-------------------- BEGINNING OF PAGE #1 -------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 228, 229, 239, 240, and 249
[Release Nos. 33-7250; 34-36643; IC-21625; File No. S7-35-95].
RIN 3235-AG42
PROPOSED AMENDMENTS TO REQUIRE DISCLOSURE OF ACCOUNTING POLICIES
FOR DERIVATIVE FINANCIAL INSTRUMENTS AND DERIVATIVE COMMODITY
INSTRUMENTS AND DISCLOSURE OF QUALITATIVE AND QUANTITATIVE
INFORMATION ABOUT MARKET RISK INHERENT IN DERIVATIVE FINANCIAL
INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS
AGENCY: Securities and Exchange Commission
ACTION: Proposed amendments
SUMMARY: The Securities and Exchange Commission ("Commission" or
"SEC") today is soliciting comment on proposed amendments to
Regulation S-X, Regulation S-K, and various forms, including Form
20-F. The proposed amendments are intended to clarify and expand
existing requirements for financial statement footnote
disclosures about registrants' accounting policies for derivative
financial instruments, as defined, and derivative commodity
instruments, as defined. In addition, the proposed amendments
require disclosure outside the financial statements of
qualitative and quantitative information about market risk
inherent in derivative financial instruments, other financial
instruments, as defined, and derivative commodity instruments.
Also, the release reminds registrants that when they provide
disclosure about financial instruments, commodity positions, firm
commitments, and other anticipated transactions ("reported
items"), such disclosure must include disclosures about
derivatives that affect directly or indirectly such reported
items, to the extent the effects of such information are material
and necessary to prevent the disclosure about the reported item
from being misleading. In sum, these proposals are designed to
make information about derivative financial instruments, other
financial instruments, and derivative commodity instruments more
useful to investors seeking to assess the market risk inherent in
these instruments.
DATES: Comments on the proposed amendments should be received on
or before [120 days after Federal Register publication].
ADDRESSES: Comments should be submitted in triplicate to
Jonathan G. Katz, Secretary, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549. Comment letters
should refer to File No. S7-35-95. All comments received will be
available for public inspection and copying in the Commission's
Public Reference Room, 450 Fifth Street, N.W., Washington, D.C.
20549.
FOR FURTHER INFORMATION CONTACT: Cathy J. Cole, Thomas J.
Linsmeier, Russell B. Mallett, III, or Stephen M. Swad, at (202)
942-4400, Office of the Chief Accountant, Securities and Exchange
Commission, 450 Fifth Street, N.W., Mail Stop 11-3, Washington,
D.C. 20549, or Kurt R. Hohl, at (202) 942-2960, Division of
Corporation Finance, Securities and Exchange Commission, 450
Fifth Street, N.W., Mail Stop 3-13, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing to amend -------------------- BEGINNING OF PAGE #2 ------------------- 2
Rule 4-08 of Regulation S-X-[1]- and to add new Item 305 to
Regulation S-K.-[2]- Additionally, the Commission is
proposing amendments to Forms S-1, S-2, S-4, S-11, and F-
4-[3]- under the Securities Act of 1933,-[4]- and Rule
14a-3,-[5]- Schedule 14A,-[6]- and Forms 10, 20-F, 10-
Q, and 10-K-[7]- under the Securities Exchange Act of
1934.-[8]-
-[1]- 17 CFR 210.4-08. Item 310 of Regulation S-B, CFR
228.310, also would be amended to incorporate the
changes to Item 4-08 of Regulation S-X.
-[2]- 17 CFR Part 229.
-[3]- 17 CFR 239.11, 12, 25, 18, and 34.
-[4]- 15 U.S.C. 77a et seq.
-[5]- 17 CFR 240.14a-3.
-[6]- 17 CFR 240.14a-101.
-[7]- 17 CFR 249.210, 220f, 308a, and 310.
-[8]- 15 U.S.C. 78a et seq. -------------------- BEGINNING OF PAGE #3 ------------------- 3
I. EXECUTIVE SUMMARY
During the last several years, there has been substantial
growth-[9]- in the use of derivative financial instruments,
other financial instruments, and derivative commodity
instruments.-[10]- The Commission recognizes that these
instruments can be effective tools for managing registrants'
exposures to market risk.-[11]- During 1994, however, some
-[9]- The worldwide notional/contract amounts for derivative
financial instruments and derivative commodity
instruments increased from $7.1 trillion in 1989 to
$62.1 trillion in 1994. These notional amounts, while
one way to measure derivative activities, do not
represent a precise measure of the risk associated with
these instruments. In many instances, the amount at
risk is much smaller than the notional amount. See
Financial Derivatives: Actions Needed to Protect the
Financial System, United States General Accounting
Office Report to Congressional Requesters (May 1994),
and Public Disclosure of the Trading and Derivatives
Activities of Banks and Securities Firms, Basle
Committee on Banking Supervision ("Basle Committee")
and the Technical Committee of the International
Organization of Securities Commissions ("IOSCO")
(November 1995).
-[10]- See section IV C, infra, for complete definitions of
the terms derivative financial instruments, other
financial instruments, and derivative commodity
instruments. In brief, for purposes of this release:
(1) derivative financial instruments include futures,
forwards, swaps, options, and other financial
instruments with similar characteristics, (2) other
financial instruments include, for example,
investments, loans, structured notes, mortgage-backed
securities, indexed debt instruments, interest-only and
principal-only obligations, deposits, and other debt
obligations, and (3) derivative commodity instruments
include, to the extent such instruments are not
derivative financial instruments, commodity futures,
commodity forwards, commodity swaps, commodity options,
and other commodity instruments with similar
characteristics that are reasonably possible to be
settled in cash or with another financial instrument.
In addition, for purposes of this release, the terms
(1) "derivatives" refer to derivative financial
instruments and derivative commodity instruments,
together, and (2) "market risk sensitive instruments"
refer to derivative financial instruments, other
financial instruments, and derivative commodity
instruments, collectively.
-[11]- Market risk is the risk of loss arising from adverse
changes in market rates and prices, such as interest
rates, foreign currency exchange rates, commodity
prices, and similar market rate or price changes (e.g.,
equity prices). See Group of Thirty, "Derivatives:
Practices and Principles" (July 1993), and Financial
Accounting Standards Board ("FASB"), Statement of
Financial Accounting Standards No. 105, "Disclosure of
Information about Financial Instruments with Off-
Balance-Sheet Risk and Financial Instruments with
(continued...) -------------------- BEGINNING OF PAGE #4 ------------------- 4
registrants experienced significant, and sometimes unexpected,
losses in market risk sensitive instruments due to, among other
things, changes in interest rates, foreign currency exchange
rates, and commodity prices. In light of these losses and the
substantial growth in the use of market risk sensitive
instruments, public disclosure about these instruments has
emerged as an important issue in financial markets.
During 1994 and 1995, to understand better this emerging
issue and to assess current disclosure practice, the SEC staff
reviewed annual reports filed with the Commission by
approximately 500 registrants. The primary purposes of these
reviews were to (i) assess the quality of disclosures pertaining
to market risk sensitive instruments and (ii) determine what, if
any, additional information is needed to improve disclosures
about these instruments. The SEC staff observed that while
disclosures reviewed in 1995 were more informative than those
reviewed in 1994, in part, because of improved guidance by the
FASB,-[12]- three significant disclosure issues remain.
Today, to address those disclosure issues:-[13]-
1. The Commission proposes amendments to Regulation S-X
requiring enhanced descriptions in the footnotes to the
financial statements of accounting policies for
derivative financial instruments and derivative
commodity instruments.-[14]- These disclosures
would be required unless the registrant's derivative
activities are not material. For this proposal, the
materiality of derivatives activities would be measured
by the fair values-[15]- of derivative financial
-[11]-(...continued)
Concentrations of Credit Risk" ("FAS 105") (March
1990), for similar definitions of market risk.
-[12]- In October 1994, the FASB issued Statement of Financial
Accounting Standards No. 119, "Disclosures about
Derivative Financial Instruments and Fair Value of
Financial Instruments" ("FAS 119") (October 1994),
which requires disclosures about derivative financial
instruments. FAS 119 is effective for fiscal years
ending after December 15, 1994, except for entities
with less than $150 million in total assets. For those
entities, FAS 119 is effective for financial statements
issued for fiscal years ending after December 15, 1995.
-[13]- The FASB currently is working on a project to improve
accounting recognition and measurement of derivatives.
This release does not address accounting recognition
and measurement of derivatives, but focuses solely on
disclosure issues related to derivatives and other
financial instruments.
-[14]- These disclosure requirements do not relate to, for
example, other financial instruments. Accounting
policy disclosure requirements for these other
instruments are prescribed by existing generally
accepted accounting principles and Commission guidance
(see, e.g., Accounting Principles Board Opinion No. 22,
"Disclosure of Accounting Policies" ("APB 22") (April
1972).
-[15]- For purposes of this release, the term "fair value" has
the same meaning as defined by generally accepted
(continued...) -------------------- BEGINNING OF PAGE #5 ------------------- 5
instruments and derivative commodity instruments at the
end of each reporting period and the fair value of
those instruments during each reporting period.
2. The Commission proposes amendments creating a new Item
305 of Regulation S-K requiring disclosure outside the
financial statements-[16]- of qualitative and
quantitative information about derivative financial
instruments, other financial instruments, and
derivative commodity instruments. These disclosures
would be required if any of the following items are
material: (i) the fair values of market risk sensitive
instruments outstanding at the end of the current
reporting period or (ii) the potential loss in future
earnings, fair values, or cash flows of market risk
sensitive instruments from reasonably possible market movements.-[17]-
a. In complying with the proposed amendments
requiring disclosure of quantitative information
about market risk, registrants would be permitted
to select any one of the following three
disclosure alternatives:
i. Tabular presentation of expected future cash
flow amounts and related contract terms
categorized by expected maturity dates;
ii. Sensitivity analysis expressing the possible
loss in earnings, fair values, or cash flows
of market risk sensitive instruments from
selected hypothetical changes in market rates
and prices; or
iii. Value at risk disclosures expressing the
potential loss in earnings, fair values, or
cash flows of market risk sensitive
instruments from market movements over a
selected period of time with a selected
likelihood of occurrence.
b. The proposed qualitative information about market
risk would include a narrative discussion of (i) a
registrant's primary market risk
exposures-[18]- and (ii) how the registrant
manages those exposures (e.g., a description of
the objectives, general strategies, and
instruments, if any, used to manage those
-[15]-(...continued)
accounting principles (see, e.g., FASB, Statement of
Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" ("FAS 107")
(December 1991), paragraph 5).
-[16]- See section III B3b, infra, for a discussion about
where, outside the financial statements, these
disclosures would appear.
-[17]- The proposed amendments regarding disclosure of
qualitative and quantitative information about market
risk do not relate solely to derivatives, but also to
investments in other financial instruments. These
disclosures would be required for registrants that have
material investments in other financial instruments,
even though they have no investments in derivatives.
-[18]- See note 63, infra, for a definition specifying how the
term "primary market risk exposures" is used in this
release. -------------------- BEGINNING OF PAGE #6 ------------------- 6
exposures).
3. The Commission is reminding registrants that when they
provide disclosure about financial instruments,
commodity positions, firm commitments, and other
anticipated transactions-[19]- ("reported
items"), such disclosure must include information about
derivatives that affect directly or indirectly such
reported items, to the extent the effects of such
information is material and necessary to prevent the
disclosure about the reported item from being
misleading. For example, when information is required
to be disclosed in the footnotes to the financial
statements about interest rates and repricing
characteristics of debt obligations, registrants should
include, when material, disclosure of the effects of
derivatives. Similarly, summary information and
disclosures in Management's Discussion and Analysis
("MD&A") about the cost of debt obligations should
include, when material, disclosure of the effects of
derivatives.
Congress recently adopted the Private Securities Litigation
Reform Act of 1995 that, among other things, amends the
Securities Act and Securities Exchange Act to include a safe
harbor for forward looking information. It is the Commission's
intention that forward looking disclosures made pursuant to
proposed Item 305 of Regulation S-K and Item 9A of Form 20-F be
subject to an appropriate safe harbor. The Commission's staff is
continuing to consider how best to craft an appropriate safe
harbor in light of this recent legislation, and the Commission
intends to issue a release shortly that would propose that the
disclosures to be required by new Items 305 and 9A be made
subject to safe harbor provisions.
The proposed amendments pertaining to qualitative and
quantitative information about market risk would not apply to
registered investment companies-[20]- and small business
issuers.-[21]- However, to the extent market risk
represents a material known trend, event, or uncertainty, small
business issuers, like other registrants, would be required to
discuss the impact of market risk on past and future financial
condition and results of operations, pursuant to Commission rules
-[19]- For purposes of this release, "anticipated
transactions" means transactions (other than
transactions involving existing assets or liabilities
or transactions necessitated by existing firm
commitments) an enterprise expects, but is not
obligated, to carry out in the normal course of
business (see, e.g., 9 of Statement of Financial
Accounting Standards No. 80, "Accounting for Futures
Contracts" ("FAS 80") (August 1984)).
-[20]- The Commission currently is considering comments and
suggestions on how to improve the descriptions of risk
provided to investors by mutual funds and other
investment companies. See "Improving Descriptions of
Risk by Mutual Funds and other Investment Companies,"
Securities Act Release No. 7153, 60 FR 17172 (April 4,
1995).
-[21]- The proposed amendments relating to accounting policies
disclosures, however, would apply to both registered
investment companies and small business issuers. -------------------- BEGINNING OF PAGE #7 ------------------- 7
relating to MD&A.-[22]-
The proposed amendments are designed to make disclosures
about market risk sensitive instruments more useful to investors.
They represent one step by the Commission to improve registrants'
disclosures about market risk sensitive instruments. The
Commission recognizes the evolving nature of market risk
sensitive instruments and intends to continue considering how
best to address disclosure issues relating to these instruments.
In this regard, if the proposals in this release are adopted, the
Commission would anticipate reconsidering the effectiveness of
those rules, as well as the need for additional proposals, after
a period of five years.
II. INITIATIVES REGARDING DISCLOSURES ABOUT DERIVATIVES
Certain private sector entities have highlighted problems
associated with disclosures about market risk sensitive
instruments, as identified by users of financial reports. For
example, the Association for Investment Management and Research
("AIMR"), an organization of financial analysts, noted that users
"are confounded by the . . . complexity of financial
instruments."-[23]- In addition, after considerable
investigation into the needs of investors and creditors, the
American Institute of Certified Public Accountant's ("AICPA")
Special Committee on Financial Reporting stated:-[24]-
Users are confused. They complain that business
reporting is not answering important questions, such
as: . . . What [innovative financial] instruments has
the company entered into, and what are their terms?
How has the company accounted for those instruments,
and how has that accounting affected the financial
statements? What risks has the company transferred or
taken on? [page 76]
Other organizations recently have made recommendations on
how to improve such disclosures about market risk sensitive
instruments. These organizations include regulators, such as the
Group of 10 Central Bankers,-[25]- the Federal Reserve Bank
of New York,-[26]- the Basle Committee and the Technical
Committee of IOSCO,-[27]- and private sector bodies, such
-[22]- See, e.g., Item 303 of Regulation S-B, 17 CFR 228.303,
and Item 303 of Regulation S-K, 17 CFR 229.303.
-[23]- See AIMR, Financial Reporting in the 1990s and Beyond,
page 30, (1993).
-[24]- See AICPA Special Committee on Financial Reporting,
Improving Business Reporting -- A Customer Focus:
Meeting the Information Needs of Investors and
Creditors (1994).
-[25]- See Bank for International Settlements, A Discussion
Paper on Public Disclosure of Market and Credit Risks
by Financial Intermediaries, prepared by working group
of the Euro-currency Standing Committee of the Central
Banks of the Group of Ten Countries (September 1994).
-[26]- See Federal Reserve Bank of New York, Public Disclosure
of Risks Related to Market Activity: A Discussion
Paper (November 1994).
-[27]- See Basle Committee and the Technical Committee of
IOSCO, Framework for Supervisory Information about the
(continued...) -------------------- BEGINNING OF PAGE #8 ------------------- 8
as the Group of Thirty-[28]- and a task force of the
Financial Executives Institute ("FEI").-[29]-
In general, these organizations have stressed the need to
make more understandable the risks inherent in market risk
sensitive instruments. In particular, they have called for
additional quantitative and qualitative disclosures about market
risk. For example, the Federal Reserve Bank of New York
recommended a new financial statement providing quantitative
information about the overall market risk of an
entity.-[30]- In addition, the FEI task force recommended
that companies "disclose some type of information which conveys
overall exposure to market risk."-[31]- In this regard,
the FEI task force suggests two distinct approaches. One
approach is to provide a high-level summary of relevant
statistics about outstanding activity at period end. The second
approach is to communicate the potential loss which could occur
under specified conditions using either a value at risk or
another comprehensive model to measure market risk.-[32]-
In October 1994, the FASB, responding in part to calls for
improved disclosure, issued Statement of Financial Accounting
Standards No. 119, "Disclosures about Derivative Financial
Instruments and Fair Value of Financial Instruments" ("FAS 119")
(October 1994).-[33]- FAS 119 prescribes, among other
things, disclosures in the financial statements about the
policies used to account for derivative financial instruments and
a discussion of the nature, terms, and cash requirements of
derivative financial instruments. FAS 119 also encourages, but
does not require, disclosure of quantitative information about an
-[27]-(...continued)
Derivatives Activities of Banks and Securities Firms
(May 1995). See also Basle Committee and the Technical
Committee of IOSCO, Public Disclosure of the Trading
and Derivatives Activities of Banks and Securities
Firms (November 1995).
-[28]- See Group of Thirty, Derivatives: Practices and
Principles (July 1993).
-[29]- See FEI, Derivative Financial Instruments Accounting
and Disclosure Issues, ("FEI Report") prepared by FEI
CCF/CCR Derivatives Disclosure Task Force (August
1994).
-[30]- See note 26, supra.
-[31]- See Attachment A, page 1 of FEI Report.
-[32]- See Attachment B, pages 5 and 6 of FEI Report.
-[33]- Similar standards were recently adopted or proposed by
the International Accounting Standards Committee, the
Canadian Institute of Chartered Accountants, and the
Australian Accounting Standards Board. See
International Accounting Standards No. 32, "Financial
Instruments: Disclosure and Presentation" ("IAS 32")
(March 1995), Section 3860 of the Handbook of the
Canadian Institute of Chartered Accountants, and the
Australian Accounting Standards Board's exposure draft
entitled, "Presentation and Disclosure of Financial
Instruments" (June 1995), respectively. -------------------- BEGINNING OF PAGE #9 ------------------- 9
entity's overall market risk.-[34]-
During 1994, in response, in part, to the concerns of
investors, regulators, and private sector entities, the SEC staff
reviewed the annual reports of approximately 500 registrants. In
addition, during 1995, more recent annual reports were reviewed
by the SEC staff to assess the effect of FAS 119 on disclosures
about market risk sensitive instruments. As a result of these
reviews, the SEC staff observed that FAS 119 had a positive
effect on the quality of disclosures about derivative financial
instruments. However, the SEC staff also concluded there was a
need to improve disclosures about derivative financial
instruments, other financial instruments, and derivative
commodity instruments. In particular, the SEC staff identified
the following three primary disclosure issues.
