A Disclosure Relating to Critical Accounting Estimates. We do not support mandatory independent auditor examination of this disclosure.

Quarterly Updates. We generally support the Commission's proposal in this regard.

Foreign Private Issuers. We do not believe that the Commission's proposals should be extended to foreign private issuers. However, we further believe that the Commission should be mindful of the competitive disadvantages to domestic companies that might result from not extending the coverage of the proposals to foreign private issuers.

Safe Harbors for Forward-Looking Information. We believe that the safe harbors for forward-looking information should specifically be extended to the proposed disclosure.

[TABLE OF CONTENTS]

1. III.B. Scope of the Proposals

a. Information Regarding Critical Accounting Estimates.

b. Presentation.

c. Information Regarding Initial Adoption of Accounting Policies.

d. Response to Specific Requests for Comments

1. III.C. Proposed Disclosure about Critical Accounting Estimates

a. Accounting estimates covered under the proposals

b. Identification and description of the accounting estimate, the methodology used, certain assumptions and reasonably likely changes

c. Impact of the estimate on financial conditions, changes in financial position and results of operations

d. Quantitative disclosure

e. Quantitative and qualitative disclosure concerning past changes in the estimate.

f. Senior Management's Discussions With the Audit Committee

2. III.C.6 Disclosure Relating to Segments

a. Response to Specific Requests for Comments

3. III.E. Auditor Examination of MD&A Disclosure Relating to Critical Accounting Estimates

a. Response to Specific Requests for Comments

4. III.F. Quarterly Updates

a. Response to Specific Requests for Comments

5. III.G. Proposed Disclosure about Initial Adoption of Accounting Policies

a. Utility of Proposed Requirements - Generally

b. Disclosure of Estimated Effect of Alternative Accounting Policies Available to a Registrant.

c. Distinctions Between Company Accounting Policies and Policies Followed by Others within Industry

6. III.H. Disclosure Presentation

7. Section III.G and Section V.G Foreign Private Issuers - Section 5.E. of Form 20-F

a. Response to Specific Requests for Comments

8. III.J; VI.F; and VIII.H Application to Small Business Issuers

9. III.K Application of Safe Harbor for Forward-Looking Information

10. IV; VI.H General Requests for Comments

11. VI.C Alternative Regulatory Approaches

12. VI.D Potential Benefits of the Proposed Rules

13. VI.E Potential Costs of Proposed Rules

Captions used in this letter refer to Sections of the Proposing Release, unless otherwise indicated.

1. III.B. Scope of the Proposals

We share the Commission's view of the importance of access by the capital markets to high-quality and transparent disclosures and appreciate the opportunity to comment on these important proposals. We support the Commission's efforts in connection with its initiative to restore confidence in our capital markets and believe certain aspects of the proposals, if implemented, will aid in the Commission in realizing these objectives. On the other hand, we believe that certain aspects of the proposals, if implemented, might not enhance investor's confidence in the capital markets because they might inundate investors with information that could detract from more meaningful disclosures.

a. Information Regarding Critical Accounting Estimates. The Commission has identified three basic elements of the proposed disclosures relating to critical accounting estimates. They are:

• Information that would allow investors to gain a basic understanding of the critical accounting policies and related estimates;

• Information that would allow investors to gain a better understanding of the sensitivity of the results of operations and financial condition to changes in those estimates or their underlying assumptions; and

• Disclosure regarding the degree of oversight of the critical accounting estimates by the audit committee of the company.

As we discuss below, we believe that certain core information regarding critical accounting estimates is appropriate, but that other information may be overly burdensome, both for the companies preparing the disclosures and for investors attempting to digest the information.

b. Presentation. We agree with the Commission that certain core information concerning critical accounting estimates and the initial adoption of accounting policies could aid investors in understanding a company's financial disclosures and consequently in making more informed investing decisions. In addition, we agree that information concerning the initial adoption of significant accounting policies is appropriately presented in the MD&A. However, we suggest that, as an alternative, the Commission consider whether certain of the information regarding critical accounting estimates and the initial adoption of significant accounting policies might be more appropriately included in the footnotes to the financial statements, rather than mandated for inclusion in the MD&A.

We are aware that including some of the proposed disclosure in footnotes to the financial statements raises issues as to the scope and costs of audits and reviews of those financial statements and the coverage of the safe harbors for forward-looking information under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act.

On the one hand, disclosure in the footnotes to the financial statements would subject that disclosure to audit or review by independent auditors. Some of our members believe that this would provide additional protection to investors, particularly since, as discussed elsewhere in our letter, we do not believe that the Commission should mandate examination of MD&A presentations by independent auditors.

However, requiring disclosure about critical accounting estimates in the footnotes to the financial statements invariably would increase the scope and, thus, the costs of audits. Moreover, currently, the footnotes to the financial statements are not covered by the statutory safe harbors for forward-looking statements.¹ (In this regard, if the Commission were to adopt this alternative, we would urge it to consider extending the safe harbors to the footnotes in the financial statements addressing critical accounting estimates.)

Notwithstanding, the foregoing, some of our members believe that it is important that the proposed disclosure be covered by the statutory safe harbors for forward-looking information due to the highly uncertain nature of the estimates and judgments required to produce this disclosure and the lack of experience of companies in preparing this type of disclosure.

The notes to financial statements are intended as the instrument for the presentation of material information that is essential to the fair presentation of financial position, results of operations and changes in financial position but that cannot be conveniently included on the face of the financial statements. The MD&A, on the other hand, is intended to aid an investor in understanding a company's financial condition, changes in financial condition and results of operations. We believe that much of the information regarding critical accounting estimates as that term would be defined in the Proposing Release, could be viewed as integral to the fair presentation of the financial statements rather than as an aid to understanding the financial statements and, hence, might be more appropriately included in the notes to financial statements, with a cross-reference in the MD&A to those notes.

The Commission suggests in the Proposing Release that the MD&A is a more appropriate place for such information because the MD&A customarily includes "less technical language." However, the information proposed to be required by the Commission is highly technical and, despite the Commission's laudable attempt to the contrary, financial disclosures regarding critical accounting estimates, in all probability, will be complex and technical. Readily understandable, simple and non-technical explanations for complex estimates might not be possible in practice. Investors may have to work to understand critical accounting estimates. There is no substitute for investor knowledge of the company in which an investor invests and the industry in which the company operates.

