Computer Sciences CorporationJonathan G. Katz, Secretary
Re: File No. S7-43-2 FILED ELECTRONICALLY (rule-comments@sec.gov) Dear Mr. Katz, Thank you for the opportunity to comment on the Commission's "Proposed Rule: Conditions for Use of Non-GAAP Financial Measures," Subject File No. S7-43-2 (the "Proposed Rule"). We support the efforts of the Congress and the Commission to improve financial reporting practices. Effective, high quality financial reporting is the very foundation of our capital markets and essential to the efficient functioning of our economy. Reporting and disclosure of pro forma information has been one of the most controversial areas with fairly wide divergence in practice. While many registrants have utilized pro forma financial information in a responsible manner, there have been noticeable instances of abuse. In response to these issues, Financial Executives International ("FEI") and National Investor Institute ("NIRI") jointly published best practices guidance regarding use of pro forma financial information on April 26, 2002. Many registrants have incorporated this guidance in their disclosure practices. We have provided a summary of our more significant comments, concerns and suggestions in the following paragraphs and have included detailed responses to each "Request for Comment" from the Proposed Rule in the attached Exhibit. Definition of "Non-GAAP Financial Measures" Generally, we think the disclosure requirements under the Proposed Rule are reasonably consistent with the requirements, and the overall intent, of Section 401(b) of the Sarbanes-Oxley Act of 2002 (the "Act"). However, we think the Commission's definition of "non-GAAP financial measures" is substantially broader than the disclosure rules for "pro forma financial information" contemplated under the Act. Admittedly, the Act does not provide any description of the scope or definition of "pro forma financial information." However, we think the definition in the Proposed Rule is broader than the generally understood intent of the Act. The definition of "non-GAAP financial measures" under the Proposed Rule encompasses much more than just "pro forma earnings and cash flow" which has been the principal focus of controversy. We think the scope of "non-GAAP financial measures" should be defined much more narrowly with a primary focus on the principal areas with potential for abuse: pro forma earnings and cash flow. In redefining the scope and definition of "non-GAAP financial measures" the Commission may wish to make reference to and incorporate the joint guidelines developed by FEI and NIRI referred to above. In reevaluating the scope and definition of these disclosures, the Commission may also wish to refer to the results of the NIRI survey published January 17, 2002, which provides an overview of existing practices and may aid in further focusing the scope of additional disclosure requirements on potential problem areas. Regulation G Disclosure Requirements We think Regulation G will deter public disclosure of inappropriate "non-GAAP financial measures." However, as discussed below, the Proposed Rule will also require registrants to file earnings announcements on Form 8-K and will prohibit, in such filings, adjustment of "non-GAAP performance measures" for infrequent or unusual items reasonably likely to recur. We think the combination of these requirements may discourage pro forma presentation of earnings before unusual items in circumstances in which such presentation is not only appropriate and meaningful, but also necessary to fully understand the registrant's financial performance. This would effectively preclude such disclosures under Regulation G, even though not specifically prohibited by this regulation, since, ultimately, the earnings release must be filed on Form 8-K and, as a consequence, would be subject to the prohibition under Regulation S-K. This issue is discussed further in the ensuing sections. Regulation S-K Disclosure Requirements Applicable to Commission Filings Except as to the scope and definition of "non-GAAP financial measures" discussed above, the disclosure requirements applicable to filings with the Commission seem generally consistent with existing policies. However, the Proposed Rule also would prohibit adjustment of "non-GAAP financial measures" for infrequent or unusual items that are reasonably likely to recur. We think this prohibition may discourage pro forma presentation of earnings before unusual items in circumstances in which such presentation is not only appropriate and meaningful, but also necessary to fully understand the registrant's financial performance. Given the registrant's exposure to liability under the Proposed Rule, we think registrants may be reluctant to provide pro forma presentation of earnings before unusual items in situations where recurrence, although unlikely, may be possible. Form 8-K Filing Requirements Regarding Release of Information Regarding Results of Operation or Financial Condition for Completed Periods Finally, the Proposed Rule would require registrants to file with the Commission any material information regarding results of operation or financial condition on Form 8-K upon issuance of an earnings release or other public announcement. We do not think filing the registrant's earnings release on Form 8-K is necessary or beneficial to investors. We also think this requirement may have the unintended consequence of delaying the release of earnings announcements and believe this consequence would far exceed any possible incremental benefits to the investment community. We also would like to make the following suggestions in response to your specific requests for comment. These suggestions and comments are more fully described in the attached Exhibit.