1. Footnote disclosures of accounting policies for
derivatives often are too general to convey adequately
the diversity in accounting that exists for
derivatives. Thus, it often is difficult to determine
the impact of derivatives on registrants' statements of
financial position, cash flows, and results of
operations;
2. Disclosures often focus on derivatives and other
financial instruments in isolation. Thus, it may be
difficult to assess whether these instruments increase
or decrease the net market risk exposure of a
registrant; and
3. Disclosure about financial instruments, commodity
positions, firm commitments, and other anticipated
transactions ("reported items") in the footnotes to the
financial statements, MD&A, schedules, and selected
financial data may not reflect adequately the effect of
derivatives on such reported items. Thus, without
disclosure about the effects of derivatives,
information about the reported items may be incomplete
or perhaps misleading.
The proposals in this release are designed to address these
issues. They reflect a significant amount of learning by the
Commission and its staff over the past year and a half about (i)
derivatives and related risk management activities and (ii)
alternative disclosure approaches to make those activities more
understandable to investors. In addition, during this period,
the Commission and its staff developed the following guiding
principles, which provided the foundation for the proposed
amendments described in this release:
ù Disclosures should allow investors to understand better how
derivatives affect a registrant's statements of financial
position, cash flows, and results of operations;
ù Disclosures should provide information about market risk;
ù Disclosures should allow the investor to understand how
market risk sensitive instruments are used in the context of
the registrant's business;
ù Disclosures about market risk should not focus on
derivatives in isolation, but rather should reflect the risk
of loss inherent in all market risk sensitive instruments;
ù Disclosure requirements about market risk should be flexible
enough to accommodate different types of registrants,
different degrees of market risk exposure, and alternative
ways of measuring market risk;
-[34]- See FAS 119 12. -------------------- BEGINNING OF PAGE #10 ------------------- 10
ù Disclosures about market risk should highlight, where
appropriate, special risks relating to leverage, option, or
prepayment features; and
ù New disclosure requirements should build on existing
disclosure requirements, where possible, to minimize
compliance costs of registrants.
III. DISCUSSION OF PROPOSED AMENDMENTS
A. Disclosure of Accounting Policies for Derivatives
1. Background
During the last several years, a significant number of
issues relating to the accounting for derivatives have been
raised. Although the FASB is working on a project that would
address comprehensively the accounting for derivatives, currently
there is very little authoritative literature on the accounting
for options and complex derivatives, many of which are used
frequently by registrants.-[35]-
In the absence of comprehensive literature, registrants are
developing accounting practices for options and complex
derivatives by analogy to the limited amount of literature that
does exist. These analogies are complicated because existing
derivative literature refers to at least three distinctly
different methods of accounting for derivatives (e.g., fair value
accounting, deferral accounting, and accrual
accounting)-[36]- and the underlying concepts and criteria
used in determining the applicability of these accounting methods
are not consistent.-[37]- As a result, during its 1994 and
-[35]- The authoritative accounting literature for options and
complex derivatives generally is limited to a few
consensuses from the FASB Emerging Issues Task Force
("EITF"), which by their nature address the accounting
for very specific transactions. See, e.g., EITF Issues
88-8, "Mortgage Swaps," and 90-17, "Hedging Foreign
Currency Risks with Purchased Options."
-[36]- Under the fair value method, derivatives are carried on
the balance sheet at fair value with changes in that
value recognized in earnings or stockholders' equity
(see, e.g., Statement of Financial Accounting Standards
No. 52, "Foreign Currency Translation" ("FAS 52")
(December 1981), and FAS 80. Under the deferral
method, gains and losses from derivatives are deferred
on the balance sheet and recognized in earnings in
conjunction with earnings of designated items (see,
e.g., FAS 52 and FAS 80). Under the accrual method,
each net payment/receipt due or owed under the
derivative is recognized in earnings during the period
to which the payment/receipt relates; there is no
recognition on the balance sheet for changes in the
derivative's fair value (see, e.g., EITF Issue 84-36,
"Interest Rate Swap Transactions").
-[37]- For example, the risk reduction criterion in FAS 52 is
different from the risk reduction criterion in FAS 80.
FAS 52 specifies risk reduction on a transaction basis,
while FAS 80 specifies risk reduction on an enterprise
basis. In addition, FAS 80 permits the use of deferral
accounting for futures contracts used to hedge
probable, but not firmly committed, anticipated
transactions, while FAS 52 prohibits deferral
(continued...) -------------------- BEGINNING OF PAGE #11 ------------------- 11
1995 reviews of filings, the SEC staff observed that registrants
may account for the same type of derivative in many different
ways.-[38]- Thus, it was difficult to compare the
financial statement effects of derivatives across registrants.
In order to provide a better understanding of the accounting
for derivative financial instruments, paragraph 8 of FAS 119
requires disclosure of the policies used to account for such
instruments, pursuant to the requirements of APB 22.-[39]-
Specifically, FAS 119 emphasizes the disclosure of "policies for
recognizing (or not recognizing) and measuring derivative
financial instruments . . . and when recognized, where those
instruments and related gains and losses are reported in the
statements of financial position and income."-[40]-
However, notwithstanding its helpful guidance, FAS 119 does not
provide an explicit indication of what must be disclosed in
accounting policies footnotes to make more understandable the
effects of derivatives on the statements of financial position,
cash flows, and results of operations, and it does not address
-[37]-(...continued)
accounting for foreign currency forward exchange
contracts used to hedge those same types of anticipated
transactions.
-[38]- The Commission does not mean to imply by this statement
that registrants may justify the use of any method of
accounting for derivatives. Rather registrants must
select appropriate accounting methods that are
consistent with generally accepted accounting
principles. In particular, generally accepted
accounting principles require registrants using
derivatives for trading, dealing, or speculative
purposes to recognize those instruments on the balance
sheet at fair value with changes in that value
recognized immediately in earnings (see, e.g., FAS 80
3).
-[39]- APB 22 12 states:
Disclosure of accounting policies should identify and
describe the accounting policies followed by the
reporting entity and the methods of applying those
principles that materially affect the determination of
financial position, cash flows or results of
operations. In general, the disclosure should
encompass important judgments as to the appropriateness
of principles relating to recognition of revenue and
allocation of asset costs to current and future
periods; in particular, it should encompass those
accounting principles and methods that involve ... a
selection from existing acceptable alternatives.
The Accounting Principles Board was the predecessor to the
FASB. Unless superseded by FASB Statements, APB Opinions
continue to be regarded as the highest level of generally
accepted accounting principles followed by the accounting
profession. See generally AICPA, Statements on Auditing
Standards No. 69, "The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles in
the Independent Auditor's Report," 5 (March 1992); AU
Section 411.05.
-[40]- See FAS 119 60. -------------------- BEGINNING OF PAGE #12 ------------------- 12
disclosure of accounting policies for derivative commodity
instruments. Thus, to facilitate a more informed assessment of
the effects of derivatives on financial statements, the proposed
amendments make explicit the items to be disclosed in the
accounting policies footnotes for derivative financial
instruments and derivative commodity instruments.
2. Proposed Disclosure Rule
The proposed amendments pertaining to accounting policies
would add a new paragraph (n) to Rule 4-08 of Regulation S-X to
require disclosure in the footnotes to the financial statements
of (i) each method used to account for derivatives, (ii) types of
derivatives accounted for under each method, (iii) the criteria
required to be met for each accounting method used (e.g., the
manner in which risk reduction, correlation, designation, and/or
effectiveness tests are applied), (iv) the accounting method used
if the specified criteria are not met, (v) the accounting for the
termination of derivatives designated as hedges or used to affect
directly or indirectly the terms, fair values, or cash flows of a
designated item, (vi) the accounting for derivatives if the
designated item matures, or is sold, extinguished, terminated,
or, if related to an anticipated transaction, is no longer likely
to occur, and (vii) where and when derivatives and their related
gains and losses are reported in the statements of financial
position, cash flows, and results of operations.-[41]-
The proposed amendments would require registrants to
distinguish between accounting policies used for derivatives
entered into for trading purposes from those that are entered
into for purposes other than trading.-[42]- Disclosure of
accounting policies for derivatives would be required unless the
registrant's derivative activities are not material. For this
proposal, the materiality of derivatives activities would be
measured by the fair values of derivative financial instruments
and derivative commodity instruments at the end of each reporting
period and the fair value of those instruments during each
reporting period.
In essence, the proposed amendments clarify the application
of the accounting policy disclosure requirements set forth in FAS
119 for derivative financial instruments. They also extend those
requirements to address the disclosure of accounting policies for
derivative commodity instruments.-[43]-
3. Requests for Comment
1. The proposed amendments requiring disclosure of
accounting policies for derivatives are designed to make it
easier for investors to assess the financial statement effects of
derivative financial instruments and derivative commodity
instruments. Would the proposed disclosures accomplish this
objective? If not, are there specific disclosures about
accounting policies that should be added or deleted?
2. The proposed amendments relating to disclosures of
accounting policies are limited to derivative financial
-[41]- FAS 119 11(b) also requires a description of where
gains and losses from derivative financial instruments
held or issued for purposes other than trading are
reported in the statements of financial position and
income.
-[42]- For purposes of this release, the term "trading
purposes" has the same meaning as defined by generally
accepted accounting principles (see, e.g., FAS 119
9a).
-[43]- See note 14, supra. -------------------- BEGINNING OF PAGE #13 ------------------- 13
instruments and derivative commodity instruments. These proposed
disclosure requirements do not add to the accounting policies
disclosure requirements for other financial instruments, which
are addressed by generally accepted accounting principles (e.g.,
APB 22). Is the scope of instruments covered by the proposed
amendments requiring additional accounting policies disclosures
appropriate? If not, which instruments should be included or
excluded?
3. Under the proposed amendments, disclosure of accounting
policies would be required unless the registrant's derivative
activities are not material. For this proposal, the materiality
of derivatives activities would be measured by the fair values of
derivative financial instruments and derivative commodity
instruments at the end of each reporting period and the fair
value of those instruments during each reporting period. Is this
disclosure threshold appropriate? If not, what other threshold
could be specified to require disclosure of all information a
reasonable investor would consider important to decision-making
(e.g., would it be more appropriate to use a disclosure threshold
similar to the threshold for quantitative and qualitative
disclosures about market risk proposed in section III B3a of this
release)?
B. Disclosures of Quantitative and Qualitative Information
About Market Risk
1. Quantitative Information About Market Risk
a. Background
Market risk is inherent in both derivative and non-
derivative instruments, including:
ù derivative financial instruments - futures, forwards, swaps,
options, and other financial instruments with similar
characteristics;
ù other financial instruments - non-derivative financial
instruments, such as investments, loans, structured notes,
mortgage-backed securities, indexed debt instruments,
interest-only and principal-only obligations, deposits, and
other debt obligations;
ù derivative commodity instruments that are reasonably
possible-[44]- to be settled in cash or with another
financial instrument - commodity futures, commodity
forwards, commodity swaps, commodity options, and other
commodity instruments with similar characteristics, to the
extent such instruments are not derivative financial
instruments.
Generally accepted accounting principles and Commission
rules require disclosure of certain quantitative information
pertaining to some of these derivative financial instruments.
For example, registrants currently are required to disclose
notional amounts of derivative financial instruments and the
nature and terms of debt obligations.-[45]- However, this
information (i) often is abbreviated, (ii) is presented piecemeal
in different parts of the financial statements, and (iii) does
not apply to all market risk sensitive instruments. Thus,
investors often are unable to assess whether or how particular
financial and commodity instruments affect a registrant's net
market risk exposure.
FAS 119 encourages, but does not require, disclosure of
quantitative information about the overall market risk inherent
-[44]- See note 65, infra, for a definition specifying how the
term "reasonably possible" is used in this release.
-[45]- See, e.g., FAS 119 8b and Rule 5-02 of Regulation S-
X, 17 CFR 210.5-02. -------------------- BEGINNING OF PAGE #14 ------------------- 14
in derivative financial instruments and other instruments subject
to market risk.-[46]- However, the SEC staff has observed
that registrants often do not make these disclosures.
b. Proposed Disclosure Rule
To allow investors to assess more easily overall market
risk, the proposed amendments would create a new Item 305(a),
which would require disclosure, outside the financial
statements,-[47]- of quantitative market risk information
for derivative financial instruments, other financial
instruments, and derivative commodity instruments, to the extent
it is material. This information would be furnished using one of
the following three ways, at the election of the
registrant.-[48]-
(i) Tabular Presentation
The first quantitative market risk disclosure alternative
would permit registrants to provide a tabular presentation of
terms and information related to derivative financial
instruments, other financial instruments, and derivative
commodity instruments. Such information would include, but is
not limited to, fair values of instruments, expected principal or
transaction cash flows, weighted average effective rates or
prices, and other relevant market risk related information.
These data are common inputs to market risk measurement methods
and, therefore, may be useful in understanding a registrant's
exposure to market risk.
This tabular information would be summarized by risk
exposure category (i.e., interest rate risk, foreign currency
exchange rate risk, commodity price risk, and other similar price
risks, such as equity price risk) and, within the foreign
currency exchange rate risk category, by functional
-[46]- In particular, FAS 119 12 lists five possible
quantitative methods of measuring and disclosing market
risk. They are: (i) details about current positions
and perhaps activity during the period, (ii) the
hypothetical effects on equity, or on annual income, of
several possible changes in market price, (iii) a gap
analysis of interest rate repricing or maturity dates,
(iv) the duration of the financial instruments, and (v)
the entity's value at risk from derivative financial
instruments and from other positions at the end of the
reporting period and the average value at risk during
the year.
-[47]- See section III B3b, infra, for a discussion about
where, outside the financial statements, these
disclosures would appear.
-[48]- At the current time, the Commission is not proposing to
prescribe standardized methods and procedures
specifying how to comply with each of these disclosure
alternatives. To the extent registrants use one of
these methods internally, they would be permitted, but
not required, to report quantitative measures of market
risk using the same method externally. To facilitate
comparison across registrants, the Commission proposes,
below, that registrants provide descriptions of the
model and assumptions used to prepare quantitative
market risk disclosures. -------------------- BEGINNING OF PAGE #15 ------------------- 15
currency-[49]- (e.g., U.S. dollar, Japanese yen). Within
each of these risk exposure categories, instruments would be
grouped based on common characteristics. At a minimum,
instruments would be distinguished by the following
characteristics: (i) fixed rate or variable rate assets or
liabilities, (ii) long or short forwards or futures, (iii)
written or purchased put or call options, (iv) receive fixed or
receive variable interest rate swaps, and (v) the currency in
which the instruments' cash flows are denominated. Thus, for
example, within the interest rate risk exposure category, a
registrant might present the following list of instruments:
fixed rate Mexican peso investments, variable rate U.S. dollar
debt obligations, long U.S. Treasury futures, and Mexican peso
receive variable interest rate swaps. Derivatives used to manage
risks inherent in anticipated transactions also would be
disclosed separately.
For each instrument in the table, expected principal or
transaction cash flow information would be presented separately
for each of the next five years, with the remaining expected cash
flows presented as an aggregate amount. The proposed amendments
also would require disclosure of information on assumptions
necessary to an understanding of a registrant's tabular market
risk disclosures. In this regard, registrants would describe, at
a minimum, the differing numbers reported in the table for
various categories of instruments (e.g., principal cash flows for
debt, notional amounts for swaps, contract amounts for options
and futures) and key prepayment and/or reinvestment assumptions
relating to the timing of reported cash flow amounts. See the
Appendix to the text of the proposed amendments for a sample
disclosure.
(ii) Sensitivity Analysis
The second quantitative market risk disclosure alternative
would permit registrants to provide disclosure of sensitivity
analyses expressing the hypothetical loss in future earnings,
fair values, or cash flows of market risk sensitive instruments
over the next reporting period due to hypothetical changes in
interest rates, currency exchange rates, commodity prices, and
other similar market price changes (e.g., equity
prices).-[50]- For example, these disclosures may be
similar to the interest rate "sensitivity" measures already
required to be calculated for regulatory purposes for thrift
institutions.-[51]- Under the proposed amendments,
earnings, fair values, or cash flows sensitivity disclosures
-[49]- For purposes of this release, functional currency means
the currency of the primary economic environment in
which the entity operates; normally, that is the
currency of the environment in which an entity
primarily generates and expends cash. This definition
is the same as the definition of functional currency in
FAS 52, Appendix E.
-[50]- The term "sensitivity analysis," as used in this
release, describes a general class of models that
assesses the risk of loss in market risk sensitive
instruments based on hypothetical changes in market
rates or prices. The term sensitivity analysis is not
meant to refer to any one model for quantifying market
risk.
-[51]- See Office of Thrift Supervision, Regulatory Capital:
Interest Rate Risk Component, 12 CFR 567.5(c)(4)
(August 1993). -------------------- BEGINNING OF PAGE #16 ------------------- 16
would be presented separately for interest rate sensitive
instruments, currency exchange rate sensitive instruments,
certain commodity price sensitive instruments, and other types of
market risk sensitive instruments (e.g., equity instruments).
The proposed amendments also would require disclosure of the
assumptions and parameters underlying the registrant's
sensitivity analysis model that are necessary to an understanding
of the registrant's market risk disclosure. In this regard,
registrants would specify, at a minimum, (i) how loss is defined
by the model (e.g., loss in earnings, fair values, or cash
flows), (ii) a general description of the modeling technique
(e.g., change in net present values arising from parallel shifts
in market rates or prices and how optionality is addressed by the
model), (iii) the general types of instruments covered by the
model (e.g., derivative financial instruments, other financial
instruments, derivative commodity instruments, and whether other
instruments are included voluntarily in the model by the
registrant, such as certain commodity instruments and positions,
cash flows from anticipated transactions, and operating cash
flows from non-financial and non-commodity instruments), and (iv)
other relevant information on model parameters (e.g., the
magnitudes of parallel shifts in market rates or prices used for
each category of market risk exposure, the method by which
discount rates are determined, and key prepayment and/or
reinvestment assumptions).
