American Institute of Certified Public Accountants

December 9, 2002

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

Re: SEC File No. S7-42-02, Disclosure in Management's Discussion and Analysis About Off-Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments

Dear Mr. Katz:

The American Institute of Certified Public Accountants (the "AICPA") respectfully submits the following written comments on the Securities and Exchange Commission's (the "SEC" or the "Commission") proposed rule regarding disclosure in management's discussion and analysis (MD&A) about off-balance sheet arrangements, contractual obligations and contingent liabilities and commitments (the "Proposed Rule"). The AICPA is the largest professional association of certified public accountants in the United States, with more than 350,000 members in business, industry, public practice, government and education.

The AICPA acknowledges the enormous effort put forth by the members and staff of the Commission to implement the provisions of the Sarbanes-Oxley Act of 2002 (the "Act"). We are firmly committed to working with the Commission in accomplishing the timely and effective implementation of the Act and rebuilding the faith of investors who depend on accounting professionals for accurate, clear, timely and relevant financial information. We further acknowledge the very technical nature of the Proposed Rule and our comments. As a result, we stand ready to meet with the Commission and its staff to further clarify any of our recommendations.

Executive Summary

We support the Commission's goals to enhance disclosures of off-balance sheet arrangements, contractual obligations and contingent liabilities and commitments. The overall objectives of the Proposed Rule are generally consistent with the recommendations contained in the Petition to the U.S. Securities and Exchange Commission for Issuance of Interpretive Release dated December 31, 2001, which was endorsed by the AICPA. The petition encouraged the SEC to issue guidance to facilitate enhanced transparency of financial reporting related to, among other things, liquidity and capital resources, including off-balance sheet arrangements.

We believe it would be appropriate under the language in Section 401(a) of the Sarbanes-Oxley Act to apply the existing "reasonably likely" threshold standard for assessing MD&A disclosure requirements for off-balance sheet arrangements. The Commission should consider whether using a different disclosure threshold for off-balance sheet arrangements as proposed could confuse and possibly mislead investors about the likelihood and effect of off-balance sheet arrangement events in the context of other significant MD&A presented.

Off-Balance Sheet Arrangements

Disclosure assessment threshold

As acknowledged in the Proposed Rule, the Commission proposes a "higher than remote" possibility ("may have an effect") threshold for management's assessment of disclosure of off-balance sheet arrangements, in comparison to the existing "reasonably likely" threshold standard used in assessing all other MD&A disclosure requirements. The proposed disclosure threshold would require management to make extraordinarily subjective judgments regarding unlikely future events. Unless management can determine that a future event resulting from an off-balance sheet arrangement is "remote," it would then have to undertake an estimation of the materiality of the possible impact of the arrangement. Because materiality determinations of possible future events involve difficult subjective judgments, this could involve substantial efforts for registrants with possible limited meaningful information for investors. We also believe this would result in a significant increase in MD&A disclosures of the effect of future events that have only slight chance of occurring.

We encourage the Commission to consider whether such a disparate threshold could lead to undue prominence of information about off-balance sheet arrangements in relation to other significant MD&A information. Also, the Commission should consider the possibility that resultant disclosures under the "higher than remote" threshold could possibly misinform or mislead investors about the likelihood and effect of off-balance sheet arrangement events on the company's financial condition, changes in financial condition, results of operations, revenues or expenses, liquidity, capital expenditures or capital resources.

We believe it would be appropriate under the language in Section 401(a) of the Sarbanes-Oxley Act to apply the "reasonably likely" disclosure threshold applicable elsewhere in MD&A to disclosures about off-balance sheet arrangements. Such an application would result in consistent thresholds throughout the MD&A section while maintaining an appropriate level of disclosure and transparency.

Reporting date considerations and non-SPE entities disclosures

Section 229.303 (a)(4)(B) requires disclosure of the nature and amount of the total assets and of the total obligations and liabilities (including contingent obligations and liabilities) of the entity in which off-balance sheet activities are conducted. The final rule should clarify the date at which this information should be presented. Certain entities in which off-balance sheet activities are conducted may have different reporting periods than the registrant. Also, it is unclear whether registrants would be required to disclose the assets and liabilities of entities with which all off-balance sheet activities are conducted. In other words, would such disclosures be required in situations where the registrant conducts off-balance sheet transactions with entities that are unrelated to the registrant, including non-special purpose entities? For activities with non-SPE entities, it may be difficult or not possible to obtain this disclosure information.

Definition of the term "off-balance sheet arrangement"

The proposed definition of "off-balance sheet arrangement" in section 229.303 (a)(4)(iii) includes any transaction, agreement or other contractual arrangement to which an entity that is not consolidated with the registrant is a party, under which the registrant, whether or not a party to the arrangement, has, or in the future may have any obligation under a direct or indirect guarantee or similar arrangement. It is unclear whether certain transactions such as unconditional purchase obligations fall within the scope of this proposed requirement. In addition, the proposed definition could be interpreted to include a company's employee pension and postretirement benefit arrangements. We do not believe that the Commission intended to include these arrangements. We recommend the staff refer to the definitions and scope exceptions that the FASB has identified in its project on special purpose entities that excludes these arrangements.