Accordingly, the notes to financial statements may be the appropriate location for the disclosure of information describing critical accounting estimates as they are components of the financial statements. The notes, under "Summary of Significant Accounting Policies," already describe the accounting policies and many of the estimates will relate to those policies where they can be discussed in context. Consequently, as an alternative, we would suggest that the Commission consider requiring companies to include in the notes to financial statements (preferably as part of the "Summary of Significant Accounting Policies," rather than as an additional note) the following information:

• A description of the critical accounting estimates, including the identification of where and how the critical accounting estimates affect the company's results of operations, financial position or changes in financial position;

• A description of the line items of the various financial statements affected by the critical accounting estimates;

• A description of the methodology underlying each critical accounting estimate;

• A description of the assumptions that are highly uncertain and other assumptions that are material;

• If applicable, a discussion of why the critical accounting estimate is reasonably likely to change in future periods with a material impact on the company's results of operations, financial position or changes in financial position; and

• An identification of the segments of a company's business affected by a critical accounting estimate, including any appropriate disclosure relating to affected segments where a failure to present the information would result in a materially misleading disclosure.

We believe that the Commission could accomplish this alternative by amending Regulation S-X, without further rulemaking omit part on its part or action by the FASB.

On the other hand, we believe that the MD&A would be the appropriate location for the following information:

• Any required discussion of why the company could have chosen estimates in the current period that would have had a materially different impact on the company's results of operations, financial position or changes in financial position;

• Any required discussion of the sensitivity of the company's results of operations and financial position to changes in critical accounting estimates; and

• Any required qualitative and quantitative discussion of the history of changes by management in critical accounting estimates in recent years.

As discussed below, we believe that certain proposed information concerning critical accounting estimates is not appropriately included in a company's financial disclosure.

c. Information Regarding Initial Adoption of Accounting Policies. The Commission proposes to require companies adopting new accounting policies to disclose certain information relating to the new policies, including:

(1) A description of transactions or events giving rise to the adoption of the new policies;

(2) A description of the policies adopted and the method of application of the policies; and

(3) A description of the impact of the adoption of the new policies on the company's financial disclosure.

As we discuss below, we feel that the information proposed to be disclosed regarding initial adoption of accounting policies is fundamentally appropriate.

d. Response to Specific Requests for Comments. We have set forth below our responses to the Commission's requests for comments on the scope of the proposals on this topic set forth in the Proposing Release.

• Should we require additional MD&A disclosure specifically regarding the effects of a change by a company from one accounting policy to another acceptable (and preferable) accounting policy under GAAP?

These disclosures are appropriate for inclusion in the MD&A, and we support their adoption; provided that such additional disclosure is consistent with the comments provided in this letter regarding similar disclosures.

• Should we require in MD&A a discussion of the impact that alternative accounting policies acceptable under GAAP would have had on a company's financial statements even when a company did not choose to apply the alternatives?

No. We do not believe that such disclosure is neither necessary or desirable. The primary goal of the Commission is to increase the transparency of financial disclosures by requiring disclosures concerning critical accounting policies. Requiring disclosure regarding accounting policies that were not adopted would only burden investors with unnecessary and meaningless information and detract from meaningful disclosure.

• What costs would companies incur if they had to prepare disclosure about the effects of alternative accounting policies that could have been chosen but were not?

We can only imagine that the costs would be substantial, particularly in relation to the questionable benefit of the information to investors.

• Beyond a company's initial adoption of those policies, should we require disclosure in MD&A regarding a company's reasons for choosing, and the effects of applying, accounting policies used for unusual or innovative transactions or in emerging areas? Similarly, should we require companies to disclose in MD&A the effects of accounting policies that a company could have adopted, but did not adopt, for unusual or innovative transactions or in emerging areas?

We do not disagree that this information, as it relates to unusual or innovative transactions or in emerging areas, would be beneficial to investors. We believe that an alternative location for these disclosures is the notes to financial statements, rather than the MD&A.

For the reasons stated elsewhere in our letter, we believe that disclosure regarding accounting policies not adopted by a company should not be required in a company's financial disclosure; provided that the failure to adopt a certain accounting policy is not inconsistent with GAAP.

• Should we require more disclosure by companies about their process of making estimates, or in other areas of discretion relating to recognition and measurement in financial statements? If so, please describe in detail.

The Commission should consider requiring a brief description of any regulatory scheme that dictates the formulation of estimates or discretion relating to the recognition and measurement in financial statements. For instance, certain federal regulations relating to financial institutions provide guidelines for the computation of loan loss reserves. A brief description of these regulations should be included as part of the discussion of the methodology employed in the development of loan loss reserves.

• Should we require a discussion in the MD&A of the impact of a company's choice among accounting methods under GAAP that are used in the company's industry (for example, the completed contract and the percentage of completion methods of accounting for construction-type contracts)? Should we require that type of disclosure only where a company uses a method under GAAP that is not generally used by other companies in the industry?

For the reasons discussed elsewhere in our letter, we believe that disclosure regarding accounting policies not adopted by a company should not be required in a company's financial disclosure; provided that the failure to adopt a certain accounting policy is not inconsistent with GAAP. This is not to say that, in some circumstances, management might believe it appropriate to provide a brief explanation addressing the company's reasoning for not employing a material accounting method that is generally used by other companies in its industry, if, in management's judgment, such disclosure might be helpful in aiding an investor's understanding of a company's financial disclosures and their comparability to other companies.

2. III.C. Proposed Disclosure about Critical Accounting Estimates

a. Accounting estimates covered under the proposals

Under proposed Item 303(c)(2)(ii), a "critical accounting estimate"² would consist of an element, item or account in the financial statements that meets two tests:

• a judgment test, -- the registrant has to make assumptions about highly uncertain matters; and

• a volatility test, -- whether the different estimates that could reasonably have been used or changes in the accounting estimate that are reasonably likely to occur in the future would have a material effect on the registrant's financial condition, changes in financial condition and results of operations.

The Proposing Release would require disclosure of a critical accounting estimate even if it were not "most important to the portrayal of the company's financial condition and results", but rather, because the different estimates that could have been used in the current period or changes in the accounting estimate that are reasonably likely in the future³ would result in a material impact on the company's financial condition and results.

While we support the Commission's objective, we are concerned that the information that would be required under the Proposing Release may not achieve it in all respects. Not only is that information complex for registrants and their advisors to understand and comply with, but it has the potential to confuse, rather than inform, investors.

With respect to registrants, the scope and operation of the definition, "highly uncertain matters" should be explained, so that the term does not become a trap for the unwary. For example, if the term "highly uncertain matters" is retained, is the analysis specific or peculiar to the registrant's management or is it one that the business community generally or the companies in the registrant's industry or segment would agree is a highly uncertain matter? The Proposed Release implies an analysis that is specific to the registrant and is beyond difficult and complex, perhaps knowable only by the registrant's management. We believe a definition of "highly uncertain matters" is necessary to enhance registrants' understanding of what is expected of them.

