August 26, 2002
Mr. Jonathan G. Katz, Secretary
File No. S7-22-02
Dear Mr. Katz:
KPMG LLP (KPMG) appreciates the opportunity to submit this letter in response to the Securities and Exchange Commission's (the Commission) request for comments on its proposed rule for additional Form 8-K disclosure requirements and acceleration of filing dates (the Proposed Rule or proposing release).
KPMG supports the Commission's efforts to provide "real-time" access to a greater range of reliable information concerning important events affecting public companies. The Commission mentions in its proposing release the benefit more prompt information will have on reducing the opportunities for deception and manipulation that stem from delayed disclosure. We believe that "real-time" access to reliable information will create an even more efficient market by providing key information more quickly to investors and other users of company information.
Specific to the Commission's current Proposed Rule, we generally support all of the proposed items requiring disclosure on Form 8-K. The challenge the Proposed Rule presents is efficient and cost-effective implementation. Care must be taken to achieve the goal of a greater range of reliable information disclosed on a timely basis without placing an undue burden on registrants' business practices, policies and procedures, and quality controls.
We generally support the two-day reporting deadline (coupled with the proposed Rule 12b-25 extension availability) for the proposed disclosure items. Our primary area of concern is the proposed two-day filing deadline for two of the proposed items. Derivation of information required to complete proposed Items 2.05 and 4.01 requires extensive coordination among various parties, including senior management, outside counsel, independent accountants, and possibly the audit committee. As more fully discussed below, we believe companies would be hard-pressed to meet the two-day deadline for these items and still provide meaningful, accurate and complete disclosure. We strongly believe the Commission should reconsider the acceleration of the filing of the required disclosures made pursuant to Items 2.05 and 4.01.
We agree that most of the proposed disclosure items are consistent with the objective of providing investors with information that is material to an assessment of a company's current operations and prospects for the future. For the most part, the items appropriately focus exclusively on definitive actions taken by a company or other parties for which triggering events are clearly identifiable. In the case of proposed Item 1.01, Entry into a Material Agreement, the Commission proposes that companies disclose letters of intent and other non-binding agreements, in addition to material, definitive agreements. Preliminary agreements can carry a significant amount of risk regarding their ultimate execution and reporting such information could inappropriately influence capital investment decisions before the final terms, and therefore the effects, of the agreement have been determined. The volume of filings resulting from such a requirement may undermine investors' ability to identify those items that are truly likely to have a material impact on a company's operations and financial performance. Similarly, without a discernible and definitive action on which to trigger reporting under proposed Item 1.03, Termination or Reduction of a Business Relationship with a Customer, (e.g., termination of a material contract with a customer), the Commission risks diluting the impact of meaningful and measurable events.
Finally, we believe that the Commission should carefully consider if, or how, the proposed new items may have the unintended consequence of interfering with normal business practices that could put some companies at a competitive disadvantage. Reporting items that are part of the give and take that characterizes most relationships with customers, banks and potential business partners may impede productive negotiations and may, in some instances, conflict with confidentiality clauses contained in contractual agreements. For instance, if a company reports the loss of a specific customer, other potential customers may view that information as a basis to strengthen their own bargaining positions. Suppliers may use the information in a similar way. In addition, we believe that the determination of what is "material" should be a matter of management's judgment and be consistent with the concepts embodied in Staff Accounting Bulletin No. 99, Materiality. We discourage the use of disclosure thresholds based on specified percentages or other measures as a means to define materiality.
We offer the following specific comments on various aspects of the Proposed Rule.
Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date
Item 2.01 Completion of Acquisition or Disposition of Assets
We support the Commission's proposed changes to what is currently Item 2 of Form 8-K. However, the Commission is also shortening the due date for filing audited financial statements of an acquired business. Currently, registrants have up to 75 days in which to provide these audited financial statements.1 In the Proposed Rule, the Commission is accelerating the due date for the initial Form 8-K by 13 days without a corresponding increase in the current additional 60 days in which registrants are permitted to file audited financial statements.
As we previously commented in our letter regarding proposed Release No. 33-8089, "Acceleration of Periodic Reporting Filing Dates And Disclosure Concerning Website Access To Reports", we do not believe the due date for providing audited financial statements of an acquired business should be accelerated. Many business combinations involve the acquisition of companies that have never prepared financial statements in accordance with generally accepted accounting principles, or have never had their financial statements audited. Each set of audited carve-out financial statements has unique preparation and audit issues. In some instances, audits of acquired businesses cannot begin until after the acquisition has been consummated. Based on our experience, in many cases, the entire 75-day period is necessary to complete the audit of an acquired business' financial statements and prepare the Form 8-K. Accelerating the due date would likely create a significant hardship for many reporting companies in terms of practicability and cost, without a commensurate benefit to investors. We suggest that the Commission amend the proposed Item 8.01(a)(4) of Form 8-K to allow financial statements of an acquired business to be filed no later than 73 days after the date the initial report on Form 8-K must be filed.