In conclusion, we respectfully request the Commission reevaluate the scope and definition of "non-GAAP financial measures" to more narrowly focus the scope of these disclosure requirements on principal areas with potential for abuse: pro forma earnings and cash flow. We also request the Commission reconsider the requirement that earnings releases be filed on Form 8-K. We do not think that the incremental benefit of such filings would overcome the potential for delays or, more importantly, curtailment in the content of such disclosures. Thank you for the opportunity to comment on this proposal and for your consideration of our suggestions and comments.
Exhibit 1 Proposed Rule: Conditions for Use of Non-GAAP Financial Measures, Subject File No. S7-43-02 (the "Proposed Rule") Request for Comments II. A. Proposed Regulation G 1. As proposed, Regulation G would apply only to companies that are required to file reports pursuant to Section 13(a) or 15(d) of the Exchange Act. Should we expand the scope of the regulation to apply to all companies that publicly disclose non-GAAP financial measures, excluding registered investment companies? Yes, we think that Regulation G should apply equally to all companies with publicly traded securities, excluding registered investment companies. 2. As an alternative to requiring reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP, should we require reconciliation to specific GAAP financial measures in all cases, such as net income and cash flow from operating activities? If yes, to which GAAP financial measures should we require reconciliation? No, we agree with the Commission's proposal under the Proposed Rule; the most meaningful reconciliation would be to the "most directly comparable GAAP financial measure." Further, reconciliation from "the most directly comparable GAAP financial measure" to net income or cash flow would be redundant and superfluous since these reconciling items would already be reflected in the GAAP financial statements. Moreover, these additional reconciling items would further increase the complexity of the reconciliation and likely make it more difficult for the user to understand. 3. Should the presentation of certain non-GAAP financial measures require the presentation of a reconciled (full or summary) consolidated balance sheet, income statement and cash flow statement? If so, which non-GAAP financial measure(s) should trigger this requirement? No, presentation of a reconciled (full or summary) consolidated balance sheet, income statement and cash flow statement would increase the complexity of the non-GAAP to GAAP reconciliation, tend to diminish user understanding and likely confuse, rather than enlighten, users. Furthermore, it might lend further weight to the non-GAAP presentation simply by virtue of the added prominence of these additional disclosures. 4. Should the requirement of a quantitative reconciliation include an exception for prospective measures where the necessary information cannot be obtained without unreasonable effort? Yes, there may be a number of situations in which non-GAAP to GAAP reconciliation of prospective information may require an unreasonable level of effort. In those situations, the reconciliation requirement might deter registrants from providing prospective information to investors, a practice we understand the Commission has been trying to encourage. Nonetheless, under the Proposed Rule the registrant would be required to disclose the nature and significance of any reconciling information that is unavailable and, when applicable, indicate the corresponding forward looking GAAP measure is indeterminable. Furthermore, notwithstanding the exception from the reconciliation requirement, disclosures regarding forward looking non-GAAP measures would also be subject to liability pursuant to Section 10(b) and Rule 10b-5. 5. Should we limit the definition of non-GAAP financial measures to historical financial measures? No, we think forward looking information should be included in the definition of "non-GAAP financial measures" and subject to the same disclosure standards as non-GAAP historical measures. The "unreasonable effort" exception to the non-GAAP to GAAP reconciliation requirement should provide registrants with sufficient flexibility. 6. Does the proposed definition of "non-GAAP financial measure" capture non-GAAP information where enhanced disclosure is appropriate? Does the proposed definition capture the pro forma financial information that the Sarbanes-Oxley Act targets? Should Regulation G apply to disclosures of material information including any financial measure calculated and presented otherwise than in accordance with GAAP? Is the proposed definition otherwise too narrow or too broad? If so, how should it be changed? We think the Commission's definition of "non-GAAP financial measures" is substantially broader than the disclosure rules for "pro forma financial information" contemplated under the Act. Admittedly, the Act does not provide any description of the scope or definition of "pro forma financial information." However, we think the definition in the Proposed Rule is broader than the generally understood intent of the Act. The definition of "non-GAAP financial measures" under the Proposed Rule encompasses much more than just "pro forma earnings and cash flow" which has been the principal focus of controversy. We think the scope of "non-GAAP financial measures" should be defined much more narrowly with a primary focus on the principal areas of abuse: pro forma earnings and cash flow. In redefining the scope and definition of "non-GAAP financial measures" the Commission may wish to make reference to and incorporate the joint guidelines developed by FEI and NIRI referred to above. In reevaluating the scope and definition of these disclosures, the Commission may also wish to refer to the results of the NIRI survey published January 17, 2002, which provides an overview of existing practices and may aid in further focusing the scope of additional disclosure requirements on potential problem areas. 