We address below the specific inquiries concerning the proposed definition of "critical accounting estimate".

• Is the definition appropriately tailored?

No, we believe the definition should clearly articulate not only the types of judgments involved, but also whether the estimate affects an item that is itself material to the current period's financial condition or results of operations.

• Does the definition capture the appropriate type and scope of accounting estimates?

We believe the proposed definition, when read together with the definition of "accounting estimate," may be overbroad. The proposed definition of accounting estimate is all-encompassing, covering every aspect of the registrant's financial statements and the process whereby they are prepared. While the criteria to determine critical accounting estimates are narrowly focused, the interplay of the two definitions could easily result in a much larger number of critical accounting estimates than the Commission anticipates.

• Is the definition appropriately designed to identify the accounting estimates that require management to use significant judgment or that are the most uncertain? If not, what other aspects descriptive of that type of estimate should be included?

We respectfully submit that the proposed definitional framework is unnecessarily complex to meet the Commission's objective. Not only is it overbroad as described above, but it introduces new terms that are unfamiliar to registrants and their advisors, and the interrelation of the two can result in a myriad of possible estimates. Therefore, to meet the Commission's objective, we would suggest a simpler approach discussed in the next item.

• Is the definition appropriately designed to identify the accounting estimates involving a high potential to result in a material impact on the company's financial presentation?

No. However, in our view, this inquiry provides the framework for the simpler approach suggested above. If this question were converted into a disclosure item - "Identify and describe the accounting estimates that involve the greatest potential to materially impact the company's financial presentation," - we believe the Commission would achieve its objective. This disclosure item could be accompanied by a requirement to describe the methodologies used, material assumptions and reasonably likely changes. To avoid triggering disclosure of a large number of accounting estimates, the Commission could limit the number to no more than "five accounting estimates with the greatest potential to materially affect the financial presentation." Alternatively, the item could impose a percentage threshold such as the potential to change revenue, operating income or net income or assets or liabilities by 20%, similar to the percentage threshold of Item 3-05 of Regulation S-K for the acquisition of a business.

• Would it be difficult for a company to discern which of its accounting estimates require assumptions about highly uncertain matters? If so how could the proposal better target them?

Without a definition of what "highly uncertain matters" means, registrants and their advisors would not know whether the term is intended to elicit matters peculiar or specific to the registrant or matters which are the most complex, difficult and subjective, but nevertheless common to public companies in general or common to an industry or segment. Moreover, given the novelty of this term and its importance to how the definition would operate, examples in the adopting release followed by a transitional period with interpretive releases would be advisable.

• Should we consider setting a minimum percentage impact or results of operations in the second criterion of the definition or would that be unnecessary because the proposed definition would not capture changes that have an insignificant impact?

As described above under our alternative approach either an upper limit on the number of critical estimates or a percentage threshold would be appropriate. If the Commission determines to adopt the definition as proposed, we would strongly recommend percentage thresholds. Given the uncertainty and scope of the terms in the proposed definition and their breadth when they are read together as well as the thresholds for materiality in Staff Accounting Bulletin No. 99, we believe percentage thresholds would have a positive effect and decrease the potential for voluminous disclosure posed by the proposed definition.

• How many accounting estimates would a company typically identify as critical accounting estimates under the proposed definition?

The answer to this question would depend on a number of variables, including the registrant's business, the number of segments and the mindset and experience of the management and their advisors in preparing the estimates. The examples in the Proposing Release should be compared to possible situations faced by a multi-national company with a tracking stock and several segments. For the first example in the Proposing Release, the cost of copper may be the company's critical accounting estimate, but for a multi-national company, the cost of a thousand minerals may be only one aspect of how the business operates.

• Would a company with multiple segments have a greater number of critical accounting estimates than a company without multiple segments? If so, please provide an explanation.

Yes. Our example is a multi-national conglomerate with operations in 50 countries with seven reportable segments that has a tracking stock. The MD&A for this type of company is already a challenge because the company is presenting two MD&As, one for its common stock and one for its tracking stock. Each of the two MD&As presents the segments as they relate to the appropriate stock and on a geographical basis. If the segments are truly different businesses, rather than merely reportable under FAS 131, the different dynamics of each segment could result in multiple separate critical accounting estimates that (a) do not relate to another segment, and (b) are not meaningful to the holder of the tracking stock.

• Should we establish a maximum number of accounting estimates that may be discussed as critical accounting estimates?

Given the expected volume of disclosures about critical accounting estimates, as well as the time, effort and expense to draft the disclosures, potential liability and adverse effect on competition, we would recommend a limit either by number or percentage impact as described above.⁴

• Should we expand the definition to include MD&A disclosure of volatile accounting estimates that use complex methodologies but do not involve significant management judgment? Should we do so only when the underlying assumptions or methodologies of those estimates are not commonly used and therefore not understood by investors?

We respectfully submit that the Commission should decide whether the proposed "Critical Accounting Policies" section of the MD&A is intended to address the range of potential changes in the financial statements due to the estimation process or to disclose the "trap doors" in the financial statements that are known only to management and can have a volatile effect on results of operations and financial condition. If the purpose is the former, then the proposed disclosure item would include both complex, but well understood, methodologies like percentage-of-completion accounting, and management judgments on highly uncertain matters, like the product return rate for a new drug that has just been approved by the FDA. Our view is that merely focusing on the unique judgments that are peculiar to a specific registrant will not result in meaningful disclosure to the marketplace that enhances comparability between registrants.

b. Identification and description of the accounting estimate, the methodology used, certain assumptions and reasonably likely changes

Once a critical accounting estimate is identified, proposed Item 303(c)(3)(i) would require disclosure of the methodology and the assumptions that are either material or relate to highly uncertain matters at the time the estimate was made. For each methodology or assumption, the registrant would have to disclose known trends, demands, commitments, events or uncertainties that are reasonably likely to occur and materially affect the methodology or assumption. Thus, the proposal contemplates four tiers of disclosure:

• the critical accounting estimate itself;

• the methodology;

• the assumptions; and

• the factors that could materially affect the methodology or assumptions.

Moreover, given the role that "highly uncertain matters" plays at various levels of the proposed disclosure, registrants could be confronted with both the uncertainty of the highly uncertain matter about which the assumption is made and the uncertainties that affect the highly uncertain matter.