(iii) Value at Risk
The third quantitative disclosure alternative would permit
registrants to provide value at risk disclosures expressing the
potential entity-wide loss in fair values, earnings, or cash
flows of market risk sensitive instruments that might arise from
adverse market movements with a selected likelihood of occurrence
over a selected time interval.-[52]- Additional separate
value at risk disclosures would be required for interest rate
sensitive instruments, currency exchange rate sensitive
instruments, certain commodity price sensitive instruments, and
other similar market risk sensitive instruments (e.g., equities).
In addition, to help place reported value at risk amounts in
context, registrants would be required to report either (i) the
average or range in value at risk amounts for the current
reporting period, (ii) the average or range in actual changes in
fair values, earnings, or cash flows from market risk sensitive
instruments occurring during the current reporting period, or
(iii) the percentage of actual changes in fair values, earnings,
or cash flows from market risk sensitive instruments that
exceeded the reported value at risk amounts during the current
reporting period.
The proposed amendments also would require disclosure of the
model assumptions and parameters underlying the registrant's
value at risk model that are necessary to an understanding of the
registrant's market risk disclosure. In this regard, registrants
would specify, at a minimum, (i) how loss is defined by the model
(e.g., loss in fair values, earnings, or cash flows), (ii) a
-[52]- The term "value at risk," as used in this release,
describes a general class of models that provide a
probabilistic assessment of the risk of loss in market
risk sensitive instruments. The term value at risk is
not meant to refer to any one model for quantifying
market risk. Value at risk models can be adapted to
non-trading activities as well as trading activities
and to non-financial institutions as well as financial
institutions, depending on the model and assumptions
selected by the registrant. -------------------- BEGINNING OF PAGE #17 ------------------- 17
general description of the modeling technique (e.g.,
variance/covariance, historical simulation, Monte Carlo
simulation, and how optionality is addressed by the model), (iii)
the general types of instruments covered by the model (e.g.,
derivative financial instruments, other financial instruments,
derivative commodity instruments, and whether other instruments
are included voluntarily in the model by the registrant, such as
certain commodity instruments and positions, cash flows from
anticipated transactions, and operating cash flows from non-
financial and non-commodity instruments), and (iv) other material
information on model parameters (e.g., holding period, confidence
interval, and the method used for aggregating value at risk
amounts across market risk exposure categories, such as by
assuming perfect positive correlation, independence, or by using
actual observed correlations).-[53]-
(iv) Other Disclosure Requirements
The proposed amendments would require presentation of
quantitative information about market risk at the end of the most
recent fiscal year or at the end of the most recent reporting
period for which a full set of financial statements is filed with
the Commission. Under the proposed amendments, registrants would
be required to provide separately quantitative information for
market risk sensitive instruments that are entered into for
trading purposes-[54]- and those that are entered into for
purposes other than trading. In addition, in order to enable an
investor to assess material changes in market risk information,
the proposed amendments would require registrants to provide
summarized information as of the end of the preceding fiscal year
or comparable preceding period. Registrants also would be
required to discuss the reasons for material changes in
quantitative information about market risk when compared to the
information reported in the previous period.-[55]-
Registrants would be allowed to change methods of disclosing
quantitative information about market risk (e.g., changing from
tabular presentation to value at risk). However, if they change
methods, registrants would be required to (i) disclose the
reasons for any such change and (ii) provide summarized
comparable information, under the new disclosure method, as of
-[53]- The primary differences between the value at risk and
sensitivity analysis disclosure alternatives are (i)
value at risk analysis reports the potential loss
arising from equally likely market movements across
instruments, while sensitivity analysis reports the
potential loss arising from hypothetical market
movements with differing likelihoods of occurrence
across instruments and (ii) value at risk explicitly
adjusts the potential loss to reflect correlations
between market movements, while sensitivity analysis is
not designed explicitly to make such adjustments.
-[54]- See note 42, supra, for a definition specifying how the
term "trading purposes" is used in this release.
-[55]- For transition purposes, the Commission is proposing
that quantitative disclosures about market risk
provided in the initial period after the rule is
adopted would not contain comparable summarized
information for the preceding period. Similarly, in
the initial year after the rule is adopted, a
discussion of the reasons for material changes in
reported amounts as compared to the preceding period
would not be necessary. -------------------- BEGINNING OF PAGE #18 ------------------- 18
the end of the period preceding the current reporting period.
(v) Encouraged Disclosures
In essence, the proposed amendments primarily are designed
to make disclosures about market risk more comprehensive by
requiring disclosure of quantitative information about market
risk that are encouraged to be disclosed by FAS 119. The
proposals apply to derivative financial instruments, other
financial instruments, and derivative commodity
instruments.-[56]-
The Commission recognizes that market risk exposures may
exist in instruments, positions, and transactions other than in
those derivative financial instruments, other financial
instruments, and derivative commodity instruments that
specifically would be subject to the proposed amendments. In
particular, market risk, in its broadest view, also may be
inherent in the following items:
ù derivative commodity instruments not reasonably possible to
be settled in cash or with another financial instrument -
such as a commodity forward contract that must be settled in
the commodity;
ù commodity positions - such as investments in corn, wheat,
oil, gas, lumber, silver, gold, and other commodity
inventory positions;
ù cash flows from anticipated transactions-[57]- - such
as cash flows from anticipated purchases and sales of
inventory; and
ù operating cash flows from non-financial and non-commodity
instruments - such as cash flows generated by manufacturing
activities.
The Commission also recognizes, however, that the amount
and timing of the cash flows inherent in such instruments,
positions, and transactions often are difficult to estimate. In
addition, most risk measurement systems currently do not include
such instruments, positions, and transactions in their
quantitative assessments of market risk. For these practical
reasons, the Commission is not proposing at this time to require
that these items be included in the proposed quantitative
disclosures about market risk. However, registrants are
encouraged, when practical, to include voluntarily these items in
their quantitative market risk disclosures. If these
instruments, positions, and transactions are not included
voluntarily, registrants, nonetheless, should consider whether
they must address this issue in their disclosures identifying
limitations of the quantitative information, discussed
below.-[58]-
(vi) Limitations
-[56]- These disclosures would be required for other financial
instruments, even if a registrant does not enter into
derivatives.
-[57]- See note 19, supra.
-[58]- In addition, registrants should review the requirements
of Item 303 of Regulation S-K, 17 CFR 229.303, to
ensure that disclosures are sufficient to inform
readers of material risks to which a registrant is
exposed. Thus, MD&A would need to discuss the risks
relating to, for example, anticipated transactions or
commodity positions, to the extent these transactions
or positions have, or are reasonably likely to have, a
material effect on the registrant's liquidity, capital
resources, and results of operations. -------------------- BEGINNING OF PAGE #19 ------------------- 19
The proposed amendments would require that registrants
discuss limitations that may cause the quantitative information
about market risk not to reflect fully the overall market risk of
the entity. This discussion would include (i) a description of
each limitation and (ii) if applicable, a description of the
instruments' features that are not reflected fully within the
selected quantitative market risk disclosure alternative.
Two illustrative examples are provided. First, as just
stated, the Commission is allowing certain instruments,
positions, and transactions to be excluded from quantitative
disclosures about market risk. The failure of a registrant to
include such items in its disclosures, while permitted, is a
limitation of the quantitative information provided. This
limitation must be described if the registrant has material
investments in these instruments, positions, and transactions
that cause its disclosures not to portray fully the overall
market risk of the entity.
Second, each of the quantitative disclosure alternatives may
not alert investors of the degree of market risk inherent in
instruments with leverage, option, or prepayment features (e.g.,
structured notes, collateralized mortgage obligations, leveraged
swaps, and swaps with embedded written options). Tabular
information on expected future cash flows normally would not
indicate that instruments have such features. Value at risk and
sensitivity analysis models generally do not reflect the
potential loss arising from all changes in market rates or
prices. Thus, if leverage, option, or prepayment features are
triggered by changes in market rates or prices outside those
reflected in the value at risk and sensitivity analysis
disclosures, the potential loss in these instruments may be
significantly larger than would be implied by a simple linear
extrapolation of the reported numbers. Thus, to make investors
fully aware of the market risk inherent in instruments with such
features, the proposed amendments would require a (i) discussion
of this limitation of the quantitative disclosures and (ii)
description of the leverage, option, or prepayment features of
the instruments causing the limitation.
c. Requests for Comment
1. The proposed amendments are designed specifically to
elicit disclosure of quantitative information to assist investors
and others in making an overall assessment of market risk. The
Commission recognizes that some investors may be unfamiliar with
certain of the proposed quantitative disclosure methods. Thus,
the Commission requests comment (a) on whether the proposed
quantitative information is expected to improve investors'
understanding of the market risk associated with business
activities of a registrant and (b) on the extent to which
investors will benefit from and understand the proposed
quantitative market risk alternatives.
2. The proposed amendments relating to disclosure of
quantitative information about market risk are limited to
derivative financial instruments, other financial instruments,
and derivative commodity instruments. In addition, when
preparing these disclosures, registrants are encouraged to
present information about all instruments, positions, and cash
flows subject to market risk. Is the scope of instruments
covered by these proposed amendments sufficient? For example,
should commodity positions with readily available market prices
be required to be included in the quantitative disclosures? In
addition, are there other instruments and positions that should
be included or excluded?
3. The Commission is proposing to allow registrants to
choose one of three alternatives to present quantitative
information about market risk (i.e., tabular presentation of -------------------- BEGINNING OF PAGE #20 ------------------- 20
expected future cash flows and terms, sensitivity analysis, or
value at risk). Are these the most appropriate alternatives? If
not, should some alternatives be added or deleted? For example,
although the Commission has not proposed use of interest gap
analysis and duration because these market risk measurement
methods commonly are not used to describe the market risk
inherent in non-interest rate sensitive instruments and non-fixed
income instruments, respectively, should these methods also be
allowed?
4. In this release, the Commission proposes amendments
designed to allow investors to evaluate quantitatively the
overall market risk inherent in derivative financial instruments,
other financial instruments, and derivative commodity
instruments. Although the proposals permit registrants to select
one of three alternative quantitative disclosure methods, they
require that the same general disclosure alternative (i.e.,
tabular presentation of expected future cash flows and terms,
sensitivity analysis, or value at risk) be used to describe
quantitatively the market risk inherent (i) in each market risk
exposure category (e.g., interest rates, foreign currency
exchange rates, and commodity prices) and (ii) in instruments
entered into for trading and other than trading purposes. Is this
approach practical? Should the Commission permit registrants to
use different alternatives to report the market risk inherent (i)
in different categories of market risk exposure and/or (ii) in
instruments entered into for trading and other than trading
purposes? If so, how will this affect the ability of investors to
assess the overall market risk inherent in market risk sensitive
instruments? Please explain.
5. The Commission recognizes that risk management methods
are evolving, and no method is dominant in practice. The
proposed amendments, therefore, do not require the use of a
single measure or standardized procedures or assumptions for
preparing quantitative market risk disclosures. As a result,
quantitative information about market risk is not likely to be
prepared in a uniform manner across registrants. However, to
facilitate the analysis and comparison of quantitative market
risk information among registrants, the Commission is proposing
disclosure of the model and assumptions used to comply with the
quantitative market risk amendments. Will the proposed
disclosures about the model and key assumptions provide
sufficient information for investors to compare market risk
across registrants? Are there additional disclosures that might
further investors' analysis and comparison? Is there a better
approach to enhancing the comparability of the proposed
disclosures? For example, despite the evolving risk management
practices, should standardized procedures be developed for
preparing disclosures across registrants? Alternatively, should
minimum acceptable standards be set prescribing model parameters
and assumptions?
6. The Commission recognizes that quantitative disclosures
about market risk may be viewed as more meaningful for certain
registrants than others. For example, because market risk is one
of the primary business risks for financial institutions,
quantitative information about market risk may be more meaningful
when applied to financial institutions than the same information
presented for registrants whose primary risks are not related to
market risk.
In this regard, the Commission has proposed that registrants
have the ability to choose among three disclosure alternatives.
These alternatives reflect different degrees of sophistication in
risk measurement methods, thereby permitting registrants
flexibility to select a disclosure method which corresponds most
closely to the degree of market risk inherent in their business -------------------- BEGINNING OF PAGE #21 ------------------- 21
activities. Are there better ways to address how information
about market risk should be presented for the different types of
registrants that file with the Commission? In particular, should
financial institutions, such as bank holding companies, thrift
holding companies, finance companies, investment banks, mortgage
banks, broker-dealers, insurance companies, and similar types of
registrants have a different set of disclosure requirements than
other companies? If so, should financial institutions have more
rigorous disclosure requirements than those proposed in this
release or should non-financial institutions be exempted from
certain of the proposed disclosures specified in this release?
7. In regard to the presentation of tabular information on
the terms, cash flow amounts, and fair values of market risk
sensitive instruments, the Commission has specified that
information be disaggregated by risk exposure category and
grouped further based on certain common instrument
characteristics. Sample disclosures have been provided in the
Appendix to the text of the proposed amendments to illustrate
compliance with these requirements. Is the level of
disaggregation specified in the requirements adequate? Is there
a better way to present such information?
8. The proposed amendments requiring disclosure of
quantitative information about market risk generally are designed
to indicate the degree of market risk from normal market
movements. The proposed disclosure alternatives do not
specifically require estimates of the market risk inherent in
unusual markets reflecting worst-case scenarios. Should the
proposed amendments address specifically market risk in worst-
case scenarios? If so, what would be a useful standard for
determining and disclosing a worst-case scenario?
9. To help place the reported value at risk numbers in
context, the proposed amendments require that registrants report
either (i) the average or range in value at risk amounts for the
current reporting period, (ii) the average or range in actual
changes in fair values, earnings, or cash flows from market risk
sensitive instruments during the current reporting period, or
(iii) the percentage of actual changes in fair values, earnings,
or cash flows from market risk sensitive instruments that
exceeded the reported value at risk amounts during the current
reporting period. Will this information be useful to investors
and others? Since similar disclosures cannot be developed easily
for the other disclosure alternatives for presenting quantitative
information about market risk (i.e. tabular presentation of
expected cash flows and terms and sensitivity analysis), should
these disclosures be encouraged, rather than required?
10. To enable investors to assess material changes in
market risk, the proposed amendments would require registrants to
provide summarized quantitative information about market risk for
the preceding fiscal year. In addition, registrants would be
required to discuss the reasons for material changes in
quantitative information about market risk when compared to the
information reported in the previous period. Is this information
necessary to an understanding of the current period market risk
disclosures? If not, are there other types of information that
would be helpful to investors in assessing material changes in
market risk?
11. Under the proposed amendments, registrants would be
allowed to change methods of presenting quantitative information
about market risk provided they (i) explain the reasons for the
change and (ii) provide summarized comparable information under
the new disclosure method for the period preceding the current
reporting period. Should registrants be required to present
comparable information for the period preceding the current
reporting period when they change methods of presenting -------------------- BEGINNING OF PAGE #22 ------------------- 22
quantitative information about market risk?
12. The proposed amendments are focused on providing
investors with improved disclosures about market risk sensitive
instruments and the impact of market risk on a registrant's
financial condition and results of operations. Other regulators
and private sector entities have set forth proposals and made
recommendations that would require disclosures about derivatives
and similar instruments that go beyond the disclosures proposed
under these proposed amendments.-[59]- Such
recommendations relate to the disclosure of credit risk,
liquidity risk, legal risk, and operational risk inherent in
market risk sensitive instruments. The Commission notes that
existing generally accepted accounting principles (e.g., FAS 105)
and Commission Regulations (e.g., Items 101 and 303 of Regulation
S-K, 17 CFR 229.101 and 229.303, respectively) already require
some disclosures relating to these risks. Thus, at this time the
Commission does not intend to propose additional disclosure
requirements about these other risks inherent in market risk
sensitive instruments. Is this decision appropriate?
13. Would any of the proposed amendments regarding
quantitative disclosures about market risk require disclosure of
information considered highly proprietary by registrants? Are
there other methods of quantifying and disclosing market risk
that would be useful to investors and present fewer proprietary
concerns?
2. Qualitative Information about Market Risk
a. Background
A qualitative discussion of a registrant's market risk
exposures and how those exposures are managed is important to an
understanding of a registrant's market risk. Such qualitative
disclosures help place market risk management activities in the
context of the business and, therefore, are a useful complement
to quantitative information about market risk.
FAS 119 requires that certain qualitative disclosures be
provided about market risk management activities associated with
derivative financial instruments held or issued for purposes
other than trading. In particular, FAS 119 requires disclosure
of "the entity's objectives for holding or issuing the derivative
financial instruments, the context needed to understand those
objectives, and its general strategies for achieving those
objectives."-[60]- In addition, FAS 119 requires separate
disclosures about derivative financial instruments used as hedges
of anticipated transactions.-[61]- As indicated above,
these requirements of FAS 119 only apply to certain derivatives
held or issued for purposes other than trading.
b. Proposed Disclosure Rule
In essence, the proposed qualitative disclosure requirements
would create a new Item 305(b) of Regulation S-K, which would
-[59]- See notes 25 and 27, supra.
-[60]- See FAS 119 11a. Footnote 4 of FAS 119 illustrates
the qualitative disclosures required by 11a. That
footnote states:
If an entity's objective for a derivative position
is to keep a risk from the entity's non-derivative
assets below a specified level, the context would
be a description of those assets and their risks,
and a strategy might be purchasing put options in
a specified proportion to the assets at risk.
-[61]- See FAS 119 11c. -------------------- BEGINNING OF PAGE #23 ------------------- 23
expand certain FAS 119 disclosures to (i) encompass derivative
commodity instruments, other financial instruments, and
derivative financial instruments entered into for trading
purposes and (ii) require registrants to evaluate and describe
material changes in their primary risk exposures and material
changes in how those exposures are managed. In particular, the
proposed amendments would require narrative disclosure outside
the financial statements-[62]- of (i) a registrant's
primary market risk exposures-[63]- and (ii) how those
exposures are managed (e.g., a description of the objectives,
general strategies, and instruments, if any, used to manage those
exposures).
In preparing the proposed qualitative disclosures about
market risk, the Commission expects that registrants would
describe their primary market risk exposures as they exist at the
end of the current reporting period and how those risks currently
are being managed. Registrants also would be required to
describe material changes in their primary market risk exposures
and material changes in how these risks are managed as compared
to what was in effect during the most recent reporting period and
what is known or expected to be in effect in future reporting
periods.
These proposed qualitative disclosure requirements would
apply to derivative financial instruments, other financial
instruments, and derivative commodity instruments. As in the
case with respect to the quantitative disclosures about market
risk, the qualitative disclosures should be presented separately
for market risk sensitive instruments that are entered into for
trading purposes and those that are entered into for purposes
other than trading. In addition, qualitative information about
market risk should be presented separately for those instruments
used to manage risks inherent in anticipated transactions.