Item 2.05 Exit Activities Including Material Write-Offs and Restructuring Charges
We agree with the Commission's proposal to require disclosure of material exit activities including material write-offs and restructuring charges. Further, we believe a definitive commitment by the board of directors or the company's officer or officers who have such authority to execute a material exit activity is the appropriate trigger for disclosure on Form 8-K. We agree that investors should be notified about planned actions that are expected to have a material impact on a company's operations and financial statements as quickly as possible. However, we are concerned with certain implementation issues relative to Item 2.05 disclosures.
Our first area of concern is the nature of the disclosures required to be made. Since the Commission's issuance of the Proposed Rule, the Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Although SFAS No. 146 retains some of the underlying concepts of EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), under SFAS No. 146, an entity's commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability in FASB Concepts Statement No. 6, Elements of Financial Statements. Therefore, SFAS No. 146 nullifies the recognition requirements of EITF 94-3 and requires a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred, which may be much later than the date management commits to a plan. Since a significant period of time may occur between the date a company definitively commits to a plan to exit an activity or incur a material restructuring charge and the date a company actually records a liability or charge for such activity, the currently proposed disclosures in the Proposed Rule may be difficult to make with reasonable accuracy. Furthermore, under SFAS No. 146 there may now be more than one liability measurement and recognition date, eliminating the single charge commonly associated with accounting under EITF 94-3. The disclosure in proposed Item 2.05 would be enhanced by requiring that a company provide quantitative information to the extent that it is available at the time the actions are definitively committed, a qualitative discussion about the factors that could impact the amount of the charges to be ultimately recorded in the financial statements, and the required actions that are necessary to complete the exit activity. Companies also should provide an estimate of the period(s) when the charges will be incurred and reported in the company's financial statements. Changes in the estimates provided in the current report on Form 8-K, excluding significant changes in the plan, should be reported in the registrant's periodic reports filed under the Exchange Act. Based on our current interpretation, we believe significant changes to a previously disclosed exit activity would trigger a new Item 2.05 Form 8-K disclosure; however, we recommend the Commission provide guidance as to how such changes in a plan to exit an activity or incur a material restructuring charge should be reported subsequent to the initial Item 2.05 Form 8-K.
Our second area of concern is a company's ability to make the required disclosures within the proposed two-day deadline. Decisions to exit an activity or incur a material restructuring charge may be discussed only at the highest levels of an enterprise before public announcement, with limited interaction among other areas in the organization, including accounting and financial reporting. We believe it would be extremely difficult for a company to generate the disclosures required by the Proposed Rule, and subject the disclosures to review by legal counsel, independent accountants and the audit committee, in two business days. Accordingly, in order to balance the need for timely information with meaningful and thoughtful disclosure of a material event, we strongly believe the Commission should extend the required filing date from the proposed two business days to five business days.
Lastly, we believe the Commission should clearly define what is meant by a "write-off" and a "restructuring" and conform the disclosure requirements and the instructions in Item 2.05 in the final rule to be consistent with SFAS No. 146.
Item 2.06 Material Impairments
We agree that the timely disclosure of material impairments would benefit investors. As proposed, disclosure of a material impairment would be required when the board of directors or the company's officer or officers who have such authority have concluded that the company is required to record a material impairment charge. In our experience, formal evaluation of the recoverability of assets is not an isolated event, but rather a substantive undertaking requiring analyses of market conditions, future estimated cash flows, etc., and increasingly involves the use of outside experts (particularly in the case of measurement of impairment under SFAS No. 142, Goodwill and Other Intangible Assets). The process often is finalized as part of the periodic reporting process and therefore may not be concluded upon until closing the books for a quarterly or annual period. While management may believe at an earlier point in time that it is likely that an asset or group of assets is impaired, that preliminary assessment usually is not formalized to the point at which we believe it appropriate, or even possible, to identify a triggering event under proposed Item 2.06 of Form 8-K. Both SFAS No. 142 and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, have their own "triggering events" and levels of testing that must be assessed in determining whether an impairment actually is required to be recognized. Accordingly, we suggest that the Commission change the triggering event to be the date on which the amount of the impairment is determined and the entry to record the impairment is authorized by the board of directors or management that has such authority. At that point, management would be in a position to provide meaningful disclosure about the impairment, including the amount of the charge to the statement of operations.
In addition, it is unclear to us the scope of asset impairments contemplated for proposed Item 2.06. For example, would material allowances for accounts receivables, loan losses, deferred taxes and inventory require disclosure on Form 8-K? Although one could interpret the Proposed Rule only to require disclosure for impairments of long-lived assets and securities, we believe the Commission should clearly state what types of asset impairments should be disclosed pursuant to Item 2.06 of Form 8-K.