Although we understand and agree with the Commission's goal of fully disclosing the whys and wherefores of each critical accounting estimate in order to provide the proper context for investors to understand the sensitivity analysis required in proposed Item 303(c)(iii), we are concerned about:

• the definitional complexity of "critical accounting estimates," both in terms of disclosure triggers and the potential conflicts with current Item 303 of Regulation S-K and the interpretive releases the Commission has published and not rescinded;

• the complexity of the proposed four-tier disclosure matrix, highlighted by the focus on uncertainty, and its effect on investor understanding, all in the context of Plain English compliance; and

• the volume of disclosure the Proposing Release could produce, potentially resulting in a lengthy discussion in which the truly important facts for investors are obscured.

Definitional Confusion. Rather than reconcile the Proposing Release with the different terms used in current Item 303 of Regulation S-K and the interpretive releases published over the past two decades, the Proposing Release adds more and different terms. At least seven terms are used in the Proposing Release, four of which are proposed to be defined. These terms are added to the term "reasonable likelihood," which was described in the 1989 interpretive release and first defined in the Commission's January 2002 MD&A Statement, and the term "material," as it is used in current Item 303 and also in SAB 99, which the Commission endorsed in its amicus brief filed in Ganino v. Citizens Utilities Company, 228 F.3d 154 (2d Cir. 2000).

In order to understand how the proposed disclosure requirement works and what disclosure it is intended to elicit in this new section of the MD&A, we respectfully request that the Commission address the issue of definitions and resolve or reconcile the potentially conflicting terms in the current Item 303, the 1989 interpretive release and the MD&A Statement, and the Proposing Release.⁵

Four-Tier Disclosure Matrix. As discussed above, the requirements in the Proposing Release, if adopted, would result in four tiers or levels of disclosure for each critical accounting estimate. This four-tier disclosure matrix differs from the typical response to line item disclosure, which requires a registrant to disclose X and the reasons for or the factors that can affect X. In this binary type of disclosure system, the investor is informed of both the registrant's position and the bases for the position. If there is uncertainty about the position, the registrant is able to disclose the company's inability to ascertain or assure that X will occur. This binary disclosure system is commonplace in the Commission's disclosure requirements, ranging from Item 303(a) of Regulation S-K to Items 1014(a) and (b) of Regulation M-A.

The Proposing Release would establish a different and far more complex disclosure matrix. Rather than require disclosure of X, the critical accounting estimate, and the bases therefore, the Proposing Release would require disclosure of X, the methodology to determine X, the assumptions to arrive at X and the known trends, demands, commitments, events or uncertainties that are reasonably likely to occur and materially affect each assumption and each methodology. A known trend could materially affect one assumption but not another; or the known trend could be material to one assumption but immaterial when considered in the totality of all the assumptions that underlie the critical accounting estimate - yet, that known trend would be required disclosure under the Proposing Release. Not only will registrants face a challenge in preparing this disclosure, they will find it difficult to comply with the requirement of being "clear, concise and understandable" to the average investor.

Volume of Disclosure. In addition to increased complexity, the Proposing Release will potentially result in substantially more disclosure. Assume arguendo that a registrant determines it has five critical accounting estimates, one methodology for each estimate and four assumptions for each estimate; and assume further that, in turn, each assumption and methodology has five known trends, demands, commitments, events or uncertainties that are reasonably likely to materially affect the assumption or methodology during the current period or in the future. Simply put, this hypothetical results in 125 new items required to be disclosed in describing the critical accounting estimates, even before those estimates are then subjected to the sensitivity analysis, of which there are two choices, that the Proposing Release would also require. You can then compound this quantification by assuming several segments. Add to this, the proposed requirements to discuss why different estimates would have had a material impact had they been used; why the estimate itself is reasonably likely to change from period to period; and whether any material changes were made to the estimate in the last three years, and the disclosure would become even more complex and voluminous.

As with the proposed definition of "critical accounting estimate," we would suggest a simpler approach that comports with the original spirit of MD&A: to require disclosure of critical accounting estimates, but to let management determine the substance of the disclosure so that the average investor is informed in understandable English of how the estimate has the potential to materially affect results of operations, financial condition or liquidity.

c. Impact of the estimate on financial conditions, changes in financial position and results of operations

Proposed Item 303(c)(3)(ii) would require a registrant to explain the significance of the accounting estimate to its financial condition, changes in financial condition and results of operations as well as, if material, to the line items in the financial statements. While we believe that the term "changes in financial condition" is subsumed within the term "financial condition," we understand and support the purpose and effect of this proposal. We would only note, however, that the disclosure proposed to be required by this sub-item would in all likelihood be included in the responses to proposed Items 303(c)(3)(i) and (iii).

d. Quantitative disclosure

We believe there may be numerous categories of accounting estimates, employed by many issuers, that meet the proposed criteria for being "critical." While it may be useful to require general disclosure about the nature of these accounting estimates in the context of a particular issuer's financial statements and MD&A, we are concerned that the extensive quantitative disclosures - both sensitivity-related and historical - will merely deluge investors with data. We do not believe that narrowing the definition of what is "critical" will satisfactorily address this problem. Rather, we believe the problem is inherent in the Commission's proposed concept. Disclosing a wide range of potential outcomes, as the sensitivity disclosures would do, does not inform a reader unless accompanied by information about the probabilities of those outcomes. That information is almost always not possible to create. Therefore, we believe that reducing the extent of required disclosure, and emphasizing that issuers should more adequately address existing MD&A requirements, would be far preferable.

We are particularly concerned that the proposal to require sensitivity analyses will result in mandating forward looking information that is not based on presently known trends, events or uncertainties. Up until now, the Commission has consciously refrained from mandating forward-looking information. While the proposals state that this information should be covered by various safe harbors for forward-looking information, the availability of those safe harbors in specific cases may be problematic.

Moreover, an unintended consequence of mandating this information may be to put domestic companies at a competitive disadvantage vis a vis their foreign competitors which would not be subject to these requirements. To use the example in the proposing Release, a domestic company might have to disclose its prediction of the world-wide prices of a commodity, such as copper, while its foreign competitors and suppliers of that commodity would not be subject to similar disclosure requirements.

We believe an active program undertaken by the Commission's staff to review existing MD&A disclosures and publish good and bad examples on a no-names basis would go much further to improve MD&A across-the-board than adding an extensive layer of mandatory disclosure. We know that the staff may already be doing some of this as part of its Fortune 500 review, but the effort should be expanded and formalized, as was done for the MD&A in 1989, with good effect.