Finally, to help make disclosures about market risk more
comprehensive, as is the case with the quantitative disclosures
about market risk, the Commission also is proposing to encourage
registrants to disclose qualitative information about market risk
relating to other items, such as derivative commodity instruments
not reasonably possible to be settled in cash or with another
financial instrument, commodity positions, cash flows from
anticipated transactions, and operating cash flows from non-
financial and non-commodity instruments (e.g., cash flows
generated by manufacturing activities).-[64]-
-[62]- See section III B3b, infra.
-[63]- For purposes of this release, primary market risk
exposures mean (i) the following categories of market
risk: interest rate risk, foreign currency exchange
rate risk, commodity price risk, and other similar
market rate or price risks (e.g., equity prices) and
(ii) within each of these categories, the particular
markets that present the primary risks of loss to the
registrant. For example, if a registrant (i) has a
material exposure to foreign currency exchange rate
risk and (ii) is most vulnerable to changes in
dollar/yen, dollar/pound, and dollar/peso exchange
rates within this category of market risk, it would
disclose these exposures.
-[64]- See section III B1b(v), supra, for a discussion as to
why these instruments are encouraged, but not required,
to be included in disclosures about market risk. -------------------- BEGINNING OF PAGE #24 ------------------- 24
c. Requests for Comment
1. The proposed amendments regarding qualitative disclosure
about market risk are designed to put market risk management
activities into the context of a registrant's overall business.
Does this qualitative information allow investors to understand
better the management of market risk inherent in the business
activities of a registrant? If not, are there other disclosure
alternatives that would be more effective?
2. Would any of the proposed amendments regarding
qualitative disclosures about market risk require the disclosure
of information considered highly proprietary in nature? Are
there other disclosures that would be useful to investors and
present fewer proprietary concerns?
3. The proposed amendments relating to disclosure of
qualitative information about market risk are limited to
derivative financial instruments, other financial instruments,
and derivative commodity instruments. In addition, when
preparing these disclosures, registrants are encouraged, but not
required, to present information about all instruments,
positions, and cash flows subject to market risk. Is the scope
of instruments covered by this proposed amendment sufficient? If
not, which instruments should be included or excluded?
3. Implementation Issues Relating to Quantitative and
Qualitative Disclosures about Market Risk
a. Disclosure Threshold
(i) Discussion
Under the proposed amendments, registrants would be required
to make quantitative and qualitative disclosures about market
risk when such risk is material. For purposes of making this
materiality assessment, registrants would need to consider both
(i) the materiality of the fair values of derivative financial
instruments, other financial instruments, and derivative
commodity instruments outstanding at the end of the current
reporting period and (ii) the materiality of the potential loss
in future cash flows, earnings, or fair values from reasonably
possible market movements.-[65]- If either (i) or (ii) in
the previous sentence are material, registrants would have to
disclose qualitative and quantitative information about market
risk.
In determining the fair values of market risk sensitive
instruments outstanding at the end of the current reporting
period, registrants generally should not net fair values, except
to the extent allowed under FASB Interpretation No. 39,
"Offsetting of Amounts Related to Certain Contracts"
("Interpretation 39") (March 1992).-[66]- For example, the
-[65]- For purposes of this release, the term "reasonably
possible" is defined by 3 of FASB, Statement of
Financial Accounting Standards No. 5, "Accounting for
Contingencies" ("FAS 5") (March 1975), which states
that "reasonably possible" means the chance of a future
transaction or event occurring is more than remote but
less than likely.
-[66]- Interpretation 39 states that it is a general principle
of accounting that the offsetting of assets and
liabilities in the balance sheet is improper except
where a right of set off exists. Interpretation 39
defines right of set off and specifies what conditions
must be met to have that right. FAS 119 15(d) in
disclosing the fair values of instruments also
(continued...) -------------------- BEGINNING OF PAGE #25 ------------------- 25
fair value of assets generally should not be netted with the fair
value of liabilities. Instead, the fair values of such
instruments should be aggregated, without netting, for purposes
of assessing materiality.-[67]-
In determining the materiality of the potential loss in
future earnings or fair values from reasonably possible market
movements, registrants should consider (i) the magnitude of past
market movements, (ii) expectations about the magnitude of
reasonably possible future market movements, and (iii) potential
losses that may arise from leverage, option, and/or multiplier
features.
(ii) Requests for Comment
In developing the proposed disclosure thresholds, the
Commission was interested in establishing thresholds that
considered the materiality of fair values of market risk
sensitive instruments at the end of a reporting period and the
potential for market risk in those instruments in future periods.
The Commission believes an assessment of the materiality of the
instruments held at period end is appropriate because investors
are likely to be concerned about the market risk exposure of an
entity whenever their financial statements indicate material
investments in derivative financial instruments, other financial
instruments, and derivative commodity instruments. Without such
disclosure, investors likely would be unable to determine the
magnitude of the combined market risk exposure inherent in these
individual instruments. Similarly, the Commission believes an
assessment of the risk of loss in earnings, cash flows, or fair
values from reasonably possible future market movements is
necessary to capture, for example, the potential exposure to
market risk in instruments with leverage, written option, or
prepayment features that may not be reflected fully in fair
values at period end.
Are these proposed disclosure thresholds relating to
quantitative and qualitative disclosures about market risk,
including the guidance relating to netting of fair values of
market risk sensitive instruments, appropriate? Are there other
disclosure thresholds that would provide more meaningful
information to investors? For example, for purposes of
determining the materiality of fair values of market risk
sensitive instruments at period end, would it be better to
determine a disclosure threshold based on the materiality of the
larger of the fair values of (i) assets and "off-balance-sheet"
unrecognized assets or (ii) liabilities and "off-balance-sheet"
unrecognized liabilities? Alternatively, would the disclosure
thresholds for MD&A be more appropriate?-[68]-
Finally, should the Commission take a different approach to
materiality assessments by specifying quantitative indicators
-[66]-(...continued)
prohibits the netting of fair values, except to the
extent that the offsetting of carrying amounts in the
statement of financial position is permitted under
Interpretation 39.
-[67]- In general, the Commission is not proposing the netting
of fair values for purposes of assessing materiality
primarily because it believes the establishment of a
set of netting rules for fair values would be complex
and difficult to implement.
-[68]- See SEC Financial Reporting Policies Section 501.02 for
the interpretative release to Item 303 of Regulation S-
K, which specifies the MD&A disclosure thresholds. -------------------- BEGINNING OF PAGE #26 ------------------- 26
that provide a threshold for disclosure, such as ratios of
certain notional amounts, contractual amounts, fair values,
and/or potential future losses to either stockholders' equity,
earnings from continuing operations, and/or some other amount?
If so, what specific indicators should result in disclosure
(e.g., fair value amounts in excess of 10% of stockholders'
equity, or some other percentage of stockholders' equity or some
other amount; notional and contractual amounts in excess of a
specified percentage of stockholders' equity; and/or potential
loss in earnings or fair values in excess of a specified
percentage of earnings from continuing operations)? If specific
indicators are used, should netting of certain amounts be
permitted?
b. Location of Quantitative and Qualitative
Disclosures
(i) Discussion
The proposed qualitative and quantitative market risk
disclosure amendments specify that these disclosures be placed
outside the financial statements. Thus, for example, this
information would be required to be included in the annual report
to shareholders, but would be located outside the financial
statements covered by the audit opinion. The proposed
disclosures are designed to supplement and make complete existing
information about market risk sensitive instruments (e.g.,
information required to be disclosed by FAS 119) that currently
appears in prospectuses, registration statements, reports, and
other documents that are used to make investment and voting
decisions and that are delivered to investors and shareholders.
Thus, the Commission is recommending that the proposed market
risk disclosures be included in such documents delivered to
investors and shareholders, rather than included in documents
filed only with the Commission.
(ii) Request for Comment
The Commission recognizes that the proposed disclosures may
be complex, especially given the requirement to describe, when
appropriate, the model and key assumptions used to prepare the
quantitative disclosures about market risk. Given this
complexity, would it be better to disclose the proposed
information about market risk in reports and statements filed
with the Commission that are not required to be delivered to all
shareholders and investors? If so, will investors be
disadvantaged by the omission of such information from delivered
documents if it is otherwise required to be included in
Commission filings and made available for free electronically and
immediately through the SEC's EDGAR system?
c. Relationship of Proposed Disclosures
to MD&A
Market risk sensitive instruments often are used to manage
known uncertainties in market rates and prices. Under Item 303
of Regulation S-K, registrants currently are required to disclose
in MD&A, among other things, the impact on past and future
financial condition and results of operations of known
uncertainties. Thus, there is a potential for overlap between
the proposed amendments under new Item 305 and current Item 303.
To the extent that the disclosures in a registrant's MD&A comply
with the proposed amendments, registrants would not need to
repeat this information elsewhere in their filings. Likewise, if
the proposed disclosures are provided in the footnotes to the
financial statements, that information also would not need to be
reported elsewhere.
d. Application to Registrants
(i) Discussion
New Item 305 would require that all registrants currently
required to provide MD&A disclosures, pursuant to Item 303 of -------------------- BEGINNING OF PAGE #27 ------------------- 27
Regulation S-X, also would have to comply with proposed Item 305
of Regulation S-K. As a result, to the extent material,
quantitative and qualitative information about market risk would
be required explicitly for many different types of registrants,
including, for example, commercial and industrial companies,
financial institutions, broker dealers, service companies,
business development companies, and companies registering
insurance contracts, such as market-value adjusted annuities and
real estate funds underlying annuity contracts.
(ii) Request for Comment
Should proposed Item 305 of Regulation S-K be required for
all registrants that prepare MD&A pursuant to Item 303 of
Regulation S-K? If not, which registrants should be exempted
from proposed Item 305 of Regulation S-K? In particular, should
business development companies and companies registering
insurance contracts be exempted from proposed Item 305?
e. Safe Harbor Provision
As noted by the FASB, some have expressed concern that
disclosing information about market risk may have legal
ramifications for registrants if actual outcomes differ from the
market risk amounts disclosed.-[69]- It is the
Commission's intention that forward looking disclosures made
pursuant to proposed Item 305 of Regulation S-K and Item 9A of
Form 20-F be subject to an appropriate safe harbor.
Congress recently adopted the Private Securities
Litigation Reform Act of 1995-[70]- that, among other
things, amends the Securities Act and Securities Exchange Act to
include a safe harbor for forward looking information. The
Commission's staff is continuing to consider how best to craft an
appropriate safe harbor in light of this recent legislation. The
Commission intends to issue a release shortly that would propose
that the disclosures to be required by new Items 305 and 9A be
made subject to safe harbor provisions. Comments received on
that release will be considered in connection with the comments
received on this release to enable the Commission to take
appropriate action with respect to both releases at the same
time.
IV. APPLICABILITY OF PROPOSED AMENDMENTS
A. Application to Small Business Issuers
1. Discussion
The Commission believes that because of the newness and
evolving nature of these disclosures, as well as the relative
costs of complying with these disclosures for small business
-[69]- See FAS 119 73. Under the Commission's current safe
harbor rules, a statement made by or on behalf of an
issuer is not deemed a fraudulent statement unless it
can be shown that the statement was made or reaffirmed
without a reasonable basis or was disclosed other than
in good faith. See Rule 175 under the Securities Act
of 1933 and Rule 3b-6 under the Securities Exchange Act
of 1934. The Commission has been re-examining Rules
175 and 3b-6. See Securities Act Release No. 7101
(October 13, 1994), 59 FR 52723 (October 19, 1994).
-[70]- Private Securities Litigation Reform Act of 1995, Pub.
L. No. 104-67 (December 22, 1995). -------------------- BEGINNING OF PAGE #28 ------------------- 28
issuers,-[71]- that it is appropriate, at this time, to
exempt small business issuers from the proposed disclosures of
quantitative and qualitative information about market risk.
Accordingly, at this time, the Commission is not proposing to
amend Regulation S-B to incorporate an item similar to proposed
Item 305 of Regulation S-K. Small business issuers, however,
still would be required (i) to comply with the proposed amendment
regarding accounting policies disclosures for derivatives, (ii)
to comply with Rule 12b-20 and Rule 408 as described in section
VI of this release, thereby being responsive to guidance
reminding registrants to provide additional information about the
effects of derivatives on information expressly required to be
filed with the Commission, and (iii) to the extent market risk
represents a known trend, event, or uncertainty, to discuss the
impact of market risk on past and future financial condition and
results of operations, pursuant to Item 303 of Regulation S-B, 17
CFR 228.303.
2. Request for Comment
Should small business issuers be excluded from either a
portion or all of the proposed quantitative and qualitative
disclosures about market risk? If not, should application of
these proposed amendments to small business issuers be delayed to
provide them more time to become familiar with and implement the
amendments?
B. Application to Foreign Private Issuers
1. Discussion
The need for improved disclosures about market risk
sensitive instruments is not an issue limited to domestic
registrants. Standard setters throughout the world have
recognized and have begun to address the need for improvement in
such disclosures for foreign companies, including some foreign
private issuers that have registered securities with the
Commission.-[72]- The Commission is proposing to amend
Form 20-F to require disclosure by all foreign private issuers of
quantitative and qualitative information about market risk.
In addition, those foreign private issuers that prepare
financial statements in accordance with Item 18 of Form 20-F
would be required to provide descriptions in the footnotes to the
financial statements of the policies used to account for
derivatives. In contrast, foreign private issuers that prepare
financial statements in accordance with Item 17 of Form 20-F are
not required to provide financial statement disclosures required
by generally accepted accounting principles and Regulation S-X,
including disclosures about accounting policies.-[73]-
-[71]- "Small business issuer" is defined to mean any entity
that (1) has revenues of less than $25,000,000, (2) is
a United States or Canadian issuer, (3) is not an
investment company, and (4) if a majority owned
subsidiary, the parent corporation is also a small
business issuer. An entity is not a small business
issuer, however, if it has a public float (the
aggregate market value of the outstanding securities
held by non-affiliates) of $25,000,000 or more, 17 CFR
Section 230.405.
-[72]- See note 33, supra.
-[73]- Foreign private issuers complying with Item 18 of Form
20-F must provide all information required by US
generally accepted accounting principles and Regulation
S-X. Disclosures required by US generally accepted
(continued...) -------------------- BEGINNING OF PAGE #29 ------------------- 29
Thus, the proposed amendments requiring disclosures of accounting
policies would not apply to foreign private issuers filing under
Item 17 of Form 20-F. However, foreign private issuers filing
under Item 17 of Form 20-F would need to consider the guidance
presented in Staff Accounting Bulletin Topic 1:D ("SAB Topic
1:D") to determine if information regarding accounting policies
for derivatives should be provided in MD&A.-[74]-
2. Request for Comment
Should foreign private issuers be subject to the proposed
amendments? In particular, are the proposed differences in
disclosure that would be applicable to foreign private issuers
that file under Items 17 and 18 of Form 20-F appropriate? For
example, should foreign private issuers filing under Item 17 of
Form 20-F be required to provide accounting policies disclosures?
Should application of some or all of the proposed amendments to
foreign private issuers be delayed to provide them more time to
become familiar with and implement the amendments? If so, which
portions of the proposed amendments should be delayed and what
period of delay would be appropriate (six months, one year, or
some other time period)?
C. Scope and Definition of Instruments
For purposes of this release, financial instruments,
derivative financial instruments, other financial instruments,
and derivative commodity instruments are defined as follows.
"Financial instruments" have the same meaning as that set forth
in paragraph 3 of FAS 107.-[75]- "Derivative financial
-[73]-(...continued)
accounting principles but not required by foreign
generally accepted accounting principles on which the
financial statements are prepared need not be furnished
pursuant to Item 17 of Form 20-F. Compliance with Item
17 of Form 20-F is acceptable for registration
statements or annual reports on Form 20-F. With
certain exceptions, foreign private issuers offering
securities must comply with Item 18 of Form 20-F.
-[74]- SAB Topic 1:D provides several examples of disclosures
in MD&A that might be necessary to enable readers to
understand the financial statements as a whole. One of
those example disclosures includes significant
accounting policies and measurement assumptions which
may bear upon an understanding of operating trends or
financial condition.
-[75]- FAS 107 3 states:
A financial instrument is defined as cash, evidence of
an ownership interest in an entity, or a contract that
both:
a. Imposes on one entity a contractual obligation (1)
to deliver cash or another financial instrument to
a second entity or (2) to exchange other financial
instruments on potentially unfavorable terms with
the second entity.
b. Conveys to that second entity a contractual right
(1) to receive cash or another financial
instrument from the first entity or (2) to
exchange other financial instruments on
potentially favorable terms with the first entity. -------------------- BEGINNING OF PAGE #30 ------------------- 30
instruments" are a subset of financial instruments and include
futures, forwards, swaps, options, and other financial
instruments with similar characteristics, as defined by
paragraphs 5 - 7 of FAS 119.-[76]-
Other financial instruments include all financial
instruments as defined in paragraph 3 of FAS 107, except for
derivative financial instruments, as defined above. For example,
other financial instruments include trade accounts receivable,
investments, loans, structured notes, mortgage-backed securities,
trade accounts payable, indexed debt instruments, interest-only
and principal-only obligations, deposits, and other debt
obligations. However, for purposes of this release, trade
accounts receivable and trade accounts payable should not be
considered other financial instruments when their carrying
amounts approximate fair value.
Commodity derivative instruments include, to the extent such
instruments are not derivative financial instruments, commodity
futures, commodity forwards, commodity swaps, commodity options,
and other commodity instruments with similar characteristics,
that are reasonably possible to be settled in cash or with
-[76]- FAS 119 5 - 7 state:
5. For purposes of this Statement, a derivative
financial instrument is a futures, forward, swap, or
option contract, or other financial instrument with
similar characteristics.
6. Examples of other financial instruments with
characteristics similar to option contracts include
interest rate caps or floors and fixed-rate loan
commitments. Those instruments have characteristics
similar to options in that they provide the holder with
benefits of favorable movements in the price of an
underlying asset or index with limited or no exposure
to losses from unfavorable price movements, generally
in return for a premium paid at inception by the holder
to the issuer. Variable-rate loan commitments and
other variable-rate financial instruments also may have
characteristics similar to option contracts. For
example, contract rate adjustments may lag changes in
market rates or be subject to caps or floors. Examples
of other financial instruments with characteristics
similar to forward contracts include various kinds of
commitments to purchase stocks or bonds, forward
interest rate agreements, and interest rate collars.
Those instruments are similar to forwards in that they
provide benefits of favorable movements in the price of
an underlying asset or index and exposure to losses
from unfavorable price movements, generally with no
payments at inception.