7. Should we exclude non-GAAP financial measures communicated orally from the proposed regulation? Would such an exclusion be consistent with the terms of the Sarbanes-Oxley Act? We agree with the Commission's proposal that Regulation G must apply to oral disclosures, as well as written, to fulfill the intent of the Act and to effectively address these disclosures in a comprehensive manner. 8. Is there a danger that investors would consider the reconciliation to have been audited or reviewed by the issuer's independent auditors? Should Regulation G require companies to disclose whether the reconciliation has been reviewed or audited by their independent accountants in order to avoid investor confusion? We think the same standards that generally apply to the overall financial information, as a whole, should apply to the presentation of the accompanying "non-GAAP financial measures" and related reconciliation. Information which has not been audited should be marked as unaudited. 9. In this release, we propose to require companies that include non-GAAP financial measures in filings to also include a discussion of the purposes for which the company's management uses the non-GAAP financial measure and why management believes the presentation of the non-GAAP financial measure provides useful information to investors.37 Should we require that information in all communications that are subject to Regulation G? If so, why? If not, why not? No, while generally we agree with the Commission's proposal to require disclosure in filings of the purpose and reason for disclosure of "non-GAAP financial measures," we do not think this disclosure would be appropriate under Regulation G in view of the context and brevity of such communications. Generally, a registrant's earnings release includes only a summary of financial performance, brief management commentary and, in many cases, highly summarized condensed financial statements. Further, we think the Regulation G disclosures required under the Proposed Rule should be sufficient to avoid misinterpretation and provide adequate context. Additionally, it is noteworthy that in some cases "non-GAAP financial measures" may not be a particular focus of management but may be presented by the registrant in response to requests for this information by the investment community. 10. Should we allow registrants greater latitude to satisfy the requirements of proposed Regulation G by posting the non-GAAP financial measure's components and the comparative GAAP financial measure on their website or in their Commission filings? We think components of "non-GAAP financial measures" and corresponding comparative GAAP financial measures should be disclosed at the time of, in conjunction with and in the same medium as, the disclosure of the "non-GAAP financial measures."
11. As proposed below, and consistent with staff practice, the Commission generally has more detailed disclosure requirements where non-GAAP financial measures are included in Commission filings. Should we require these additional disclosure requirements in all cases, even in documents not filed with the Commission? No, we think the more detailed disclosure requirements are most appropriately included in registrant filings with the Commission. 12. Should we prohibit the presentation, whether or not included in filings with the Commission, of certain non-GAAP financial measures (for example, certain per-share measures or liquidity measures that exclude cash items)? If so, which measures? We agree with the Commission's proposal under the Proposed Rule to prohibit non-GAAP per-share measures (except as permitted by Staff Accounting Bulletin Topic 5-P) and non-GAAP liquidity measures that exclude cash items. We do not think any other non-GAAP measures should be prohibited. 13. Will proposed Regulation G limit the use of non-GAAP financial measures? Please explain. We think Regulation G will deter public disclosure of inappropriate "non-GAAP financial measures." However, as discussed below, the Proposed Rule will also require registrants to file earnings announcements on Form 8-K and will prohibit, in such filings, adjustment of "non-GAAP performance measures" for infrequent or unusual items reasonably likely to recur. We think the combination of these requirements may discourage pro forma presentation of earnings before unusual items in circumstances in which such presentation is not only appropriate and meaningful, but also necessary to fully understand the registrant's financial performance. This would effectively preclude such disclosures under Regulation G, even though not specifically prohibited by this regulation, since, ultimately, the earnings release must be filed on Form 8-K and, as a consequence, would be subject to the prohibition under Regulation S-K (also refer to our response to question 25).