The following examples are intended to illustrate that there may be numerous critical accounting estimates that are universal or nearly so. While extensive disclosures of these subjects may be of interest to a particular issuer's audit committee as background in reviewing its MD&A for appropriate trend and explanatory disclosure, we believe it will be more confusing than helpful to investors generally.⁶

Quantitative disclosures to demonstrate sensitivity. We believe that there may be too much disclosure. As previously noted, we believe there well may be many more critical accounting estimates for each issuer than the three to five estimated by the Commission. The resulting excess of disclosure would be more likely to confuse than inform investors and would be unnecessarily burdensome to issuers. For example, there are likely to be several critical accounting estimates employed relatively across-the-board. The several examples below are intended to illustrate this point.

Pension Costs. We believe a very large number of reporting issuers may conclude that their pension-related costs involve a critical accounting estimate, either because of uncertainty about the assumed rate of return on pension fund assets or the assumed rate of retirements and pay-out obligations. For example, future long-term equity market returns are probably "highly uncertain" within the meaning of the proposed rules.⁷ It also seems likely that a registrant may be able to select from a range of reasonable assumed rates of return. For many such registrants, changing that assumption would significantly affect current period pension expense. It appears that a consequence of the Commission's new critical accounting estimate rule, if adopted, would be to require quantified sensitivity information about assumed pension plan rates of return, in much the same way as is currently required by GAAP in financial statement footnotes for sensitivity of post-retirement medical costs to a 1% change in health-care cost trend ^_ It seems odd that a near-universal disclosure of pension cost sensitivity will appear in MD&A (without the benefit of audit procedures unless an SSAE No. 8 report is required as discussed below), while the conceptually identical disclosure for post-retirement medical costs will appear in the financial statement footnotes.⁸

Goodwill Impairment. Under the current requirements of GAAP, issuers must, starting this year, periodically test acquired goodwill for impairment, the first step of which generally requires use of a fair value technique such as a discounted cash flow model.⁹ Like the cash flow estimation method in Example 3 of the Proposing Release, this cash flow estimate may be a critical accounting estimate for most companies having material amounts of goodwill on their balance sheets. Given the requirements to use discounted cash flows, there may be more instances where changes in the cash flow estimate would cause varying degrees of impairment than under the GAAP standard for impairment of long-lived assets used in Example 3, the initial trigger for which is based on nondiscounted cash flows.¹⁰ Thus, the uncertainty and materiality of goodwill impairment would often lead to critical accounting estimate sensitivity disclosures. In fact, any registrant that has partially written down acquired goodwill probably would be in this situation, given that it retains exposure to further write-downs that would be caused by changes in cash flow estimates.

Fair value. Issuers in many industries are required to reflect substantial portions of their assets at fair value, rather than cost, on their balance sheets. These include banks, broker-dealers, insurance companies and businesses that trade commodities and financial instruments. For assets not having a liquid trading market, fair value principles generally must be used.¹¹ The Commission has addressed the MD&A disclosure issues raised by this fair value process in the energy trading context.¹² We believe similar issues - the significant uncertainty about and potential materiality of the value estimates being made and their potential effect on income - would lead many issuers to conclude similar disclosures must be made under the proposed new MD&A requirements even for more traditional fair value assets, such as trading securities, loans available for sale and private equity investments and other non-marketable securities.

Loss Contingencies. Under current accounting standards an issuer must record an expense when a loss is both probable of occurrence and reasonably estimable in amount.¹³ This principle is applied by many issuers in a wide variety of contexts, such as potential litigation liabilities of all sorts, various types of contract claims, other disputes not involving litigation and potential environmental clean-up costs. In most of these cases, significant judgment is required. It seems likely that there will also be sufficient uncertainty that issuers will generally conclude that these contingencies, when material individually or in the aggregate, warrant treatment as critical accounting estimates.

Furthermore, to the extent the proposed required disclosure would force issuers to reveal the specific details of their litigation reserves, it raises the same concerns of unduly prejudicing the issuer's settlement possibilities as we previously observed regarding the Commission's proposal to amend Regulation S-K and S-X to require details of valuation and loss accrual accounts to be disclosed.¹⁴

Deferred Taxes. Virtually every balance sheet has a line item for deferred taxes.¹⁵ Broadly speaking, this item reflects the issuer's assessment of future tax obligations or benefits that result from the timing differences between income computed for tax and accounting purposes. While the calculation of deferred taxes is complex, it often necessarily involves estimates and assumptions about future income or actions by the issuer, as well as action by Congress or the IRS, many of which may be inherently uncertain. These deferred tax items and related income statement effects will often be material. Due to the inherent unreliability of making estimates in this area, we are unconvinced that more detailed disclosure about possible quantitative outcomes in calculating deferred taxes will promote investor understanding of the issuer's financial statements.

Current vs. Deferred Items. Often an issuer must allocate portions of the amount of a transaction among current period revenue or expense and a future period effect. For example, percentage of completion revenue recognition¹⁶ requires judgments about the progress of contract completion based on milestones that may involve high uncertainty: Is the major construction 55% or 60% complete? Is the tanker 35% or 45% built? While some expenses must be capitalized, others must be expensed in the current period. Judgments about the period of benefit may determine the allocation between these two treatments, and those may involve high uncertainty and materially different alternate outcomes.¹⁷ For example, a software firm must expense any costs incurred to establish the "technological feasibility" of software that is to be sold, leased, or otherwise marketed. But once "technological feasibility" is established, the firm's costs must be capitalized until the product is available for general release to customers.¹⁸

We therefore believe that the required disclosures would not be meaningful to investors. We agree that in some instances quantitative information will be helpful to an understanding of a company's MD&A discussion of its critical accounting estimates. However, even if quantification were optional we are concerned that the proposed quantification regime contemplated for the proposed sensitivity analysis will in many cases not provide relevant information and in some cases may not even be possible. Instead, we believe these particular quantification approaches should also remain optional for use by registrants in discussing those types of estimates where it is particularly relevant. We suggest that the Commission do so by removing them from the rule itself and including them as non-exclusive examples in the adopting release or, perhaps, as an alternative, in an interpretive release issued after the Commission's staff has had an opportunity to review the first round of disclosure under the proposals.

We believe the required sensitivity disclosures may not produce meaningful results in a number of cases. For example, bank loan loss reserves for large loans that are subject to individual analysis may involve such a wide range of reasonable estimates as to result in relatively unhelpful disclosure. A similar result may apply to other types of reserves, such as property and casualty insurance reserves and oil and gas reserves. The same thing can be said in the pharmaceutical industry for joint venture contracts to develop a new drug; as well as alliance agreements generally.

e. Quantitative and qualitative disclosure concerning past changes in the estimate.