7. The definition of derivative financial instrument
in paragraph 5 excludes all on-balance-sheet
receivables and payables, including those that "derive"
their values or contractually required cash flows from
the price of some other security or index, such as
mortgage-backed securities, interest-only and
principal-only obligations, and indexed debt
instruments. It also excludes option features that are
embedded within an on-balance-sheet receivable or
payable, for example, the conversion feature and call
provisions embedded in convertible bonds. -------------------- BEGINNING OF PAGE #31 ------------------- 31
another financial instrument.-[77]-
Thus, the instrument definitions described above do not
encompass (i) commodity positions, (ii) derivative commodity
instruments that are not reasonably possible to be settled in
cash or with another financial instrument (e.g., a commodity
forward contract that must be settled in the commodity), (iii)
cash flows from anticipated transactions, and/or (iv) operating
cash flows from non-financial and non-commodity
instruments.-[78]-
D. Reporting Frequency
1. Discussion
The proposed amendments would apply to all registration
statements filed under the Securities Act and all reports and
proxy and information statements filed under the Exchange Act
that are required to include or incorporate financial statements.
However, for reports that only include interim financial
statements (e.g., Form 10-Qs), the proposed amendments would need
to be complied with only to the extent there has been a material
change in the information disclosed as of the preceding fiscal
year end. Thus, for example, the quantitative and qualitative
information about market risk required by the proposed amendments
would be included in interim filings only if there was a material
change in that information when compared to the information
presented as of the end of the preceding fiscal year.
2. Request for Comment
Is the frequency of reporting proposed in the amendments
adequate? Alternatively, given that market risk sensitive
instruments allow a registrant to change rapidly its exposures to
market risk, should the proposed disclosures be provided in all
interim filings?
V. GENERAL REQUEST FOR COMMENT
The Commission seeks comment from all interested persons
wishing to address any aspect of the proposed amendments. In
addition to the requests for comments listed throughout this
release, the Commission also is requesting comment on whether the
proposed amendments, if adopted, would have an adverse impact on
competition or would impose a burden on competition that is
neither necessary nor appropriate in furthering the purposes of
the Securities Act and the Exchange Act. Comments in this regard
will be considered by the Commission in complying with its
responsibilities under Section 23(a) of the Exchange Act, 15
U.S.C. 78w(a).
-[77]- The term "reasonably possible" as used in the proposed
rulemaking amendments is consistent with 3 of FAS 5,
which defines "reasonably possible" to mean the chance
of a future transaction or event occurring is more than
remote but less than likely.
-[78]- See section III B1b(v), supra, for a further
description of the instruments, positions, and
transactions described in this paragraph. -------------------- BEGINNING OF PAGE #32 ------------------- 32
VI. DISCLOSURE OF THE EFFECTS OF DERIVATIVE INSTRUMENTS ON
REPORTING FINANCIAL INSTRUMENTS, COMMODITY POSITIONS, FIRM
COMMITMENTS, AND ANTICIPATED TRANSACTIONS
In conjunction with the publication today of proposed rules
to require specific additional disclosures concerning market risk
sensitive instruments, including derivatives, the Commission is
taking this opportunity to remind registrants of existing
obligations that may already require certain disclosures about
derivatives. The staff's 1994 and 1995 reviews of registrant
filings suggested that some registrants may not be providing
sufficient disclosure about how derivatives directly or
indirectly affect reported items. As a result, those disclosures
that are being made may not accurately reflect such matters as
the effective terms or expected cash flows of the reported items.
It is fundamental that registrants must include in any
filings or reports any material information that may be necessary
to make statements made, in light of the circumstances under
which they are made, not misleading.-[79]- That is,
registrants must provide disclosure about derivatives that
affect, directly or indirectly, the terms, fair values, or cash
flows, of the reported items. This would include derivative
transactions that are designated to reported items under
generally accepted accounting principles.-[80]-
Thus, for example, information required to be disclosed in
the footnotes to the financial statements about the interest
rates and repricing characteristics of debt obligations should
include, when material, the effects of derivatives. Similarly,
summary information and disclosures in MD&A about the interest
costs of debt obligations should include, when material,
disclosure of the effects of derivatives. Likewise, when
derivatives directly or indirectly affect the terms and cash
flows of items such as securities held as assets, servicing
rights, oil and gas reserves, loan receivables, deposit
liabilities, and leases, disclosure about the terms and cash
flows of these items should include, when material, disclosure of
the effects of derivatives to the extent such disclosure is
necessary to prevent the disclosure about the reported item from
being misleading.
VII. COST-BENEFIT ANALYSIS
A. Background
To assist the Commission in its evaluation of the costs and
benefits that may result from the proposed disclosure
requirements discussed in this release, commenters are requested
to provide views and data relating to any costs and benefits
associated with the proposed amendments. In general, the
proposed amendments clarify existing standards and rules, include
additional instruments within existing standards, and provide
alternatives for quantitative disclosures regarding market risk
sensitive instruments. In particular, the proposed amendments
provide:
1. Enhanced descriptions of accounting policies for derivative
financial instruments and derivative commodity instruments;
2. Quantitative disclosures about market risk; and
3. Qualitative disclosures about market risk.
-[79]- See, e.g., Rule 12b-20, 17 CFR 240.12b-20, under the
Securities Exchange Act of 1934 ("Exchange Act") and
Rule 408, 17 CFR 230.408 under the Securities Act of
1933 ("Securities Act").
-[80]- See, e.g., FAS 52 21a and FAS 80 4a. -------------------- BEGINNING OF PAGE #33 ------------------- 33
The Commission is proposing these amendments in response to
requests from investors and others to provide more meaningful
information about market risk sensitive instruments.-[81]-
The expected benefits of these proposed amendments are to make
information about market risk sensitive instruments, including
derivative instruments, more understandable to investors and
others. This increased understanding is expected to enhance the
ability of investors to make investment decisions and also
improve the efficiency of markets. The Commission believes these
benefits will outweigh the related costs, which are discussed
below.
B. Descriptions of Accounting Policies for Derivatives
FAS 119 was designed, in part, to help investors and others
understand how derivative financial instruments are reported in
the financial statements.-[82]- Thus, FAS 119 requires,
among other things, disclosure of the policies used to account
for derivative financial instruments, pursuant to the
requirements of APB 22.-[83]- However, the scope of FAS
119 is limited to derivative financial instruments; therefore, it
does not apply to other derivative instruments with similar
characteristics, such as derivative commodity instruments. In
addition, FAS 119 does not provide explicit guidance indicating
what must be described in accounting policies footnotes to make
the financial statement effects of derivatives more
understandable. The SEC staff found that the accounting policies
footnotes for derivatives often were too general in nature, not
reflecting adequately the many choices made by registrants in
their accounting for derivatives.
The current proposed amendments require descriptions of
accounting policies for derivative financial instruments and
derivative commodity instruments, unless the registrant's
derivative activities are not material. Thus, the scope of the
proposed amendments is broader than the scope of FAS 119. In
addition, to help make clear the impact of derivatives on the
financial statements, the proposed amendments make explicit the
items to be disclosed in the accounting policies footnotes.
The proposed amendments are likely to result in a more
focused and descriptive discussion of the accounting policies for
both derivative financial instruments and derivative commodity
instruments. This additional information is likely to result in
additional preparation, audit, and printing costs. However,
because accounting policies for these instruments are known by
registrants and should be known by their auditors, most of the
preparation and audit costs are expected to relate to initial
compliance with the proposed amendments. These costs, along with
expected printing costs, are not estimated to be significant.
Other costs, such as ongoing recordkeeping and compliance costs,
also are not expected to be significant.
C. Quantitative Information About Market Risk
As discussed earlier in this release, under the proposed
amendments, registrants would be required to present quantitative
information about market risk. An important aspect of this
requirement, from a cost perspective, is that registrants will
-[81]- See notes 23-29, supra, for examples of investors,
regulators, and other private bodies endorsing or
recommending improved quantitative disclosures about
market risk.
-[82]- See FAS 119 60.
-[83]- See FAS 119 8. See also note 39, supra, for a
discussion of the requirements of APB 22. -------------------- BEGINNING OF PAGE #34 ------------------- 34
have the flexibility to choose one of three disclosure
alternatives (tabular presentation, sensitivity analysis, or
value at risk) to provide such quantitative information about
market risk.
The Commission believes that, for registrants electing to
provide tabular disclosure, much of the required information is
currently available. Thus, additional costs relating to
recordkeeping are not expected to be significant. While
increased reporting and compliance burdens may result, in many
cases the information presented in the tabular disclosures is
used in managing the business activities of the registrant and,
therefore, may be available at relatively low incremental costs.
Further, registrants complying with Securities Act Industry Guide
3,-[84]- principally financial institutions, already
disclose a significant amount of the requested information.
Registrants that choose to use either the sensitivity or
value at risk disclosure alternatives may incur significant
additional costs if they currently do not use these methodologies
to manage market risk. In contrast, if registrants currently use
sensitivity or value at risk analyses to manage market risk, the
Commission believes that any additional costs associated with
complying with the proposed amendments are likely to be
negligible. In addition, the Commission understands that some of
the data and the systems needed to develop these analyses
recently have been made available at a relatively moderate
cost.-[85]- Moreover, some registrants are required to
prepare such information for regulatory capital measurement
purposes. In particular, thrift institutions are required to
prepare fair value sensitivity analysis amounts for risk-based
capital purposes.-[86]- Also, bank holding companies may
be required, under a proposed rulemaking requirement, to prepare
a value at risk analysis for risk-based capital
purposes.-[87]- Thus, the costs associated with the
sensitivity and value at risk analyses may vary depending on (i)
whether the registrant currently engages in these analyses for
other management or regulatory purposes and (ii) the particular
model and assumptions used in the registrant's calculations. Any
-[84]- Securities Act Industry Guide 3, "Statistical
Disclosure by Bank Holding Companies." Exchange Act
Industry Guide 3 is identical to the Securities Act
guide. Detailed disclosures are required under Guide 3
of, among other things, the registrant's: (i)
distribution of assets, liabilities and stockholders'
equity; interest rates and interest differential; (ii)
investment portfolio; (iii) loan portfolio (including
types of loans, maturities and sensitivities of loans
to changes in interest rates, risk elements, and loans
outstanding in foreign countries); (iv) summary of loan
loss experience; (v) deposits; (vi) return on equity
and assets; and (vii) short-term borrowings.
-[85]- See Wall Street Journal, "Morgan Unveils the Way It
Measures Market Risk" C1 (October 11, 1994).
-[86]- See note 51, supra.
-[87]- See Department of the Treasury, Notice of Proposed
Rulemaking, "Risk-Based Capital Standards: Market
Risk," 60 FR 38082 (July 25, 1995): see also Federal
Reserve System, Request of Comments, "Capital
Requirements for Market Risk," 60 FR 38142 (July 25,
1995). -------------------- BEGINNING OF PAGE #35 ------------------- 35
registrant that believes the cost of such analyses outweigh the
benefits of disclosing them, however, may elect to provide
tabular presentation of information about market risk sensitive
instruments.
D. Qualitative Information About Market Risk
FAS 119 requires certain qualitative disclosures about the
market risk management activities associated with derivative
financial instruments held or issued for purposes other than
trading. In particular, FAS 119 requires disclosure of "the
entity's objectives for holding or issuing the derivative
financial instruments, the context needed to understand those
objectives, and its general strategies for achieving those
objectives."-[88]- However, as indicated above, these
requirements of FAS 119 only apply to certain derivative
financial instruments, and the SEC staff has observed that these
disclosures typically have been general in nature, providing only
limited insight into an entity's overall market risk management
activities.
In essence, the proposed amendments expand certain
disclosure requirements set forth in FAS 119 to (i) encompass
derivative financial instruments entered into for trading
purposes, other financial instruments, and derivative commodity
instruments and (ii) require registrants to evaluate and describe
material changes in their primary risk exposures and their market
risk management activities. The Commission believes this should
present a more complete discussion of a registrant's exposure to
market risks and the way it manages those risks. Because this
information is likely to be used by registrants as part of their
risk management activities, incremental costs relating to such
disclosure are not expected to be significant.
E. Small Business Issuers
As noted earlier, the Commission has determined not to amend
Regulation S-B-[89]- to incorporate an item similar to Item
305 of Regulation S-K. Regulation S-B may be used by small
business issuers-[90]- required to register their securities with
the Commission. By excluding small business issuers from all but
the accounting policies disclosures that would be required by the
proposed amendments, the Commission has limited substantially the
cost of these proposals for small entities.
The Commission will reassess reporting, recordkeeping,
compliance requirements, and other cost-benefit issues in light
of comments it receives in response to the proposed amendments.
VII. SUMMARY OF INITIAL REGULATORY FLEXIBILITY ANALYSIS
The Commission has prepared an Initial Regulatory
Flexibility Analysis pursuant to the requirements of the
Regulatory Flexibility Act,-[91]- regarding the proposed
amendments to Rule 4-08 of Regulation S-X and to Regulation S-K
to create Item 305. Additionally, the Commission is proposing
amendments to Forms S-1, S-2, S-4, S-11, and F-4 under the
Securities Act of 1933, and Rule 14a-3, Schedule 14A and Forms
10, 20-F, 10-Q, and 10-K under the Exchange Act. The analysis
notes that the amendments would clarify existing disclosure
requirements, include additional instruments within existing
disclosure requirements, and provide disclosure alternatives for
-[88]- See FAS 119 11a.
-[89]- 17 CFR 228.10 et seq.
-[90]- See note 71, supra.
-[91]- 5 U.S.C. Section 603. -------------------- BEGINNING OF PAGE #36 ------------------- 36
quantitative information regarding derivative financial
instruments, other financial instruments, and derivative
commodity instruments. These amendments are intended to provide
investors with information that provides a clearer understanding
of registrants' use of such instruments, and the market risks
inherent in those instruments.
The analysis notes that, although the proposed amendments
may increase the reporting burden for those registrants not
currently providing comparable disclosures, there should not be a
significant impact on recordkeeping or other compliance burdens.
The analysis also indicates that the proposals do not conflict or
overlap with existing requirements but rather tailor them for
specific purposes.
As more fully discussed in the analysis and noted in the
Cost-Benefit Analysis section of this release, the Commission has
determined not to amend Regulation S-B to incorporate an item
similar to proposed Item 305 of Regulation S-K. The Commission,
therefore, has reduced the impact of the proposed amendments on
small business issuers.
Request for Comment
Written comments are encouraged with respect to any aspect
of the Initial Regulatory Flexibility Analysis. Such comments
will be considered in preparation of the Final Regulatory
Flexibility Analysis if the proposed amendments are adopted. A
copy of the Initial Regulatory Flexibility Analysis may be
obtained by contacting Robert E. Burns, Chief Counsel, Office of
the Chief Accountant, at (202) 942-4400, Securities and Exchange
Commission, 450 Fifth Street, N.W., Mail Stop 11-3, Washington,
D.C. 20549.
List of Subjects in 17 CFR Parts 210, 228, 229, 239, 240, and 249
Accounting, reporting and recordkeeping requirements, securities
TEXT OF PROPOSED AMENDMENTS
In accordance with the foregoing, Title 17, Chapter II of
the Code of Federal Regulations is proposed to be amended as
follows:
PART 210- FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT
OF 1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935,
INVESTMENT COMPANY ACT OF 1940, AND ENERGY POLICY AND
CONSERVATION ACT OF 1975
1. The authority citation for Part 210 continues to read as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77aa(25),
77aa(26), 78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79e(b), 79j(a),
79n, 79t(a), 80a-8, 80a-20, 80a-29, 80a-30, 80a-37a, unless
otherwise noted.
2. By amending 210.4-08 by adding paragraph (n) to read as
follows:
Section 210.4-08 General notes to financial statements
* * * * *
(n) Accounting policies for certain derivative instruments.
In connection with the accounting policies disclosures required
by generally accepted accounting principles, identify and
describe all accounting principles and the methods of applying
those principles that affect the recognition and measurement of
derivative financial instruments and derivative commodity
instruments, as defined in the instructions to this paragraph,
unless the registrant's derivatives activities are not material.
Materiality of derivative activities shall be measured by the
fair values of derivative financial instrument and derivative
commodity instruments at the end of each reporting period and the -------------------- BEGINNING OF PAGE #37 ------------------- 37
fair value of those instruments during each reporting period.
This description shall include:
(1) A description of each method used to account for
derivative financial instruments and derivative commodity
instruments;
(2) The types of derivative financial instruments and
derivative commodity instruments accounted for under each method;
(3) The criteria required to be met for each accounting
method used (e.g., the manner in which the type of risk
reduction, correlation, designation, and/or effectiveness tests
are applied);
(4) The accounting method used if the specified criteria are
not met;
(5) The accounting for terminations of derivatives
designated as hedges or used to affect directly or indirectly the
terms, fair values, or cash flows of a designated item;
(6) The accounting for derivatives if the designated item
matures, or is sold, extinguished, terminated, or, if related to
an anticipated transaction, is no longer likely to occur; and
(7) Where and when derivative financial instruments and
derivative commodity instruments and their related gains and
losses are reported in the statements of financial position, cash
flows, and results of operations.
Instructions to Paragraph 4-08(n). 1. In preparing the
accounting policies disclosures under this paragraph 4-08(n),
registrants should include those derivative financial instruments
and derivative commodity instruments that are held during, or
outstanding at the end of, each reporting period.
2. For purposes of this paragraph 4-08(n), derivative
financial instruments and derivative commodity instruments are
defined as follows:
(i) Derivative financial instruments have the same meaning
as defined by generally accepted accounting principles (see,
e.g., Financial Accounting Standards Board ("FASB"), Statement of
Financial Accounting Standards No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial
Instruments," paragraphs 5-7, (October 1994) ("FAS 119")), and
includes futures, forwards, swaps, options, and other financial
instruments with similar characteristics.
(ii) Derivative commodity instruments include, to the extent
such instruments are not derivative financial instruments,
commodity futures, commodity forwards, commodity swaps, commodity
options, and other commodity instruments with similar
characteristics that are reasonably possible to be settled in
cash or with another financial instrument. For purposes of this
paragraph, the term "reasonably possible" has the same meaning as
defined by generally accepted accounting principles (see, e.g.,
FASB, Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies," paragraph 3 (March 1975)).
3. For purposes of these instructions, "anticipated
transactions" means transactions (other than transactions
involving existing assets or liabilities or transactions
necessitated by existing firm commitments) an enterprise expects,
but is not obligated, to carry out in the normal course of
business (see, e.g., FASB, Statement of Financial Accounting
Standards No. 80, "Accounting for Futures Contracts," paragraph
9, (August 1984)).
4. For purposes of paragraphs 4-08(n)(2), 4-08(n)(3), 4-
08(n)(4), and 4-08(n)(7) registrants should distinguish
derivative financial instruments and derivative commodity
instruments entered into for trading purposes from those
instruments that are entered into for purposes other than
trading. For purposes of this paragraph, "trading purposes" has
the same meaning as defined by generally accepted accounting -------------------- BEGINNING OF PAGE #38 ------------------- 38
principles (see, e.g., FASB Statement of Accounting Standards No.