Item 4.01 Changes in Registrant's Certifying Accountant
We believe that the reporting required by the current Item 4 of Form 8-K is adequate and has been effective in meeting the goals stated by the Commission when the rule was originally enacted. We are not aware of any evidence that a reduction in the current 5-day filing deadline would provide added benefit to investors or other users of financial statements. Compliance with Item 304 of Regulation S-K requires significant coordination between the company, its legal counsel, the affected auditor(s) and the audit committee. The drafting and review of the disclosures and accountant's letters required by Item 304 of Regulation S-K requires the meaningful involvement of the aforementioned parties, and, with respect to our firm, requires involvement of our national office as part of our quality control system.
To ensure a continuation of high quality, complete and meaningful disclosures and to diminish the need for, and disruption caused by, Form 12b-25 filings in a majority of situations involving a change in accountant and multiple amendments to Item 4.01 Forms 8-K, we strongly recommend that the Commission maintain the current 5-day filing deadline for proposed Item 4.01.
Employee Benefit Plans
In its proposing release, the Commission questions whether it should require Item 4.01 disclosure regarding a change in the auditor of a company's employment benefit plan if that auditor is different from the company's independent accountant. In the past, several questions have arisen as to the necessity of an Item 4 Form 8-K filing when a change in auditor for an employee benefit plan (the plan) has occurred as a result of a change in auditor for the sponsor of the employee benefit plan (the sponsor). To clarify this issue, and to provide important information to the users of the plan's financial statements, we suggest that the final Item 4.01 require an Item 4.01 Form 8-K filing for a change in auditor of the plan only when there is a change in the auditor of the plan and that auditor is different from the auditor of the sponsor. In situations where the sponsor and its employee benefit plan have the same auditor, and the plan changes auditors as a result of a change in auditors at the sponsor, we believe the reporting of the event by the sponsor alone is sufficient.
Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report
In its discussion of Item 4.02 in the proposing release, the Commission states "when the company files a Form 8-K in response to a notice from the independent accountant, the company would have to provide the independent accountant with the Form 8-K disclosure no later than the business day after it files and request that the accountant furnish a letter to the company..." This language is more limited than the text of the Proposed Rule, which would require the registrant to provide its independent accountant with a copy of the disclosures prepared pursuant to Item 4.02 and request a letter from the accountant regarding the statements made in that current report in all situations requiring the filing of an Item 4.02 Form 8-K. Although we believe the text of the Proposed Rule was the intent of the Commission, we suggest that the Commission clarify in the final rule that the registrant must provide the independent accountant with the Form 8-K disclosures, and be required to file by amendment the responding letter from the independent accountant, in all situations requiring the filing of an Item 4.02 Form 8-K.
In the proposing release, the Commission requests comment on whether Item 4.02 should be expanded to "require disclosure of events relating to a company's quarterly financial statements." We believe that the requirements of Item 4.02 should cover quarterly financial statements.
Application to Foreign Private Issuers
Given the special nature of Foreign Private Issuers (FPIs), we believe that the Commission should consider issuing a separate rule proposal specific to FPIs, so that these companies have the opportunity to respond to the Commission's suggested changes to the current FPI reporting system. A separate proposal specific to FPIs would also allow other international accounting and governmental bodies to express their views, to ensure that there is a consistent reporting system among the various countries, many of which have already developed interim reporting requirements and periodic requirements similar to those found in Form 8-K.
Short Form Eligibility
We support the acceleration of the filing deadline for the events required to be reported in the Proposed Rule, except, as discussed above, for Items 2.05 and 4.01. However we are concerned about the increased chance that a registrant may inadvertently miss the two-day filing deadline for filing the required Form 8-K or alternatively, a Form 12b-25. By significantly increasing the number of events that must be reported on Form 8-K, while simultaneously reducing the filing deadline, the chances of an inadvertent late filing will increase. As currently proposed, a short delay in filing a required Form 8-K would cause a registrant to lose its short form status and therefore limit its ability to quickly access the capital markets. In its final rule, we recommend the Commission allow for this possibility by providing some form of exemption for minor violations. The Commission proposed such an exemption, subject to certain conditions, in its Proposed Rule: Form 8-K Disclosure of Certain Management Transactions. For example, that proposal includes a change in the General Instructions to Form S-3 that reads:
"For purposes of this paragraph, a registrant will be considered as having filed all the material required to be filed under section 13 or 15(d) of the Exchange Act and has having filed in a timely manner all reports required to be filed notwithstanding that the registrant may not have timely filed one or more current reports on Form 8-K (§249.308 of this chapter) required to be filed solely to disclose the occurrence of an event or events specified in Item 10 of Form 8-K."
Amendments to Rule 12b-25 and Form 12b-25 Regarding Late Filing
We agree with the Commission's proposal to amend Rule 12b-25 to provide for a two-day extension for those items filed on Form 8-K that require disclosure within two business days of a triggering event.
In the proposing release, the Commission poses a number of questions to elicit comment on specific proposed disclosure requirements, many of which we have addressed elsewhere in this letter. We offer the following additional comments in response to certain of those questions:
If you have any questions about our comments please contact Sam Ranzilla at (212) 909-5837 or Melanie Dolan at (202) 533-4934.
Very truly yours,
/s/ KPMG LLP