We believe that the required historical disclosures - both qualitative and quantitative - may be more confusing than helpful to investors. It appears that the Commission's goals in requiring historical information is to aid in year-over-year comparisons and to show that a different judgment call or set of different assumptions could have produced a different result. Rather than requiring detailed information about historical amounts, it may be more useful for issuers to disclose material changes to estimation methodology or assumptions. As the Commission notes in the Proposing Release, Accounting Principles Board Opinion No. 20 already urges disclosure about changes in estimates that are expected to affect several future reporting periods and that are not made each period in the ordinary course of accounting, as well as other changes in estimate that are material. We believe that it would be sufficient for the Commission to strongly urge issuers to make these disclosures where they are necessary to understanding material trends.

f. Senior Management's Discussions With the Audit Committee

We agree with the Commission that the general oversight of the financial reporting process may be improved if senior management discussed the company's critical accounting estimates with the audit committee. We also agree that, to the extent that has not already done so in the past, these new discussions between senior management and audit committees regarding the development, selection and disclosure of critical accounting estimates may encourage the audit committee to seek a more comprehensive understanding of the underlying methodologies and the appropriateness of management's decisions and conclusions. Therefore, we agree with the proposal to require disclosure of whether these discussions have taken place, to the extent not already required by professional standards.¹⁹

3. III.C.6 Disclosure Relating to Segments

The Commission is proposing to require disclosure concerning the impact of critical accounting estimates on a company's business segments. We agree with the Commission that, in many circumstances, "this disclosure would be important for investors because it would enable them to determine which reported segments results are dependent on management's subjective estimates." Under the proposals, a company operating in more than one segment would be required to identify the segments affected by accounting estimates if fewer than all of the segments were affected thereby. We support this proposal, if the final rules are consistent with our comments elsewhere in our letter. (For the reasons stated above, we believe that the more appropriate location for such disclosures may be in the notes to financial statements, rather than the MD&A.) However, we must emphasize that, if the Commission adopts the proposals as proposed, the disclosure required from a company with multiple segments will be exceedingly lengthy and complex and burdensome to prepare. The problems we discuss under III.C above would be multiplied by the number of segments requiring disclosure about critical accounting estimates, if the Commission adopts the proposals as issued, particularly in view of the number of line items that may be required to be addressed and the application of the materiality standards enunciated in SAB No. 99.

a. Response to Specific Requests for Comments

• Should we provide more guidance for determining the circumstances that warrant segment disclosure?

If the final rules are consistent with our comments elsewhere in our letter, we do not believe it is necessary to provide any further guidance in this area due to the availability of guidance in segment reporting disclosure.

• Should we require the additional segment discussion only when more than one segment is affected?

No. We agree that, if less than all of the segments of a company's business are affected, a company should be required to provide the proposed information for that segment.

3. III.E. Auditor Examination of MD&A Disclosure Relating to Critical Accounting Estimates

The Commission's consideration of requiring additional auditor examination of critical accounting estimates in the MD&A is a further indication that some of the information relating to critical accounting estimates in the MD&A may be more appropriately included in the notes to financial statement.²⁰ As we have previously stated, we believe that some of the information concerning critical accounting estimates perhaps could be included in the notes to the consolidated financial statements, rather than the MD&A. Because the notes to financial statements are a part of the financial statements that are subject to auditor examination, we believe that any increased scrutiny by auditors of the MD&A would not be necessary.

a. Response to Specific Requests for Comments

Set forth below are our responses to the Commission's requests for comments on auditor examination of critical accounting estimates. Our responses assume that the Commission will require disclosure of information concerning critical accounting estimates in the MD&A rather than in the notes to financial statements as we have suggested. We also note that, to the extent that the Commission adopts our suggestion to move much of the proposed disclosure to the footnotes to the financial statements, closer auditor involvement would occur to an extent similar to that provided by a report on an examination of the MD&A pursuant to SSAE No. 8.

• Should we require that the critical accounting estimates disclosure in the MD&A undergo an auditor examination comparable to that enumerated in AT §701?

Auditors are required under current auditing standards to evaluate the reasonableness of accounting estimates used in the preparation of a company's financial statements. However, an examination by the auditor could require significant additional work and is therefore not desirable as a mandatory requirement. Under current attest standards, auditors could examine a company's MD&A, if engaged to do so. We do not recommend that such an attestation be made mandatory.

• Would these engagements significantly improve the disclosure provided in MD&A?

It is unclear to us whether an examination by an independent auditor of the disclosures concerning critical account estimates would improve the quality of disclosures. Nonetheless, we believe that, if and only if the incremental costs of such examinations are found to be relatively minor and would be outweighed by the benefits of such examinations, voluntary examinations could benefit investors.

• In practice, when companies engage auditors to examine the MD&A pursuant to AT §701, does it elicit a higher quality of disclosure than when auditors consider only, as currently required, whether an MD&A is materially inconsistent with the financial statements?

In our experience, there have been relatively few such engagements. Therefore, it is unclear to us whether, in practice, such examinations elicit a higher quality of disclosure that would otherwise be obtained.

• If we were to require examinations by auditors of part or all of MD&A disclosures, should we also require that a company file, or disclose the results of, the auditor's reports?

Yes. Because of the integral nature of the critical accounting estimates, we feel that, if an examinations if conducted, the auditor's report should be disclosed.

• If we do not require auditors' examinations of MD&A disclosure but an auditor nonetheless examines MD&A disclosure on critical accounting estimates, should we require that the auditor's report be filed or results be disclosed?

No. We believe that requiring the auditor's report to be filed could discourage voluntary engagement's of auditors to examine company's MD&A.

• What would be the relative benefits and costs of a requirement for an auditor examination with respect to the critical accounting estimates portion of the MD&A

Given the few examples of it ever being done, we do not have the experience or data necessary to respond to this question.

• Should we require an auditor "review" under standards comparable to AT §701, as opposed to an auditor "examination" of the critical accounting estimates MD&A disclosure?

We do not believe that either an examination or review should be mandated. Which of those alternatives is more appropriate on a voluntary basis should be left to the standard setters to determine.

• Do current requirements relating to what an auditor must consider make an examination or review of the proposed MD&A disclosure under standards comparable to AT §701 unnecessary?

No. We believe an examination is more appropriate than a review given the crucial nature of the critical accounting estimates.

