July 19, 2002

Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549

Re: File No. S7-16-02

Dear Mr. Katz:

The Association for Financial Professionals (AFP) welcomes the opportunity to comment on the Securities and Exchange Commission's (SEC) Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies. The proposal would require additional disclosure in the areas of accounting estimates and initial adoption of an accounting policy that has a material effect on the financial statements. We agree with the SEC about the need to provide users of financial information with high quality and transparent disclosures. However, based upon our assessment of the proposed changes, we anticipate that the critical accounting estimate disclosures will significantly increase the burden on companies and add administrative cost, but will provide marginal value to investors and analysts.

The membership of AFP includes approximately 14,000 financial executives employed by over 5,000 corporations and other organizations. Our members represent a broad spectrum of financial disciplines and their organizations are drawn generally from the Fortune 1000 and middle-market companies in a wide variety of industries, including manufacturing, retail, energy, financial services, and technology.

Summary of Proposal

Companies would be required to report the proposed disclosures in a new section of the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section (MD&A) of their annual reports, registration statements and proxy and information statements. In addition, they would be required to disclose material changes to critical accounting estimates in the MD&A of quarterly reports. A company must make the required disclosures of "critical accounting estimates" if different reasonable estimates, or likely changes in the estimate, would have had a material effect on the financial statements. Accounting estimates based on assumptions about matters that were highly uncertain at the time are considered to be "critical." For initial adoption of an accounting policy, companies would be required to describe what gave rise to the initial adoption, the accounting principle that it adopted and method of applying it, qualitative impact on the financial statements, and why it chose the policy if alternatives were acceptable.

Current Rules and Accounting Standards

Current SEC rules require that the objective of the MD&A is to provide: (1) narrative description of the financial statements that allows investors to see the company through management's eyes, (2) context for analyzing the financial statements, and (3) information about the quality and variability of cash flows. The MD&A should also discuss earnings, liquidity and capital, and identify material changes from prior periods. Certain generally accepted accounting principles (GAAP) require disclosure about changes in estimates that are expected to affect future periods. Other GAAP require that companies disclose when there has been a change in an accounting principle. There is no requirement however to disclose the initial adoption of an accounting principle.

Discussion of Critical Accounting Estimates

AFP has serious concerns about the extent of the proposed critical accounting estimate disclosures. The proposed rules would require that companies discuss the (1) methodologies used, (2) underlying assumptions that are highly uncertain, (3) known trends likely to occur that would materially affect the estimate, (4) quantitative effects on the financial statements of changes in the estimates, (5) material qualitative and quantitative changes in the estimate over the past three years, and (6) whether management has discussed the estimate with the audit committee. The proposed rules will create a significant burden for companies with no clear measure of value to investors and analysts.

In addition, the proposed requirement to prepare the various scenarios and disclose the hypothetical effects is problematic. Certain information that companies use in determining critical accounting estimates could be company sensitive and should not be available to competitors and others, i.e., loss accruals for pending litigation. The rules could result in the unintended consequence of less disclosure because companies might report assumptions and ranges in very general terms. In addition, when companies have multiple critical accounting estimates, the proposed rules could result in voluminous disclosures of assumptions, estimates, and range of outcomes that could inadvertently mask, rather than clarify, information in the financial statements. Moreover, the proposed disclosures of critical accounting estimates are even more burdensome when combined with the SEC's proposal to reduced the time for filing Form 10Ks and Form 10Qs, which AFP supports in principle.

AFP recommends that the SEC limit the disclosures to qualitative discussions of critical accounting estimates. Specifically, the SEC should require that companies disclose the critical accounting estimates (as defined in the proposed rules), methodology used in determining the estimate, underlying assumptions, material changes to the accounting estimate for the past three years, and whether management has discussed the development of the estimates with the audit committee. These recommended disclosures will provide analysts and investors with sufficient information to assess the quality and reliability of management's critical accounting estimates. We strongly urge the SEC to eliminate the proposed disclosures that involve quantifying hypothetical effects of unknown changes in variables that affect the estimate.

Discussion About Initial Adoption of an Accounting Policy

AFP supports the disclosures that would be required when a company initially adopts an accounting policy that has had a material impact on the company's financial statements. Such disclosures would improve the quality of financial information because it would help analysts and investors in assessing the effects of a new accounting policy on current and future cash flows, earnings, assets, liabilities and capital. We support requiring a company to disclose why it selected an accounting policy, if it had a choice among acceptable alternatives. We do not believe however that it would benefit investors and analysts to disclose qualitatively the effects of an alternative accounting policy that was not chosen.

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We commend the SEC in its continuing efforts to improve the quality of financial reporting by public companies. We appreciate the opportunity to comment on the proposed rules and offer our recommendations to improve the required disclosures about critical accounting estimates. If you have any questions, please contact Gregory Fletcher, AFP's Director of Financial Accounting and Reporting, at (301) 961-8869.


Alvin C. Rodack, CCM
Associate Treasurer
The Ohio State University
AFP Government Relations Committee
James R. Haddad, CCM
Vice President, Corporate Finance
Cadence Design Systems, Inc.
AFP Financial Accounting and Investor Relations (FAIR) Task Force