119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments," paragraph 9a, (October 1994)).
PART 228 - INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS
ISSUERS
3. The authority citation for Part 228 continues to read
as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn,
77sss, 78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-
37, 80b-11, unless otherwise noted. -------------------- BEGINNING OF PAGE #39 ------------------- 39
4. By amending the NOTES to Section 228.310 by revising
the first sentence of Note 2 to read as follows:
Section 228.310 (Item 310) Financial Statements
NOTES--1. * * *
2. Regulation S-X [17 CFR 210.1-210.12] Form and Content
of and Requirements for Financial Statements shall not apply to
the preparation of such financial statements, except that the
report and qualifications of the independent accountant shall
comply with the requirements of Article 2 of Regulation S-X [17
CFR 210.2], Articles 3-19 and 3-20 [17 CFR 210.3-19 and 210.3-20]
shall apply to financial statements of foreign private issuers,
the description of accounting policies shall comply with Article
4-08(n) of Regulation S-X [17 CFR 210.4-08(n)], and small
business issuers engaged in oil and gas producing activities
shall follow the financial accounting and reporting standards
specified in Article 4-10 of Regulation S-X [17 CFR 210.4-10]
with respect to such activities. * * *
PART 229- STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY
POLICY AND CONSERVATION ACT OF 1975 - REGULATION S-K
5. The authority citation for Part 229 continues to read
in part as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d),
79e, 79n, 79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless
otherwise noted.
* * * * *
6. By amending Section 229 by adding Item 305 to read as
follows:
Section 229.305 (Item 305) Quantitative and qualitative
disclosures about market risk.
* * * * *
(a) Quantitative information about market risk. (1) To the
extent material, registrants shall provide quantitative
disclosures about market risk, as of the end of the latest fiscal
year. Such disclosures should be provided using any one of the
following three disclosure alternatives at the election of the
registrant:
(i)(A)(1) Tabular presentation of terms and information
related to market risk sensitive instruments; such information
(e.g., expected cash flows by maturity dates) should be
categorized according to risk exposure category (e.g., interest
rate risk, foreign currency exchange rate risk, commodity price
risk, and other similar market risks, such as equity price risk),
and within the foreign currency exchange rate risk category, by
functional currency (e.g., U.S. dollar, Japanese yen).
(2) Within each of these risk exposure categories,
instruments should be grouped based on common characteristics.
At a minimum, instruments should be distinguished by the
following characteristics:
(i) Fixed rate or variable rate assets or liabilities;
(ii) Long or short forwards or futures;
(iii) Written or purchased put or call options;
(iv) Receive fixed or receive variable interest rate swaps;
and
(v) The currency in which the instruments' cash flows are
denominated.
(3) For each instrument in the table, expected cash flow
information should be presented separately for each of the next
five years with the remaining expected cash flows presented as an
aggregate amount. Derivatives used to manage risks inherent in -------------------- BEGINNING OF PAGE #40 ------------------- 40
anticipated transactions also should be disclosed separately; and
(B) A description of assumptions necessary to an
understanding of the disclosures required under subparagraph (A)
of this item 305(a)(1)(i) (see the Appendix to this Item for a
suggested tabular format for presentation of this information),
or
(ii)(A) Sensitivity analyses that express the hypothetical
loss in future earnings, fair values, or cash flows of market
risk sensitive instruments resulting from at least one selected
hypothetical change in interest rates, currency exchange rates,
commodity prices, and similar market rates or prices over a
selected time period. The magnitude of each selected
hypothetical change in rates or prices may differ across risk
exposures. Separate sensitivity analysis disclosures should be
made for each category of risk exposure, i.e., interest rate
risk, foreign currency exchange rate risk, commodity price risk,
and other similar market risks, such as equity price risk; and
(B) A description of the model assumptions and parameters
necessary to an understanding of the disclosures required under
subparagraph (A) of this item 305(a)(1)(ii); or
(iii)(A) Value at risk disclosures that express the
potential loss in fair values, earnings, or cash flows from
market movements (e.g., changes in interest rates, foreign
currency exchange rates, commodity prices, and other similar
market rates or prices) over a selected time period with a
selected likelihood of occurrence; value at risk disclosures
should be made on an aggregate basis for all market risk
sensitive instruments and for each category of market risk
exposure, such as interest rate risk, foreign currency exchange
rate risk, commodity price risk, and other similar market risks,
such as equity price risk;
(B) For each risk exposure category either:
(1) The average or range in the value at risk numbers for
the reported period;
(2) The average or range in actual changes in fair values,
earnings, or cash flows of instruments occurring during the
reporting period; or
(3) The percentage of time the actual changes in fair
values, earnings, or cash flows of market risk sensitive
instruments exceeded the reported value at risk amounts during
the current reporting period; (The information in this
subparagraph (B) is not required for the first fiscal year end
for which this rule is effective) and
(C) A description of the model assumptions and parameters
necessary to an understanding of the disclosures required under
subparagraphs (A) and (B) of this Item 305(a)(1)(iii).
(2) Registrants shall discuss material limitations that may
cause the information required under paragraph (a)(1) of this
item 305 not to reflect the overall market risk of the entity.
This discussion shall include descriptions of:
(i) Each limitation; and
(ii) If applicable, the instruments' features that are not
reflected fully within the selected quantitative market risk
disclosure alternative.
(3) Registrants shall present summarized information for
the preceding fiscal year. Registrants also shall discuss the
reasons for material changes in quantitative information about
market risk when compared to the information reported in the
previous period. Information required by this paragraph (a)(3)
of item 305, however, is not required if disclosure is not
required pursuant to paragraph (a)(1) of this item 305 for the
current fiscal year. Information required by this paragraph
(a)(3) of item 305 is not required for the first fiscal year end
in which item 305 is effective. -------------------- BEGINNING OF PAGE #41 ------------------- 41
(4) Registrants may change methods of presenting
quantitative information about market risk (e.g., changing from
tabular presentation to value at risk). However, if such a
change is made the registrants shall:
(i) Explain the reasons for the change; and
(ii) Provide summarized comparable information, under the
new disclosure method, for the year preceding the current year.
Instructions to Paragraph 305(a).
1. In preparing the disclosures under paragraph 305(a),
registrants are required to include derivative financial
instruments, other financial instruments, and derivative
commodity instruments, as specified in the General Instructions
to Paragraphs 305(a) and 305(b).
2. In preparing disclosures under paragraph 305(a),
registrants should distinguish derivative financial instruments,
other financial instruments, and derivative commodity instruments
entered into for trading purposes from those instruments that are
entered into for purposes other than trading.
3. In preparing disclosures under paragraph 305(a),
registrants may include other market risk sensitive instruments,
positions, and transactions that are not addressed in instruction
1. to paragraph 305(a). Such instruments, positions, and
transactions might include commodity positions, derivative
commodity instruments that are not reasonably possible to be
settled in cash or with another financial instrument, cash flows
from anticipated transactions, and operating cash flows from non-
financial and non-commodity instruments (e.g., cash flows
generated by manufacturing activities). Registrants choosing to
include voluntarily these instruments, positions, and cash flows
for purposes of paragraphs 305(a)1(ii) and 305(a)1(iii) are
required to state that they have included such instruments,
positions, and cash flows.
4. Under paragraph 305(a)(1)(i):
(A) The examples of terms and information relating to market
risk sensitive instruments that should be disclosed include, but
are not limited to, the instruments' fair values, expected
principal or transaction cash flows, weighted average effective
rates or prices, and other relevant market risk related
information;
(B) Functional currency means functional currency as defined
by generally accepted accounting principles (see, e.g., FASB,
Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation", ("FAS 52") Appendix E (December 1981);
(C) Model assumptions that should be described include, but
are not limited to, specification of the differing numbers
reported in the table for various categories of instruments
(e.g., principal cash flows for debt, notional amounts for swaps,
and contract amounts for options and futures) and key prepayment
and/or reinvestment assumptions relating to the timing of
reported cash flow amounts; and
(D) Market risk sensitive instruments that are exposed to
rate or price changes in more than one market risk exposure
category should be presented within the tabular information under
each of those risk exposure categories.
5. Under paragraph 305(a)(1)(ii), model assumptions and
parameters that should be described include, but are not limited
to, how loss is defined by the model (e.g., loss in earnings,
fair values, or cash flows), a general description of the
modeling technique (e.g., change in net present values arising
from parallel shifts in market rates or prices and how
optionality is addressed by the model), the types of instruments
covered by the model (e.g., derivative financial instruments,
other financial instruments, derivative commodity instruments,
and whether other instruments are included voluntarily, such as -------------------- BEGINNING OF PAGE #42 ------------------- 42
certain commodity instruments and positions, cash flows from
anticipated transactions, and operating cash flows from non-
financial and non-commodity instruments), and other relevant
information on the model's parameters, (e.g., the magnitudes of
parallel shifts in market rates or prices used, the method by
which discount rates are determined, and key prepayment and/or
reinvestment assumptions).
6. Under paragraph 305(a)(1)(iii), model assumptions and
parameters that should be described include, but are not limited
to, how loss is defined by the model (e.g., loss in earnings,
fair values, or cash flows), type of model used (e.g.,
variance/covariance, historical simulation, Monte Carlo
simulation, and how optionality is addressed by the model), the
types of instruments covered by the model (e.g., derivative
financial instruments, other financial instruments, derivative
commodity instruments, and whether other instruments are included
voluntarily, such as certain commodity instruments and positions,
cash flows from anticipated transactions, and operating cash
flows from non-financial and non-commodity instruments), and
other relevant information on model parameters, (e.g., holding
period, confidence interval, and the method used for aggregating
value at risk amounts across market risk exposure categories,
such as by assuming perfect positive correlation, independence,
or actual observed correlation).
7. Under paragraph 305(a)(2), limitations that should be
considered include, but are not limited to:
(A) The exclusion of certain market risk sensitive
instruments, positions, and transactions from the disclosures
required under paragraph 305(a)(1) (e.g., derivative commodity
instruments not reasonably possible to be settled in cash or with
another financial instrument, commodity positions, cash flows
from anticipated transactions, and operating cash flows from non-
financial and non-commodity instruments, such as cash flows from
manufacturing activities). Failure to include such instruments,
positions, and transactions in preparing the disclosures under
paragraph 305(a)(1) may be a limitation because the resulting
information may not fully reflect the overall market risk of a
registrant; and
(B) The ability of disclosures required under paragraph
305(a)(1) to reflect fully the market risk that may be inherent
in instruments with leverage, option, or prepayment features
(e.g., structured notes, collateralized mortgage obligations,
leveraged swaps, and swaps with embedded written options). -------------------- BEGINNING OF PAGE #43 ------------------- 43
(b) Qualitative information about market risk. To the
extent material, describe:
(1) The registrant's primary market risk exposures;
(2) How those exposures are managed (e.g., a description of
the objectives, general strategies, and instruments, if any, used
to manage those exposures); and
(3) Changes in either the registrant's primary market risk
exposures or how those exposures are managed when compared to
what was in effect during the most recent reporting period and
what is known or expected to be in effect in future reporting
periods.
Instructions to Paragraph 305(b).
1. The disclosures required by this paragraph relate to the
market risk exposures inherent in derivative financial
instruments, other financial instruments, and derivative
commodity instruments, as defined in the General Instructions to
Paragraphs 305(a) and 305(b).
2. In preparing disclosures under paragraph 305(b), the
qualitative information about market risk should be presented
separately for derivative financial instruments, other financial
instruments, and derivative commodity instruments that are
entered into for trading purposes and those that are entered into
for purposes other than trading. In addition, qualitative
information about market risk should be presented separately for
those instruments used to manage risks inherent in anticipated
transactions.
3. Primary market risk exposures, for the purposes of this
paragraph, mean:
(A) The following categories of market risk: interest rate
risk, foreign currency exchange rate risk, commodity price risk,
and other similar market rate or price risks (e.g., equity
prices); and
(B) Within each of these categories, the particular markets
that present the primary risk of loss to the registrant. For
example, if a registrant has a material exposure to foreign
currency exchange rate risk and, within this category of market
risk, is most vulnerable to changes in dollar/yen, dollar/pound,
and dollar/peso exchange rates, the registrant would disclose
these exposures. Similarly, if a registrant has a material
exposure to interest rate risk and, within this category of
market risk, is most vulnerable to changes in short-term U.S.
prime interest rates, it would disclose this exposure.
4. For purposes of disclosure under paragraph (b) of this
item 305, registrants should describe primary market risk
exposures that exist at the end of the current reporting period,
and how those exposures are managed.
General Instructions to Paragraphs 305(a) and 305(b).
1. The disclosure called for by paragraphs 305(a) and
305(b) is intended to clarify the registrant's exposure to market
risks associated with activities in derivative financial
instruments, other financial instruments, and derivative
commodity instruments.
2. For purposes of paragraphs 305(a) and 305(b), derivative
financial instruments, other financial instruments, and
derivative commodity instruments (referred collectively as
"market rate sensitive instruments" or "instruments") are defined
as follows:
(A) Derivative financial instruments has the same meaning
as defined by generally accepted accounting principles (see,
e.g., FASB, Statement of Financial Accounting Standards No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value
of Financial Instruments," paragraphs 5-7, (October 1994)), and
includes futures, forwards, swaps, options, and other financial
instruments with similar characteristics; -------------------- BEGINNING OF PAGE #44 ------------------- 44
(B) Other financial instruments means all financial
instruments as defined by generally accepted accounting
principles (see, e.g., FASB, Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial
Instruments," paragraph 3, (December 1991)), except for
derivative financial instruments, as defined above;
(C) Other financial instruments include, but are not
limited to, trade accounts receivable, investments, loans,
structured notes, mortgage-backed securities, trade accounts
payable, indexed debt instruments, interest-only and principal-
only obligations, deposits, and other debt obligations. However,
for purposes of this release, trade accounts receivable and trade
accounts payable should not be considered other financial -------------------- BEGINNING OF PAGE #45 ------------------- 45
instruments when their carrying amounts approximate fair value;
and
(D) Derivative commodity instruments include, to the extent
such instruments are not derivative financial instruments,
commodity futures, commodity forwards, commodity swaps, commodity
options, and other commodity instruments with similar
characteristics that are reasonably possible to be settled in
cash or with another financial instrument. For purposes of
paragraphs 305(a) and 305(b) and these general instructions, the
term "reasonably possible" has the same meaning as defined by
generally accepted accounting principles (see, e.g., FASB,
Statement of Financial Accounting Standards No. 5, "Accounting
for Contingencies," paragraph 3, (March 1975)).
3. For purposes of paragraphs 305(a) and 305(b), disclosure
is not required for:
(A) Commodity positions;
(B) Derivative commodity instruments that are not reasonably
possible to be settled in cash or with another financial
instrument;
(C) Cash flows from anticipated transactions; and/or
(D) Operating cash flows from non-financial and non-
commodity instruments.
4.(A) For purposes of making a materiality assessment under
paragraphs 305(a) and 305(b), registrants should consider both:
(i) The materiality of the fair values of derivative
financial instruments, other financial instruments, and
derivative commodity instruments outstanding at the end of the
current reporting period; and
(ii) The materiality of the potential loss in future
earnings, fair values, or cash flows from reasonably possible
market movements.
(B) If either (i) or (ii) of instruction 4.(A) is material,
then the disclosures under paragraphs 305(a) and 305(b) are
required.
(C) In determining the materiality of the fair values of
market risk sensitive instruments outstanding at the end of the
current reporting period, registrants generally should not net
fair values, except to the extent allowed under generally
accepted accounting principles (see, e.g., FASB Interpretation
No. 39, "Offsetting of Amounts Related to Certain Contracts"
(March 1992)). For example, under this instruction, the fair
value of assets generally should not be netted with the fair
value of liabilities. In determining the materiality of the
potential loss in future earnings or fair values from reasonably
possible market movements, registrants should consider both the
magnitude of past market movements, as well as expectations about
the magnitude of future market movements. In addition, in making
the determination under this instruction about the materiality of
the potential loss in future earnings, fair values, or cash
flows, registrants should consider, among other things, potential
losses that may arise from leverage, option, and/or multiplier
features.
5. For purposes of presenting quantitative and qualitative
information about market risk, registrants generally should
provide the required information in one location. However,
alternative presentation, such as inclusion of all or part of the
information in the footnotes to the financial statements or in
Management's Discussion and Analysis, may be used at the
discretion of the registrant.
6. For purposes of the instructions to paragraphs 305(a)
and 305(b), "trading purposes" has the same meaning as defined by
generally accepted accounting principles (see, e.g., FASB,
Statement of Financial Accounting Standards No. 119, "Disclosure
about Derivative Financial Instruments and Fair Value of -------------------- BEGINNING OF PAGE #46 ------------------- 46
Financial Instruments," paragraph 9a, (October 1994)). In
addition, "anticipated transactions" means transactions (other
than transactions involving existing assets or liabilities or
transactions necessitated by existing firm commitments) an
enterprise expects, but is not obligated, to carry out in the
normal course of business (e.g., FASB, Statement of Financial
Accounting Standards No. 80, "Accounting for Futures Contracts,"
paragraph 9, (August 1984)).
Appendix to Item 305 -- Tabular Disclosures
The tables set forth below are illustrative of the format
that might be used when a registrant elects to present the
information required by paragraph (a)(1)(i)(A) of Item 305
regarding terms and information about derivative financial
instruments, other financial instruments, and derivative
commodity instruments. These examples are for illustrative
purposes only. Registrants are not required to display the
information in the specific manner illustrated below.
Alternative methods of display are permissible as long as the
disclosure requirements of the section are satisfied.
Furthermore, these examples were designed primarily to illustrate
possible formats for presentation of the information required by
the proposed section and do not purport to illustrate the broad
range of derivative financial instruments, other financial
instruments, and derivative commodity instruments utilized by
registrants. -------------------- BEGINNING OF PAGE #47 ------------------- 47
Interest Rate Sensitivity
The table below provides information about the Company's
derivative financial instruments and other financial instruments
that are sensitive to changes in interest rates, including
interest rate swaps and debt obligations. For debt obligations,
the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the
yield curve at the reporting date. For interest rate swaps, the
table presents notional amounts and weighted average interest
rates by expected (contractual) maturity dates. Notional amounts
are used to calculate the contractual payments to be exchanged
under the contract. The information is presented in US dollar
equivalents, which is the Company's reporting currency. The
instrument's actual cash flows are denominated in both US dollar
($US) and German deutschmarks (DMs), as indicated in parentheses.