• If we do not require auditor examination or review, are there other steps we should take to help ensure the quality of disclosure in this proposed section of MD&A?

No. Additional steps are unnecessary.

4. III.F. Quarterly Updates

The Commission expects that U.S. companies are evaluating accounting estimates on a quarterly basis at a minimum. Consequently, the Commission believes that quarterly updates of material developments would be appropriate. However, we agree quarterly updates will be more feasible and the disclosure more meaningful if the rules are modified so that it is truly an update rather than a full explication every quarter.

The Commission proposes that companies provide an update to the MD&A information concerning critical accounting estimates in quarterly reports on Form 10-Q or Form 10-QSB. In addition, companies would be required to report newly identified critical accounting estimates in the same manner as presented in its annual report.

a. Response to Specific Requests for Comments

Below are our responses to the Commission's requests for comments on the proposals concerning quarterly updates of disclosures of critical accounting estimates.

• Are there some accounting estimates or material assumptions or methodologies that would normally be considered by companies only on a less frequent basis than quarterly? If so, which ones? Should they be omitted from the quarterly updating requirement on that basis?

We are unaware of any accounting estimates, material assumptions or methodologies that are normally made by companies on a basis less frequently than quarterly.

• Is the scope of the disclosure required in a quarterly update appropriate? If not, what should be added or omitted?

We believe the scope of the required disclosures in a quarterly update is appropriate as proposed.

5. III.G. Proposed Disclosure about Initial Adoption of Accounting Policies

The Proposing Release also solicits comments on the Commission's proposal to require registrants to provide additional disclosures relating to their initial adoption of accounting policies. In general, we agree that additional information regarding the events or transactions that give rise to a registrant's initial adoption of an accounting policy, and the impact of an adopted policy on the registrant's financial condition, should enhance investors' understanding of a company's financial reporting. However, as an alternative, we suggest that it may be more appropriate to provide this information in a financial statement footnote required by Regulation S-X, rather than in the MD&A.

In adopting a final rule, however, we urge the Commission to keep in mind three general principles:

• First, while investors should benefit from additional information about the genesis of a company's adoption of an accounting policy, excessively detailed disclosures could prove confusing to investors and actually discourage their review of periodic filings. Accordingly, we urge the Commission to clarify that disclosures regarding the initial adoption of an accounting policy should be drafted in understandable English separately identified as part of the MD&A discussion, if such disclosures is to be included in the MD&A and relatively brief.

• Second, as discussed below, we believe that the Commission should provide additional guidance to registrants to address those situations in which information required under this section of the proposal is already mandated under existing disclosure requirements or GAAP.

• Third, the proposal must be practicable for reporting companies to interpret and implement. Additional information regarding a company's initial adoption of an accounting policy can enhance investors' understanding of the company's financial condition and decision-making processes. On the other hand, requirements that registrants survey, and explain why they did not follow, accounting policies followed by other companies within an industry with respect to transactions to which the registrants were not themselves parties could prove difficult to interpret and impose costs that exceed their potential benefits

Our comments with respect to the specific questions raised by the Commission in the Proposing Release relating to the initial adoption of accounting policies follow.

a. Utility of Proposed Requirements - Generally.

In general, we believe that the proposed MD&A disclosures relating to a company's initial adoption of an accounting policy should prove useful for investors and other users of periodic reports. In our view, the proposed rule, as drafted, strikes the right balance in identifying the particular situations involving the initial adoption of a material accounting policy that warrant additional disclosures.

We recommend, however, that the Commission address several issues, preferably in the text of the final rule (or the instructions thereto) or, if not, in the Adopting Release. First, we believe that the Commission should require registrants to identify, by separate caption, the portion of the MD&A that discusses the initial adoption of accounting policies. Second, we suggest that the Commission provide specific and practical examples in the Adopting Release to illustrate the types of narrative disclosures that it contemplates with respect to the initial adoption of accounting policies, similar to the examples provided in the Proposing Release with respect to a registrant's critical accounting estimates.

In addition, we believe that the Commission should provide additional guidance on the relationship between any new MD&A disclosure requirements relating to the initial adoption of accounting policies and existing MD&A and GAAP disclosure requirements. To the extent that such information already must be disclosed elsewhere (for example, in the case of a newly adopted accounting policy that would be discussed as a "significant accounting policy" in the footnotes of the financial statements under APB No. 22), the Commission should clarify whether registrants will be expected to make separate disclosures in the section of the MD&A addressing the initial adoption of accounting policies or permitted to cross-reference other sections of a periodic report.

b. Disclosure of Estimated Effect of Alternative Accounting Policies Available to a Registrant.

Proposed Item 303(c)(4)(iv) would require registrants to provide "qualitative disclosures" of the estimated financial statement impact of initial accounting policies that companies could have adopted, but did not adopt, where material. The Proposing Release also solicits comments as to whether the Commission should require companies to disclose, in MD&A or the financial statements, the "estimated effect" of adopting policies that the companies could have adopted, but did not adopt, upon the initial accounting for unusual or novel transactions.

It is unclear from the question posed in the Proposing Release whether the Commission is considering the imposition of disclosure requirements with respect to the impact of alternative accounting policies that would exceed those set forth in Proposed Item 303(c)(4)(iv), as proposed. We question the utility, however, of requiring companies to provide quantitative estimates of the impact of alternative accounting policies. Requiring a company to set forth such hypothetical financial disclosures risks drowning investors in a sea of numbers, and impeding their ability to understand and compare a company's current and past performance as well as known trends and uncertainties for its future financial performance.

We also suggest that the Commission consider whether to qualify any requirement that registrants furnish qualitative estimates of the impact of alternative accounting policies. In some instances, a company may have decided to avoid adopting an alternative accounting policy precisely because it would be time-consuming or costly to apply the alternative to its circumstances or ascertain its financial statement effect. In those instances, companies would find compliance with this requirement quite burdensome, and we do not believe the Commission should mandate additional disclosures. Instead, where a company affirmatively determines that it is not practical to estimate the effect of alternative accounting policies, we believe that the Commission could allow a company to disclose its conclusion in the MD&A section.

In addition, should the Commission require companies to provide qualitative disclosures of the financial statement impact, "where material," of alternative accounting policies that were not selected, we believe that the Commission should clarify the proposed rule in two respects. First, the Commission should explain how it believes that registrants should assess the materiality of the alternative accounting policy not selected (i.e., would additional disclosures be required only if a company concluded that the use of an alternative policy would result in a material difference from the outcome under the policy actually selected?). In addition, we believe that the Commission should specify the period over which a company would be expected to assess the impact of an alternative policy on its financial condition or results of operation.

c. Distinctions Between Company Accounting Policies and Policies Followed by Others within Industry.