14. Is the limited exception from Regulation G for foreign private issuers appropriate in furtherance of the purposes of the Sarbanes-Oxley Act? Should the exception be broader or more limited? If so, how? No comment. 15. Does the limited exception from Regulation G for foreign private issuers deprive U.S. investors of material information? Alternatively, would eliminating the limited exception for foreign private issuers deprive U.S. investors of non-GAAP financial measures? Furthermore, would eliminating the limited exception from Regulation G for foreign private issuers result in foreign private issuers de-registering and exiting the U.S. capital markets? No Comment. 16. Proposed Regulation G would apply to disclosures of non-GAAP financial measures that represent projections or forecasts of results of business combination transactions ("post-transaction measures") and that are filed with the Commission as information pursuant to the communications rules applicable to business combination transactions,38 as well as non-GAAP financial measures of each registrant that are used to calculate post-transaction measures. Should there be an exception from certain of the requirements of Regulation G for post-transaction measures or other measures filed as information under the business combination rules? Should such measures be treated differently under Regulation G? If so, how? Business combination communications often include brief statements regarding the potential benefits to be achieved by the business combination (e.g., synergies, valuations, dividend amounts, etc.). Either instead of or in addition to the requirements of proposed Regulation G, should the rules specifically require the disclosure of any assumptions or bases underlying these measures? No, we think "post-transaction measures" are already adequately addressed by existing Commission disclosure requirements under Article 11 of Regulation S-K regarding acquisition pro forma information (refer also to our response to question 28).
17. Should Regulation G be enforceable by the Commission only or by private plaintiffs? Should language be included in Regulation G that makes explicit the manner in which it is to be enforced? We agree with the Commission's proposal that Regulation G should be enforced only by the Commission, rather than private plaintiff litigants. We think Commission enforcement will be sufficient to deter violations. 18. Will proposed Regulation G meet the goals of Section 401(b) of the Sarbanes-Oxley Act? Does proposed Regulation G meet those goals in the most appropriate manner? Is there a way to achieve these goals that is less burdensome than that in proposed Regulation G? If so, what is it? Subject to the comments discussed elsewhere herein, yes, we think Regulation G, as proposed by the Commission, meets the goals of Section 401(b) of the Act. However, we think the scope and definition of "non-GAAP financial measures" is too broad and should be defined more narrowly with a primary focus on the principal areas with potential for abuse: pro forma earnings and cash flow (refer also to our response to question 6). We also think the Commission should further clarify the prohibition against adjustment of "non-GAAP financial measures" for infrequent and unusual items to ensure that pro forma presentation is preserved where necessary and meaningful (also refer to our response to question 25). II. B. Proposed Amendments to Item 10 of Regulation S-K, Item 10 of Regulation S-Band Form 20-F. 19. Are the proposed additional disclosures required in filings necessary in light of proposed Regulation G? Generally, we agree with the Commission's proposed disclosures under the Proposed Rule and think these disclosures are substantially consistent with existing Commission policies. However, we think the "non-GAAP financial measures" has been too broadly defined as indicated in our response to question 6. We also believe further clarification is necessary with respect to the prohibition against adjustment of "non-GAAP financial measures" for infrequent or unusual items that are reasonably likely to recur. 20. Consistent with current staff policy, our proposal would prohibit the use of non-GAAP per-share measures. Is such a prohibition necessary, or would it suffice to reconcile both the numerator and denominator of the non-GAAP per-share measure with comparable GAAP measures, respectively? Yes, we agree with the proposed prohibition against disclosure of non-GAAP per-share measures, except as permitted by Staff Accounting Bulletin Topic 5-P. 21. Should the non-GAAP financial measures be presented in a separate section of a Commission filing? No, we do not think a separate section for "non-GAAP financial measures" is necessary or appropriate; instead, "non-GAAP financial measures" should be integrated into the overall filing where such information is most meaningful. 22. Should the requirements for filings and those required in Regulation G be different? For example, should the requirement that the GAAP measure in a filing be presented with equal or greater prominence be included in Regulation G or not included in Item 10 of Regulation S-K and Item 10 Regulation S-B? We believe the disclosure requirements under Regulation G are appropriate to the context of these disclosures, except as to the definitional issue referred to in our response to question 6, and do not think they need to be the same as disclosure requirements for a filing. 23. Should the requirement that a quantitative reconciliation of prospective measures be included in the filing have an exception similar to that proposed in Regulation G where the necessary information cannot be obtained without unreasonable effort? We think reconciliation of non-GAAP prospective measures with corresponding comparative GAAP measures is appropriate in filings with the Commission. If a registrant wishes to preempt non-GAAP prospective measures from the more rigorous disclosure requirements applicable to filings with the Commission (and, in a sense, preserve the "unreasonable effort" exception available under Regulation G) the registrant could simply elect to furnish such non-GAAP prospective measures under Item 6.01 of Form 8-K in accordance with Regulation F-D. In this manner, such disclosure would not be considered part of the filing (refer also to our response to question 36). 