December 31, 19x1 Expected Maturity Date
There- Fair
19x2 19x3 19x4 19x5 19x6 after Total Value
Liabilities (In millions)
Long-term Debt
Fixed Rate ($US) $XXX $XXX $XXX $XXX $XXX $XXX $XXX $XXX
Average interest rate X.X% X.X% X.X% X.X% X.X% X.X% X.X%
Fixed Rate (DMs) XXX XXX XXX XXX XXX XXX XXX XXX
Average interest rate X.X% X.X% X.X% X.X% X.X% X.X% X.X%
Variable Rate ($US) XXX XXX XXX XXX XXX XXX XXX XXX
Average interest rate X.X% X.X% X.X% X.X% X.X% X.X% X.X%
Expected Maturity Date
Interest Rate Derivatives There- Fair
19x2 19x3 19x4 19x5 19x6 after Total Value
(In millions)
Interest Rate Swaps
Variable to Fixed ($US)$XXX $XXX $XXX $XXX $XXX $XXX $XXX $XXX
Average pay rate X.X% X.X% X.X% X.X% X.X% X.X% X.X%
Average receive rate X.X% X.X% X.X% X.X% X.X% X.X% X.X%
Fixed to Variable ($US) XXX XXX XXX XXX XXX XXX XXX XXX
Average pay rate X.X% X.X% X.X% X.X% X.X% X.X% X.X%
Average receive rate X.X% X.X% X.X% X.X% X.X% X.X% X.X%
Exchange Rate Sensitivity -------------------- BEGINNING OF PAGE #48 ------------------- 48
The table below provides information about the Company's
derivative financial instruments, other financial instruments,
and firmly committed sales transactions by functional currency
and presents such information in U.S. dollar
equivalents.-[1]- The table summarizes information on
instruments and transactions that are sensitive to foreign
currency exchange rates, including foreign currency forward
exchange agreements, deutschmark (DM)-denominated debt
obligations, and firmly committed DM sales transactions. For
debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity
dates. For firmly committed DM-sales transactions, sales amounts
are presented by the expected transaction date, which are not
expected to exceed two years. For foreign currency forward
exchange agreements, the table presents the notional amounts and
weighted average exchange rates by expected (contractual)
maturity dates. These notional amounts generally are used to
calculate the contractual payments to be exchanged under the
contract.
December 31, 19x1
Expected Maturity Date
On-Balance Sheet Financial Instruments
There- Fair
19x2 19x3 19x4 19x5 19x6 after Total Value
(US$ Equivalent in Millions)
$US Functional Currency-[2]-
Liabilities
Long-Term Debt (DM) $XXX $XXX $XXX $XXX $XXX $XXX $XXX $XXX
Average U.S. dollar
/DM Exchange Rate X.X X.X X.X X.X X.X X.X X.X
Expected Maturity or Transaction Date
There- Fair
19x2 19x3 19x4 19x5 19x6 after Total Value
Anticipated Transactions and
Related Derivatives-[3]- (US$ Equivalent in millions)
$US Functional Currency:
Firmly committed transactions:
Sales Contracts (DM) $XXX $XXX - - - - $XXX $XXX
Forward Exchange Agreements
(Receive $US/Pay DM)
-[1]- The information is presented in U.S. dollars because that
is the registrant's reporting currency.
-[2]- Similar tabular information would be provided for other
functional currencies.
-[3]- Pursuant to Instruction 3 to proposed Item 305(a) of
Regulation S-K, registrants may include cash flows from
anticipated transactions and operating cash flows
resulting from non-financial and non-commodity
instruments. -------------------- BEGINNING OF PAGE #49 ------------------- 49
Contract Amount XXX XXX - - - - XXX XXX
Average Exchange Rate X.X X.X - - - - X.X -------------------- BEGINNING OF PAGE #50 ------------------- 50
Commodity Price Sensitivity
The table below provides information about the Company's
corn inventory and futures contracts that are sensitive to
changes in commodity prices, specifically corn prices. For
inventory, the table presents the carrying amount and fair value
at December 31, 19x1. For the futures contracts the table
presents the notional amounts in bushels, the weighted average
contract prices, and the total dollar contract amount by expected
maturity dates, the latest of which occurs one year from the
reporting date. Contract amounts are used to calculate the
contractual payments and quantity of corn to be exchanged under
the futures contracts.
December 31, 19x1
On Balance Sheet Commodity
Position and Related Derivatives
Carrying Fair
Amount Value
(In millions)
Corn Inventory $XXX $XXX-[4]-
Related Derivatives
Expected
Maturity Fair
1992 Value
Futures Contracts (Short)
Contract Volumes (100,000 bushels)
XXX
Weighted Average Price (Per 100,000 bushels)
$X.XX
Contract Amount ($US in millions)
$XXX $XXX
-[4]- Pursuant to Instruction 3 to proposed Item 305 of
Regulation S-K, registrants may include information on
commodity positions, such as corn inventory. -------------------- BEGINNING OF PAGE #51 ------------------- 51
PART 239 - FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
7. The authority citation for Part 239 continues to read,
in part, as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c,
78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l,
79m, 79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and 80a-37, unless
otherwise noted.
* * * * *
8. By amending Form S-1 (referenced in 239.11) by
redesignating items 11(j) through 11(m) as items 11(k) through
11(n) and adding item 11(j) to read as follows:
Note - The text of Form S-1 does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form S-1
Registration Statement Under the Securities Act of 1933
* * * * *
Item 11. Information with Respect to the Registrant.
* * * * *
(j) Information required by Item 305 of Regulation S-K
(Section 229.305 of this chapter), quantitative and qualitative
disclosures about market risk.
* * * * *
9. By amending Form S-2 (referenced in Section 239.12) by
adding paragraph (9) to Item 11(b), removing "and" at the end of
Item 12(a)(3)(vii), removing the period at the end of Item
12(a)(3)(viii) and in its place adding "; and", and adding
paragraph (ix) to Item 12(a)(3) to read as follows:
Note - The text of Form S-2 does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form S-2
Registration Statement Under the Securities Act of 1933
* * * * *
Item 11. Information with Respect to the Registrant.
(a) * * *
(b) * * *
(9) Furnish quantitative and qualitative disclosures about
market risk required by Item 305 of Regulation S-K (Section
229.305 of this chapter).
* * * * *
Item 12. Incorporation of Certain Information by Reference.
(a) * * *
(3) * * *
(ix) quantitative and qualitative disclosures about market
risk as required by Item 305 of Regulation S-K (Section 229.305
of this chapter).
* * * * *
10. By amending Form S-4 (referenced in Section 239.25) by
removing "and" at the end of Item 12(b)(3)(v) and the period at
the end of Item 12(b)3)(vi) and in its place adding "; and",
adding paragraph (vii) to Item 12(b)(3), removing "and" at the
end of Item 13(a)(3)(v) and the period at the end of Item
13(a)(3)(vi) and in its place adding "; and", adding paragraph
(vii) to Item 13(a)(3), removing "and" at the end of Item 14(h)
and the period at the end of Item 14(i) and in its place adding
"; and", adding paragraph (j) to Item 14, and adding paragraph
(10) to Item 17(b) to read as follows:
Note - The text of Form S-4 does not, and this amendment
will not, appear in the Code of Federal Regulations. -------------------- BEGINNING OF PAGE #52 ------------------- 52
Form S-4
Registration Statement Under the Securities Act of 1933
* * * * *
Item 12. Information with Respect to S-2 or S-3 Registrants.
* * * * *
(b) * * *
(3) * * *
(vii) Item 305 of Regulation S-K (Section 229.305 of
this chapter), quantitative and qualitative disclosures about
market risk.
* * * * *
Item 13. Incorporation of Certain Information by Reference.
* * * * *
(a) * * *
(3) * * *
(vii) Item 305 of Regulation S-K (Section 229.305 of
this chapter) quantitative and qualitative disclosures about
market risk.
* * * * *
Item 14. Information with Respect to Registrants Other Than S-3
or S-2 Registrants.
* * * * *
(j) Item 305 of Regulation S-K (Section 229.305 of this
chapter), quantitative and qualitative disclosures about market
risk.
* * * * *
Item 17. Information with Respect to Companies Other Than S-3 or
S-2 Companies.
* * * * *
(b) * * *
(10) Item 305 of Regulation S-K (Section 229.305 of this
chapter), quantitative and qualitative disclosures about market
risk.
* * * * *
11. By amending Form S-11 (referenced in Section 239.18) to
redesignate Items 30 through 36 as Items 31 through 37 and to add
Item 30 to Part I to read as follows:
Note - The text of Form S-11 does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form S-11
Registration Statement Under the Securities Act of 1933
* * * * *
Item 30. Quantitative and Qualitative Disclosures About Market
Risk.
Furnish the information required by Item 305 of Regulation
S-K (Section 229.305 of this chapter).
* * * * *
12. By amending Form F-4 (referenced in Section 239.34) to
redesignate Item 12(b)(3)(vi) as Item 12(b)(3)(vi)(A), add new
paragraph (B) to Item 12(b)(3)(vi), redesignate Item 14(g) as
Item 14(g)(1), add new Item 14(g)(2), redesignate Item 17(b)(4)
as Item 17(b)(4)(i), and add new Item 17(b)(4)(ii) to read as
follows:
Note - The text of Form F-4 does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form F-4 -------------------- BEGINNING OF PAGE #53 ------------------- 53
Registration Statement Under the Securities Act of 1933
* * * * *
Item 12. Information With Respect to F-2 or F-3 Registrants.
* * * * *
(b) * * *
(3) * * *
(vi)(A) * * *
(B) Item 9A of Form 20-F, quantitative and qualitative
disclosures of market risk.
* * * * *
Item 14. Information With Respect to Foreign Registrants Other
Than F-2 or F-3 Registrants.
* * * * *
(g)(1) * * *
(g)(2) Item 9A of Form 20-F, quantitative and qualitative
disclosures of market risk.
* * * * * -------------------- BEGINNING OF PAGE #54 ------------------- 54
Item 17. Information With Respect to Foreign Companies Other
Than F-2 or F-3 Companies.
* * * * *
(b)(4)(i) * * *
(b)(4)(ii) Item 9A of Form 20-F, quantitative and
qualitative disclosures of market risk.
* * * * *
PART 240 - GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT
OF 1934
13. The authority citation for Part 240 continues to read
in part as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29,
80a-37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
14. By amending Section 240.14a-3 by adding paragraph
(b)(5)(iii) to read as follows:
Section 240.14a-3 Information to Be Furnished Security Holders
* * * * *
(b) * * *
(5) * * *
(iii) The report shall contain the quantitative and
qualitative disclosures about market risk required by Item 305 of
Regulation S-K (Section 229.305 of this chapter).
* * * * *
15. By amending Section 240.14a-101 to remove the word
"and" at the end of Item 13(a)(4), redesignate Item 13(a)(5) as
Item 13(a)(6), add Item 13(a)(5), add Instruction 6 to Item 13,
remove "and" at the end of Item 14(b)(2)(i)(B)(3)(vi) and the
period at the end of Item 14(b)(2)(i)(B)(3)(vii) and in its place
add "; and", add paragraph (viii) to Item 14(b)(2)(i)(B)(3),
remove "and" at the end of Item 14(b)(2)(ii)(A)(3)(v) and the
period at the end of Item 14(b)(2)(ii)(A)(3)(vi) and in its place
add "; and", add paragraph (vii) to Item 14(b)(2)(ii)(A)(3),
remove "and" at the end of Item 14(b)(3)(i)(H) and the period at
the end of Item 14(b)(3)(i)(I) and in its place add "; and", add
paragraph (J) to Item 14(b)(3)(i), and add Instructions 8, 9, and
10 to Item 14 to read as follows:
Section 240.14a-101 Schedule 14A. Information required in proxy
statement.
* * * * *
Item 13. Financial and other information
(a) Information required. * * *
(5) Item 305 of Regulation S-K, quantitative and
qualitative disclosures about market risk; and
* * * * *
Instructions to Item 13.
* * * * *
6. A registered investment company need not comply with
items (a)(2), (a)(3), and (a)(5) of this Item 13.
* * * * *
Item 14. Mergers, consolidations, acquisitions and similar
matters.
* * * * *
(b) Information about the registrant and the other person.
* * * * *
(2) Information with respect to S-2 or S-3 registrants. -------------------- BEGINNING OF PAGE #55 ------------------- 55
(i) Information required to be furnished. * * *
(B) * * *
(3) * * *
(viii) Item 305 of Regulation S-K (Section 229.305 of this
chapter), quantitative and qualitative disclosures about market
risk.
(ii) Incorporation of certain information by reference.
* * * * *
(A) * * *
(3) * * *
(vii) Item 305 of Regulation S-K, quantitative and
qualitative disclosures about market risk.
* * * * *
(3) Information with respect to registrants other than S-2
or S-3 registrants.
(i) * * *
(A) * * *
(J) Item 305 of Regulation S-K, quantitative and
qualitative disclosures about market risk.
* * * * *
Instructions to Item 14.
* * * * *
8. A registered management company need not comply with
Items (i), (iii), (iv), (v), (vi), and (viii) of paragraph
(b)(2)(i)(B)(3) of this Item 14.
9. A registered management company need not comply with
Items (i), (ii), (iii), (iv), (v), and (vii) of paragraph
(b)(2)(ii)(A)(3) of this Item 14.
10. A registered management company need not comply with
items (A), (B), (D), (F), (G), (H), and (J) of paragraph
(b)(3)(i) of this Item 14.
* * * * *
PART 249 - FORMS, SECURITIES EXCHANGE ACT OF 1934
16. The authority for Part 249 continues to read, in part,
as follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.
17. By amending Form 10 (referenced in Section 249.210) by
revising Item 2 to read as follows:
Note - The text of Form 10 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 10
General Form For Registration of Securities
* * * * *
Item 2. Financial Information.
Furnish the information required by Items 301, 303, and 305
of Regulation S-K (Sections 229.301, 229.303, and 229.305 of this
chapter).
* * * * *
18. By amending Form 20-F (referenced in Section 249.220f)
by adding Item 9A to be inserted after Item 9 and before Item 10
in Part I to read as follows:
Note - The text of Form 20-F does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form 20-F
Registration Statement Pursuant to Section 12(b) or (g) of
The Securities Exchange Act of 1934
or -------------------- BEGINNING OF PAGE #56 ------------------- 56
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
or
Transaction Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
* * * * *
Part I
* * * * *
Item 9A. Quantitative and qualitative disclosures about
market risk.
(a) Quantitative information about market risk. (1) To the
extent material, registrants shall provide quantitative
disclosures about market risk, as of the end of the latest fiscal
year. Such disclosures should be provided using any one of the
following three disclosure alternatives at the election of the
registrant:
(i)(A)(1) Tabular presentation of terms and information
related to market risk sensitive instruments; such information
(e.g., expected cash flows by maturity dates) should be
categorized according to risk exposure category (e.g., interest
rate risk, foreign currency exchange rate risk, commodity price
risk, and other similar market risks, such as equity price risk),
and within the foreign currency exchange rate risk category, by
functional currency (e.g., U.S. dollar, Japanese yen).
(2) Within each of these risk exposure categories,
instruments should be grouped based on common characteristics.
At a minimum, instruments should be distinguished by the
following characteristics:
(i) Fixed rate or variable rate assets or liabilities;
(ii) Long or short forwards or futures;
(iii) Written or purchased put or call options;
(iv) Receive fixed or receive variable interest rate swaps;
and
(v) The currency in which the instruments' cash flows are
denominated.
(3) For each instrument in the table, expected cash flow
information should be presented separately for each of the next
five years with the remaining expected cash flows presented as an
aggregate amount. Derivatives used to manage risks inherent in
anticipated transactions also should be disclosed separately; and
(B) A description of assumptions necessary to an
understanding of the disclosures required under subparagraph (A)
of this item 9A(a)(1)(i) (see the Appendix to this Item for a
suggested tabular format for presentation of this information),
or
(ii)(A) Sensitivity analyses that express the hypothetical
loss in future earnings, fair values, or cash flows of market
risk sensitive instruments resulting from at least one selected
hypothetical change in interest rates, currency exchange rates,
commodity prices, and similar market rates or prices over a
selected time period. The magnitude of each selected
hypothetical change in rates or prices may differ across risk
exposures. Separate sensitivity analysis disclosures should be
made for each category of risk exposure, i.e., interest rate
risk, foreign currency exchange rate risk, commodity price risk,
and other similar market risks, such as equity price risk; and
(B) A description of the model assumptions and parameters
necessary to an understanding of the disclosures required under
subparagraph (A) of this item 9A(a)(1)(ii); or
(iii)(A) Value at risk disclosures that express the
potential loss in fair values, earnings, or cash flows from
market movements (e.g., changes in interest rates, foreign -------------------- BEGINNING OF PAGE #57 ------------------- 57
currency exchange rates, commodity prices, and other similar
market rates or prices) over a selected time period with a
selected likelihood of occurrence; value at risk disclosures
should be made on an aggregate basis for all market risk
sensitive instruments and for each category of market risk
exposure, such as interest rate risk, foreign currency exchange
rate risk, commodity price risk, and other similar market risks,
such as equity price risk;
(B) For each risk exposure category either:
(1) The average or range in the value at risk numbers for
the reported period;
(2) The average or range in actual changes in fair values,
earnings, or cash flows of instruments occurring during the
reporting period; or
(3) The percentage of time the actual changes in fair
values, earnings, or cash flows of market risk sensitive
instruments exceeded the reported value at risk amounts during
the current reporting period; (The information in this
subparagraph (B) is not required for the first fiscal year end
for which this rule is effective) and
(C) A description of the model assumptions and parameters
necessary to an understanding of the disclosures required under
subparagraphs (A) and (B) of this Item 9A(a)(1)(iii).
(2) Registrants shall discuss material limitations that may
cause the information required under paragraph (a)(1) of this
item 9A not to reflect the overall market risk of the entity.
This discussion shall include descriptions of:
(i) Each limitation; and
(ii) If applicable, the instruments' features that are not
reflected fully within the selected quantitative market risk
disclosure alternative.
(3) Registrants shall present summarized information for
the preceding fiscal year. Registrants also shall discuss the
reasons for material changes in quantitative information about
market risk when compared to the information reported in the
previous period. Information required by this paragraph (a)(3)
of item 9A, however, is not required if disclosure is not
required pursuant to paragraph (a)(1) of this item 9A for the
current fiscal year. Information required by this paragraph
(a)(3) of item 9A is not required for the first fiscal year end
in which this item 9A is effective.
(4) Registrants may change methods of presenting
quantitative information about market risk (e.g., changing from
tabular presentation to value at risk). However, if such a
change is made the registrants shall:
(i) Explain the reasons for the change; and
(ii) Provide summarized comparable information, under the
new disclosure method, for the year preceding the current year.
Instructions to Paragraph 9A(a).
1. In preparing the disclosures under paragraph 9A(a),
registrants are required to include derivative financial
instruments, other financial instruments, and derivative
commodity instruments, as specified in the General Instructions
to Paragraphs 9A(a) and 9A(b).