The Proposing Release also solicits comment as to whether registrants should be required to disclose that an initially adopted accounting policy differs from accounting policies applied in "similar circumstances" by other companies in its industry, and the reasons for those differences. The Commission further invited comment as to whether registrants could readily obtain the information necessary for such assessments and disclosures.

In general, we do not believe that requiring a company to research and disclose accounting policies followed by their competitors in analogous, but potentially distinguishable, circumstances is likely to result in meaningful disclosures. While many companies may be able to determine accounting policies followed by other companies within an industry, either on their own or with the assistance of outside advisors, other companies may be unable to ascertain this information. For example, if competitors were unwilling to disclose this information or were not under a separate obligation to disclose it, companies could encounter difficulty determining whether their accounting policies were comparable to their competitors' policies or instead dissimilar.

In addition, even assuming that a company could gather information about the accounting policies followed by their competitors, it may remain unclear whether the other companies had, in fact, addressed "similar circumstances." Moreover, while such distinctions could account for a difference in approaches, a company may, with good reason, prove reluctant to speculate as to factors that had led a competitor to follow an accounting policy different from that adopted by the company.

Moreover, investors may infer from the disclosure of a difference between a company's accounting policies and those followed by one or more of its competitors that there is a preferable accounting method that the company should have employed in lieu of the policy selected. Even where several accounting treatments were available to a company under GAAP, investors may erroneously conclude that the company's choice was improper. If, in fact, the underlying purpose of the type of disclosure requirement under consideration by the Commission is to reduce the discretion available to registrants in selecting accounting policies, then we believe that the Commission should address this perceived problem more directly by encouraging or directing standard-setters to modify the specific provisions of GAAP that are viewed as providing reporting companies with an excessive number of accounting options.

6. III.H. Disclosure Presentation

The Commission's proposals would require that the information about critical accounting estimates be presented in a separate section of the MD&A in language and format that is understandable to the "average investor." ²¹ While we strongly support a requirement that the presentation of this information be understandable, we urge the Commission not to adopt and the Staff not to follow in the review process rigid conventions as to what an understandable presentation is.

7. Section III.G and Section V.G Foreign Private Issuers - Section 5.E. of Form 20-F

The Commission proposes to apply requirements to disclose critical accounting policies and initial adoption of accounting policies to foreign private issuers through a new Item 5.E to Form 20-F.²²

We have the same comments on the substantive provisions of Items 5.E as those discussed elsewhere in this letter with respect to the proposed amendments to Item 303 of Regulation S-K. However, we have certain additional comments with respect to updating and cost of compliance unique to the proposals as they relate to foreign private issuers.

The Commission would not require foreign private issuers to update their disclosure about critical accounting policies periodically, unless they file registration statements that are required to include interim period financial statements and related MD&A disclosure.²³

Foreign private issuers that have registration statements under the Securities Act in connection with shelf or other delayed offerings undertake to update the registration statements include interim financial statements in accordance with Item 8.A.5 of Form 20-F.

Moreover, those foreign private issuers that are required to reconcile their non-U.S. GAAP financial statements to U.S. GAAP, including interim financial statements, would be doubly impacted by the proposed rules. Not only would they be obligated to determine their critical accounting policies under the applicable non-U.S. GAAP, but they would also have to consider whether the disclosure about their critical accounting policies would be different under U.S. GAAP. We believe that many foreign issuers would view proposed Item 5.E as imposing a substantial additional burden.

a. Response to Specific Requests for Comments

We have set forth below our responses to the Commission's requests for comments on the applicability of the proposals to foreign private issuers.

• Should the Commission apply different standards for foreign private issuers with respect to the proposed MD&A disclosure?

Due to the burdens the proposed rules would impose on foreign private issuers that are required to reconcile non-GAAP financial statements to U.S. GAAP, we suggest that the Commission consider deferring a determination as to whether those rules should apply to foreign private issuers until the Commission has determined whether or not to accept International Financial Reporting Standards without reconciliation. Even in the absence of a determination with respect to International Financial Reporting Standards, we believe that further analysis is required as to the potential burden on the proposed rules on foreign private issuers and the unique disclosure issues that could arise under those rules.

• Are there specific items of the proposed disclosure that would be less appropriate for foreign private issuers? If so, what should substitute for that disclosure?

The Commission proposes, in Item 5. E.3(e) of Form 20-F, to require foreign private issuers to disclose whether or not senior management has discussed the development and selection of critical accounting estimates and the MD&A disclosure regarding those estimates with the audit committee of the issuer's board of directors or the equivalent oversight group. If the response is that senior management has not had these discussions, the issuer must disclose the reasons why they have not.

This proposed requirement appears inconsistent with the accommodations, which the Commission and the New York and American Stock Exchanges and the Nasdaq Stock Market (the "SROs") have historically extended to foreign private issuers. Foreign private issuers are not required to provide an audit committee report or related disclosure about audit committees in filings with the Commission nor, in practice are they subject to SRO rules as to audit committee structure or responsibilities. Accordingly, we urge the Commission to reconsider this proposed requirement in view of the current and past accommodations for foreign private issuers, and the concern that the disclosure which would be required by Item 5.E(3)(e) would be unduly intrusive into governance practices of foreign private issuers.

• Should the Commission consider applying an updating requirement to the proposed critical accounting estimates disclosure for foreign private issuers that do not file quarterly reports? If so, what should trigger that updating requirement?

As discussed above, we do not believe that the Commission should require updating of the proposed disclosure on a quarterly or other interim basis.

• Are there reasons to distinguish this aspect of MD&A disclosure when foreign private issuers otherwise may not prepare MD&A -- equivalent disclosure on a quarterly basis?

As discussed above, we do not believe that foreign private issuers should be required to update the proposed disclosures on a quarterly or other interim basis.

8. III.J; VI.F; and VIII.H Application to Small Business Issuers

We believe that the proposed accommodations for small business issuers are appropriate.

9. III.K Application of Safe Harbor for Forward-Looking Information

The Commission has asked if there is any need for further guidance with respect to the statutory safe harbor provisions or its safe harbor rules. We believe that, pursuant to Section 27A(g) of the Securities Act and Section 21E(g) of the Exchange Act, the Commission should specifically provide by rule that the statutory safe harbor for forward-looking information applies to the disclosure required by the proposed rules.

10. IV; VI.H General Requests for Comments

In addition to a general request for comments, the Commission has solicited comments on the topics set forth below.