24. Are there additional disclosures that should be required in filings? If so, what disclosure items would be beneficial to investors? No. 25. Consistent with the current staff policy, our proposal would prohibit specified types of disclosures. Is such a prohibition necessary and appropriate? Yes, generally we think the prohibitions regarding "non-GAAP financial measures" in filings with the Commission are substantially consistent with existing Commission policies. However, we think the prohibition against adjustment of "non-GAAP financial measures" for infrequent or unusual items that are reasonably likely to recur may discourage separate presentation of earnings before unusual items. As indicated in our response to question 13, we think registrants may be reluctant to provide pro forma presentation of earnings before unusual items in situations where recurrence, although unlikely, may be possible, given the registrant's exposure to liability under the Proposed Rule. 26. Should the proposed requirements apply to foreign private issuers' reports on Form 20-F? No comment. 27. Should the proposed requirements apply to filings by Canadian issuers under the MJDS on Form 40-F? No comment. 28. As with Regulation G, in the case of business combinations, the proposed requirements would apply to "post-transaction measures" filed as information under the communication rules applicable to business combination transactions.41 Is an exception from certain of the requirements for post-transaction measures or other measures filed as information under the business combination rules appropriate? Should such measures be treated differently? If so, how? Either instead of or in addition to the requirements of proposed Regulation G, should the rules specifically require the disclosure of assumptions or bases underlying announcements of potential benefits to be achieved by the business combination (e.g., synergies, valuations, dividend amounts, etc.)? We think "post-transaction measures" are already adequately addressed by existing Commission disclosure requirements under Article 11 of Regulation S-K regarding acquisition pro forma information (refer also to our response to question 16). 29. If a company presents a non-GAAP measurement for a previous completed fiscal period, should it be required to present that same non-GAAP measurement in future filings where the previous period is compared to a recent completed fiscal period? For example, if a company presents a non-GAAP financial measurement that for the first fiscal quarter of 2002, should it be required to present the same non-GAAP measurement for the first fiscal quarter of 2003? No, this decision should rest with the registrant so the registrant may tailor their disclosure to the particular facts and circumstances of the business including relative significance on a year over year basis. II. C. Proposed New Item 1.04 of Form 8-K 30. Is proposed Item 1.04 necessary given Regulation FD and proposed Regulation G? The Proposed Rule would require registrants to file with the Commission any material information regarding results of operation or financial condition on Form 8-K upon issuance of an earnings release or other public announcement. We do not think filing the registrant's earnings release on Form 8-K is necessary or beneficial to investors. We also think this requirement may have the unintended consequence of delaying the release of earnings announcements and believe this consequence would far exceed any incremental benefits to the investors.
31. Should the Commission define "public disclosure" for purposes of proposed Item 1.04? No. 32. Proposed Item 1.04 would apply only to disclosures regarding completed annual or quarterly fiscal periods. Should we expand the scope of proposed Item 1.04 to require the filing of all material updates to estimates for current or future fiscal periods? No, we do not think the Form 8-K filing requirement should be expanded to encompass material updates to current or future period earnings. If such a requirement is implemented we think it could delay registrant disclosures regarding forecasted results of operations or financial condition, such as "earnings warnings" and other guidance. 33. Will proposed Item 1.04 have the effect of decreasing the extent to which public companies make public announcements or releases of material non-public information regarding completed fiscal periods? If so, what are the specific factors that would result in that decrease? Why would those factors result in that decrease? No, we do not think registrants would discontinue public earnings announcements to avoid the Form 8-K filing requirement. However, it would likely affect the content of such disclosures. For example, registrants may be more reluctant to present separate disclosure of earnings adjusted for unusual items (refer to our responses to questions 13 and 25). 34. Is the posting of the complementary information on a website sufficient disclosure or should a filing be required for this information as well? Yes, we think posting to the registrant's web site is a better alternative which overcomes the disadvantages described in our responses to questions 30, 32 and 33. 35. Regulation G requires that any information provided on a website be available at the time the original public communication is made. Is it necessary for Item 1.04 to contain the same timing requirement? No. 36. Should we require forward-looking information to be considered filed for purposes of Section 18 of the Exchange Act? Should forward-looking information, where appropriate, be incorporated by reference into a registration statement, proxy statement or other report? No, we think the exception available for forward looking information under Regulation F-D may be necessary to encourage disclosure of forward looking information (also refer to our response to question 23). 37. Should the disclosure requirements of Item 10 of Regulation S-K and Item 10 of Regulation S-B apply to complementary information not filed with the Commission? No. 38. Would the application of Item 1.04 only to disclosures regarding completed annual or quarterly periods cause public companies to increase their disclosure of intra-period information, rather than disclosure regarding completed periods, in an effort to avoid the requirements of Item 1.04? No. |