2. In preparing disclosures under paragraph 9A(a),
registrants should distinguish derivative financial instruments,
other financial instruments, and derivative commodity instruments
entered into for trading purposes from those instruments that are
entered into for purposes other than trading.
3. In preparing disclosures under paragraph 9A(a),
registrants may include other market risk sensitive instruments,
positions, and transactions that are not addressed in instruction
1. to paragraph 9A(a). Such instruments, positions, and
transactions might include commodity positions, derivative -------------------- BEGINNING OF PAGE #58 ------------------- 58
commodity instruments that are not reasonably possible to be
settled in cash or with another financial instrument, cash flows
from anticipated transactions, and operating cash flows from non-
financial and non-commodity instruments (e.g., cash flows
generated by manufacturing activities). Registrants choosing to
include voluntarily these instruments, positions, and cash flows
for purposes of paragraphs 9A(a)1(ii) and 9A(a)1(iii) are
required to state that they have included such instruments,
positions, and cash flows.
4. Under paragraph 9A(a)(1)(i):
(A) The examples of terms and information relating to market
risk sensitive instruments that should be disclosed include, but
are not limited to, the instruments' fair values, expected
principal or transaction cash flows, weighted average effective
rates or prices, and other relevant market risk related
information;;
(B) Functional currency means functional currency as defined
by generally accepted accounting principles (see, e.g., FASB,
Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation", ("FAS 52") Appendix E (December 1981); -------------------- BEGINNING OF PAGE #59 ------------------- 59
(C) Model assumptions that should be described include, but
are not limited to, specification of the differing numbers
reported in the table for various categories of instruments
(e.g., principal cash flows for debt, notional amounts for swaps,
and contract amounts for options and futures) and key prepayment
and/or reinvestment assumptions relating to the timing of
reported cash flow amounts; and
(D) Market risk sensitive instruments that are exposed to
rate or price changes in more than one market risk exposure
category should be presented within the tabular information under
each of those risk exposure categories.
5. Under paragraph 9A(a)(1)(ii), model assumptions and
parameters that should be described include, but are not limited
to, how loss is defined by the model (e.g., loss in earnings,
fair values, or cash flows), a general description of the
modeling technique (e.g., change in net present values arising
from parallel shifts in market rates or prices and how
optionality is addressed by the model), the types of instruments
covered by the model (e.g., derivative financial instruments,
other financial instruments, derivative commodity instruments,
and whether other instruments are included voluntarily, such as
certain commodity instruments and positions, cash flows from
anticipated transactions, and operating cash flows from non-
financial and non-commodity instruments), and other relevant
information on the model's parameters, (e.g., the magnitudes of
parallel shifts in market rates or prices used, the method by
which discount rates are determined, and key prepayment and/or
reinvestment assumptions).
6. Under paragraph 9A(a)(1)(iii), model assumptions and
parameters that should be described include, but are not limited
to, how loss is defined by the model (e.g., loss in earnings,
fair values, or cash flows), type of model used (e.g.,
variance/covariance, historical simulation, Monte Carlo
simulation, and how optionality is addressed by the model), the
types of instruments covered by the model (e.g., derivative
financial instruments, other financial instruments, derivative
commodity instruments, and whether other instruments are included
voluntarily, such as certain commodity instruments and positions,
cash flows from anticipated transactions, and operating cash
flows from non-financial and non-commodity instruments), and
other relevant information on model parameters, (e.g., holding
period, confidence interval, and the method used for aggregating
value at risk amounts across market risk exposure categories,
such as by assuming perfect positive correlation, independence,
or actual observed correlation).
7. Under paragraph 9A(a)(2), limitations that should be
considered include, but are not limited to:
(A) The exclusion of certain market risk sensitive
instruments, positions, and transactions from the disclosures
required under paragraph 9A(a)(1) (e.g., derivative commodity
instruments not reasonably possible to be settled in cash or with
another financial instrument, commodity positions, cash flows
from anticipated transactions, and operating cash flows from non-
financial and non-commodity instruments, such as cash flows from
manufacturing activities). Failure to include such instruments,
positions, and transactions in preparing the disclosures under
paragraph 9A(a)(1) may be a limitation because the resulting
information may not fully reflect the overall market risk of a
registrant; and
(B) The ability of disclosures required under paragraph
9A(a)(1) to reflect fully the market risk that may be inherent in
instruments with leverage, option, or prepayment features (e.g.,
structured notes, collateralized mortgage obligations, leveraged
swaps, and swaps with embedded written options). -------------------- BEGINNING OF PAGE #60 ------------------- 60
(b) Qualitative information about market risk. To the
extent material, describe:
(1) The registrant's primary market risk exposures;
(2) How those exposures are managed (e.g., a description of
the objectives, general strategies, and instruments, if any, used
to manage those exposures); and
(3) Changes in either the registrant's primary market risk
exposures or how those exposures are managed when compared to
what was in effect during the most recent reporting period and
what is known or expected to be in effect in future reporting
periods.
Instructions to Paragraph 9A(b).
1. The disclosures required by this paragraph 9A(b) relate
to the market risk exposures inherent in derivative financial
instruments, other financial instruments, and derivative
commodity instruments, as defined in the General Instructions to
Paragraphs 9A(a) and 9A(b).
2. In preparing disclosures under paragraph 9A(b), the
qualitative information about market risk should be presented
separately for derivative financial instruments, other financial
instruments, and derivative commodity instruments that are
entered into for trading purposes and those that are entered into
for purposes other than trading. In addition, qualitative
information about market risk should be presented separately for
those instruments used to manage risks inherent in anticipated
transactions.
3. Primary market risk exposures, for the purposes of this
paragraph, mean:
(A) The following categories of market risk: interest rate
risk, foreign currency exchange rate risk, commodity price risk,
and other similar market rate or price risks (e.g., equity
prices); and
(B) Within each of these categories, the particular markets
that present the primary risk of loss to the registrant. For
example, if a registrant has a material exposure to foreign
currency exchange rate risk and, within this category of market
risk, is most vulnerable to changes in dollar/yen, dollar/pound,
and dollar/peso exchange rates, the registrant would disclose
these exposures. Similarly, if a registrant has a material
exposure to interest rate risk and, within this category of
market risk, is most vulnerable to changes in short-term U.S.
prime interest rates, it would disclose this exposure.
4. For purposes of disclosure under paragraph (b) of this
item 9A, registrants should describe primary market risk
exposures that exist at the end of the current reporting period,
and how those exposures are managed.
General Instructions to Paragraphs 9A(a) and 9A(b).
1. The disclosure called for by paragraphs 9A(a) and 9A(b)
is intended to clarify the registrant's exposure to market risks
associated with activities in derivative financial instruments,
other financial instruments, and derivative commodity
instruments.
2. For purposes of paragraphs 9A(a) and 9A(b), derivative
financial instruments, other financial instruments, and
derivative commodity instruments (referred collectively as
"market rate sensitive instruments" or "instruments") are defined
as follows:
(A) Derivative financial instruments has the same meaning
as defined by generally accepted accounting principles (see,
e.g., FASB, Statement of Financial Accounting Standards No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value
of Financial Instruments," paragraphs 5-7, (October 1994)), and
includes futures, forwards, swaps, options, and other financial
instruments with similar characteristics; -------------------- BEGINNING OF PAGE #61 ------------------- 61
(B) Other financial instruments means all financial
instruments as defined by generally accepted accounting
principles (see, e.g., FASB, Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial
Instruments," paragraph 3, (December 1991)), except for
derivative financial instruments, as defined above;
(C) Other financial instruments include, but are not
limited to, trade accounts receivable, investments, loans,
structured notes, mortgage-backed securities, trade accounts
payable, indexed debt instruments, interest-only and principal-
only obligations, deposits, and other debt obligations. However,
for purposes of this release, trade accounts receivable and trade
accounts payable should not be considered other financial
instruments when their carrying amounts approximate fair value;
and
(D) Derivative commodity instruments include, to the extent
such instruments are not derivative financial instruments,
commodity futures, commodity forwards, commodity swaps, commodity
options, and other commodity instruments with similar
characteristics that are reasonably possible to be settled in
cash or with another financial instrument. For purposes of
paragraphs 9A(a) and 9A(b) and these general instructions, the
term "reasonably possible" has the same meaning as defined by
generally accepted accounting principles (see, e.g., FASB,
Statement of Financial Accounting Standards No. 5, "Accounting
for Contingencies," paragraph 3, (March 1975)). -------------------- BEGINNING OF PAGE #62 ------------------- 62
3. For purposes of paragraphs 9A(a) and 9A(b), disclosure
is not required for:
(A) Commodity positions;
(B) Derivative commodity instruments that are not reasonably
possible to be settled in cash or with another financial
instrument;
(C) Cash flows from anticipated transactions; and/or
(D) Operating cash flows from non-financial and non-
commodity instruments.
4.(A) For purposes of making a materiality assessment under
paragraphs 9A(a) and 9A(b), registrants should consider both:
(i) The materiality of the fair values of derivative
financial instruments, other financial instruments, and
derivative commodity instruments outstanding at the end of the
current reporting period; and
(ii) The materiality of the potential loss in future
earnings or fair values from reasonably possible market
movements.
(B) If either (i) or (ii) of instruction 4.(A) is material,
then the disclosures under paragraphs 9A(a) and 9A(b) are
required.
(C) In determining the materiality of the fair values of
market risk sensitive instruments outstanding at the end of the
current reporting period, registrants generally should not net
fair values, except to the extent allowed under generally
accepted accounting principles (see, e.g., FASB Interpretation
No. 39, "Offsetting of Amounts Related to Certain Contracts"
(March 1992)). For example, under this instruction, the fair
value of assets generally should not be netted with the fair
value of liabilities. In determining the materiality of the
potential loss in future earnings or fair values from reasonably
possible market movements, registrants should consider both the
magnitude of past market movements, as well as expectations about
the magnitude of future market movements. In addition, in making
the determination under this instruction about the materiality of
the potential loss in future earnings, fair values, or cash
flows, registrants should consider, among other things, potential
losses that may arise from leverage, option, and/or multiplier
features.
5. For purposes of presenting quantitative and qualitative
information about market risk, registrants generally should
provide the required information in one location. However,
alternative presentation, such as inclusion of all or part of the
information in the footnotes to the financial statements or in
Management's Discussion and Analysis, may be used if such
presentation would be more meaningful to investors.
6. For purposes of the instructions to paragraphs 9A(a) and
9A(b), "trading purposes" has the same meaning as defined by
generally accepted accounting principles (see, e.g., FASB,
Statement of Financial Accounting Standards No. 119, "Disclosure
about Derivative Financial Instruments and Fair Value of
Financial Instruments," paragraph 9a, (October 1994)). In
addition, "anticipated transactions" means transactions (other
than transactions involving existing assets or liabilities or
transactions necessitated by existing firm commitments) an
enterprise expects, but is not obligated, to carry out in the
normal course of business (e.g., FASB, Statement of Financial
Accounting Standards No. 80, "Accounting for Futures Contracts,"
paragraph 9, (August 1984)).
Appendix to Item 9A -- Tabular Disclosures
The tables set forth below are illustrative of the format
that might be used when a registrant elects to present the
information required by paragraph (a)(1)(i)(A) of Item 9A -------------------- BEGINNING OF PAGE #63 ------------------- 63
regarding terms and information about derivative financial
instruments, other financial instruments, and derivative
commodity instruments. These examples are for illustrative
purposes only. Registrants are not required to display the
information in the specific manner illustrated below.
Alternative methods of display are permissible as long as the
disclosure requirements of the section are satisfied.
Furthermore, these examples were designed primarily to illustrate
possible formats for presentation of the information required by
the proposed section and do not purport to illustrate the broad
range of derivative financial instruments, other financial
instruments, and derivative commodity instruments utilized by
registrants. -------------------- BEGINNING OF PAGE #64 ------------------- 64
Interest Rate Sensitivity
The table below provides information about the Company's
derivative financial instruments and other financial instruments,
which are sensitive to changes in interest rates, including
interest rate swaps and debt obligations. For debt obligations,
the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the
yield curve at the reporting date. For interest rate swaps, the
table presents notional amounts and weighted average interest
rates by expected (contractual) maturity dates. Notional amounts
are used to calculate the contractual payments to be exchanged
under the contract. The information is presented in US dollar
equivalents, which is the Company's reporting currency. The
instrument's actual cash flows are denominated in both US dollar
($US) and German deutschmarks (DMs), as indicated in parentheses.
December 31, 19x1 Expected Maturity Date
There- Fair
19x2 19x3 19x4 19x5 19x6 after Total Value
Liabilities (In millions)
Long-term Debt
Fixed Rate ($US) $XXX $XXX $XXX $XXX $XXX $XXX $XXX $XXX
Average interest rate X.X% X.X% X.X% X.X% X.X% X.X% X.X%
Fixed Rate (DMs) XXX XXX XXX XXX XXX XXX XXX XXX
Average interest rate X.X% X.X% X.X% X.X% X.X% X.X% X.X%
Variable Rate ($US) XXX XXX XXX XXX XXX XXX XXX XXX
Average interest rate X.X% X.X% X.X% X.X% X.X% X.X% X.X%
Expected Maturity Date
Interest Rate Derivatives There- Fair
19x2 19x3 19x4 19x5 19x6 after Total Value
(In millions)
Interest Rate Swaps
Variable to Fixed($US)$XXX $XXX $XXX $XXX $XXX $XXX $XXX $XXX
Average pay rate X.X% X.X% X.X% X.X% X.X% X.X% X.X%
Average receive rate X.X% X.X% X.X% X.X% X.X% X.X% X.X%
Fixed to Variable($US) XXX XXX XXX XXX XXX XXX XXX XXX
Average pay rate X.X% X.X% X.X% X.X% X.X% X.X% X.X%
Average receive rate X.X% X.X% X.X% X.X% X.X% X.X% X.X%
Exchange Rate Sensitivity
The table below provides information about the Company's
derivative financial instruments, other financial instruments,
and firmly committed sales transactions by functional currency -------------------- BEGINNING OF PAGE #65 ------------------- 65
and presents such information in U.S. dollar
equivalents.-[1]- The table summarizes information on
instruments and transactions that are sensitive to foreign
currency exchange rates, including foreign currency forward
exchange agreements, deutschmark (DM)-denominated debt
obligations, and firmly committed DM sales transactions. For
debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity
dates. For firmly committed DM-sales transactions, sales amounts
are presented by the expected transaction date, which are not
expected to exceed two years. For foreign currency forward
exchange agreements, the table presents the notional amounts and
weighted average exchange rates by expected (contractual)
maturity dates. These notional amounts generally are used to
calculate the contractual payments to be exchanged under the
contract.
December 31, 19x1
Expected Maturity Date
On-Balance Sheet Financial Instruments
There- Fair
19x2 19x3 19x4 19x5 19x6 after Total Value
(US$ Equivalent in Millions)
$US Functional Currency-[2]-
Liabilities
Long-Term Debt (DM) $XXX $XXX $XXX $XXX $XXX $XXX $XXX $XXX
Average U.S. dollar
/DM Exchange Rate X.X X.X X.X X.X X.X X.X X.X
Expected Maturity or Transaction Date
There- Fair
19x2 19x3 19x4 19x5 19x6 after Total Value
Anticipated Transactions and
Related Derivatives-[3]- (US$ Equivalent in millions)
$US Functional Currency:
Firmly committed transactions:
Sales Contracts (DM) $XXX $XXX - - - - $XXX $XXX
Forward Exchange Agreements
(Receive $US/Pay DM)
Contract Amount XXX XXX - - - - XXX XXX
Average Exchange Rate X.X X.X - - - - X.X
-[1]- The information is presented in U.S. dollars because that
is the registrant's reporting currency.
-[2]- Similar tabular information would be provided for other
functional currencies.
-[3]- Pursuant to Instruction 3 to proposed Item 9A of Form 20-
F, registrants may include cash flows from anticipated
transactions and operating cash flows resulting from non-
financial and non-commodity instruments. -------------------- BEGINNING OF PAGE #66 ------------------- 66
Commodity Price Sensitivity
The table below provides information about the Company's
corn inventory and futures contracts that are sensitive to
changes in commodity prices, specifically corn prices. For
inventory, the table presents the carrying amount and fair value
at December 31, 19x1. For the futures contracts the table
presents the notional amounts in bushels, the weighted average
contract prices, and the total dollar contract amount by expected
maturity dates, the latest of which occurs within one year from
the reporting date. Contract amounts are used to calculate the
contractual payments and quantity of corn to be exchanged under
the futures contracts.
December 31, 19x1
On Balance Sheet Commodity
Position and Related Derivatives
Carrying Fair
Amount Value
(In millions)
Corn Inventory $XXX $XXX-[4]-
Related Derivatives
Expected
Maturity Fair
1992 Value
Futures Contracts (Short)
Contract Volumes (100,000 bushels) XXX
Weighted Average Price (Per 100,000 bushels)
$X.XX
Contract Amount ($US in millions) $XXX $XXX
* * * * *
19. By amending Form 10-Q (referenced in Section 249.308a)
by removing references to "Items 1 and 2 of Part I of this form"
and adding in their place references to "Items 1, 2, and 3 of
Part I of this form" in paragraphs 1 and 2 of General Instruction
F, adding paragraph 2.c. to General Instruction H and Item 3 to
Part I to read as follows:
Note - The text of Form 10-Q does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
or
Transition Report Pursuant to Section 13 or 15(d)
-[4]- Pursuant to proposed Instruction 3 to proposed Item 9A of
Form 20-F, registrants may include information on
commodity positions, such as corn inventory. -------------------- BEGINNING OF PAGE #67 ------------------- 67
of the Securities Exchange Act of 1934
* * * * *
General Instructions
* * * * *
H. Omission of Information by Certain Wholly-Owned Subsidiaries
* * * * *
2. * * *
c. Such registrants may omit the information called for by
Item 3 of Part I, Quantitative and Qualitative Disclosures About
Market Risk.
* * * * *
Part I - Financial Information
* * * * *
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
If there has been a material change in the information
required by Item 305 of Regulation S-K (Section 229.305 of this
chapter) from the end of the preceding fiscal year to the date of
the most recent interim balance sheet provided, furnish the
information required by Item 305 of Regulation S-K.
* * * * *
20. By amending Form 10-K (referenced in Section 249.310)
by adding Item 7A to be inserted after Item 7 and before Item 8
in Part II to read as follows:
Note - The text of Form 10-K does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
or
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
* * * * *
Part II
* * * * *
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.
Furnish the information required by Item 305 of Regulation
S-K (Section 229.305 of this chapter).
* * * * *
By the Commission.
Jonathan G. Katz
Secretary
December 28, 1995