Further, it would also be helpful if the Commission would provide examples of what is meant by an "indirect guarantee." (Would a 50-50% joint venture debt be included even if it wasn't directly guaranteed?) In addition, "obligations not classified as liabilities" should be more clearly defined. (Does the term "classified" mean classified on the balance sheet in an account titled liabilities or does it refer to something that is not recorded at all? Would it include items such as contract termination penalties, deferred revenue amortized over a performance period or requirements purchase contracts?)

Contractual Obligations

We support the proposed tabular format requirement in section 229.303 (a)(5)(i), which requires a tabular disclosure of contractual obligations with respect to the registrant's known contractual obligations as of the latest balance sheet date. The final rule should clarify, however, that the contractual obligation information to be included in the tabular disclosure is consistent with current GAAP measurement and disclosure requirements for contractual obligations, and would not include the disclosure of certain unconditional purchase obligations that are currently not required to be disclosed under GAAP, such as open purchase orders.

Contingent Liabilities and Commitments

Under Section 229.303 (a)(5)(ii) of the Proposed Rule, registrants (other than small business issuers) would be required to provide MD&A disclosure about the potential demands on liquidity from "contingent liabilities or commitments." We recommend that the Commission instead use the term "commercial commitments," define that term, and provide specific examples of commercial commitments that would fall within the scope of any final rule. We believe that the term "contingent liabilities and commitments" generally is understood to include loss contingencies accounted for under FASB Statement No. 5, Accounting for Contingencies (FASB Statement 5). We believe that loss contingencies would not lend themselves to the type of summarized disclosures that would be required under the proposed rules, because by their nature loss contingencies do not have an objectively determinable maturity or expiration. Under existing MD&A rules, issuers are required to discuss such loss contingencies to the extent they represent uncertainties that could materially affect liquidity.

In January 2002, the Commission issued FR-61 in response to a petition for issuance of an interpretive release endorsed by the AICPA. In FR-61, consistent with the petition, the Commission recommended that issuers provide summarized disclosures about "commercial commitments," which "are intended to include lines of credit, guarantees, and other potential cash outflows resulting from a contingent event that requires registrant performance pursuant to a funding commitment." FR-61 suggested by illustration that commercial commitments would include lines of credit; standby letters of credit, guarantees and standby repurchase obligations. Such commitments are identical to the specific examples cited in the proposing release that would fall within the scope of the proposed MD&A disclosure. Accordingly, we recommend that the Commission use the term "commercial commitments" in any final rule and define that term as "potential cash outflows resulting from a contingent event that requires registrant performance pursuant to a funding commitment, such as lines of credit, standby letters of credit, guarantees and standby repurchase obligations." In addition, the Commission should consider providing a more comprehensive listing of the types of commercial commitments that should be included in the summarized MD&A disclosures. Such a listing would assist issuers in identifying whether or not the required disclosures include, among other things, residual value guarantees in leasing arrangements, contingent purchase consideration, and contractual performance bonds.

Application of the Proposals for Foreign Private Issuers

Foreign private issuers' annual reports on Form 20-F or 40-F

The Proposed Rule asks for comments on whether the Commission should apply the proposed rules to foreign private issuers' annual reports on Form 20-F or 40-F, as proposed, or exempt those foreign private issuer annual reports from the scope of the proposed rules. Subject to our other comments about this Proposed Rule, we believe it should be equally applicable to foreign private issuers with the exception of companies that file on MJDS - see comments below. Historically, with respect to disclosures included in management's discussion and analysis, market risk, etc, the Commission has required foreign private issuers to disclose information that is substantially similar to that required by domestic companies.

Multi-jurisdictional Disclosure System (MJDS) annual report

The Proposed Rule also asks for comments on whether the Commission should exempt Form 40-F, the MJDS annual report filed by qualified Canadian issuers, from the scope of the proposed rules. While not commenting on the continuation of the MJDS, we believe that the requirement to disclose such information is inconsistent with the principles of the MJDS system. Securities Act Release No. 6902 that established MJDS states that qualifying Canadian companies can meet the Commission's reporting requirements by providing disclosure documents prepared in accordance with the requirements of the Canadian securities regulatory authority. The concept is that, with the exception of the requirement to provide reconciliation to US GAAP, the document filed with the SEC is simply a wrap of the document submitted to the Canadian regulators that has been prepared in accordance with the Canadian requirements. By requiring this disclosure, the Commission would be deviating from the fundamental principle of the establishment of MJDS. Since the adoption of the MJDS system over ten years ago, the Commission has made changes that are far more significant to the reporting requirements that apply to foreign private issuers without modifying the MJDS system.

Report of Foreign Private Issuer Pursuant to Rules 13a-16 and 15d-16 Under the Securities Exchange Act of 1934 (Form 6-K)

The Proposed Rule also asks for comments on whether the Commission should exempt Form 6-K reports from the scope of the proposed rules, as proposed. We agree with the proposed exemption for Form 6-K reports for the reasons stated in the proposing release.

Proposed Safe-Harbor for Forward-Looking Information

The Proposed Rule asks for comments on whether the Commission should expand the proposed safe harbor to apply to all forward-looking information in MD&A, regardless of whether the information relates to off-balance sheet arrangements. We believe the safe-harbor provisions should be expanded to include all forward-looking information in MD&A to encourage a prospective analysis of all items that are reasonably likely to have a material effect, both those related to off-balance sheet arrangements and other items meeting the MD&A threshold.

* * * * *

Respectfully submitted,
William F. Ezzell, CPA
Chairman, Board of Directors
Barry C. Melancon, CPA
President and CEOM