July 19, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 C/o rule-comments@sec.gov Attn: Jonathan J. Katz, Secretary Re: File No. S7-16-02 -- Release No. 33-8098; 34-45907 Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies Dear Mr. Katz: Intel Corporation is pleased to submit this letter with our comments on Securities and Exchange Commission ("SEC" or "Commission") Release No. 33-8098 and 34-45907. This Release concerns proposals to require a public company to include in Management's Discussion and Analysis disclosures about accounting estimates the company makes in applying its accounting policies and the initial adoption by a company of an accounting policy that has a material impact on its financial presentation. Executive Summary Intel supports the Commission's desire to improve the quality of disclosure to investors about critical accounting estimates; however, we have an overall concern that certain aspects of these proposed rules could impair rather than improve the disclosure. In particular, if the goal is to provide the investor with a view of the company through the eyes of senior management, disclosing a large quantity of potentially immaterial or overwhelming data will not serve that purpose. The objective should be to ensure that MD&A informs the investor about important matters and addresses issues at an appropriate level of detail. We think the disclosures required under the current proposal would be overly detailed, difficult to implement, potentially hurt the competitive position of the company and would not provide meaningful information for the average investor. In addition, the increased burden of the very detailed proposed disclosures could be counterproductive in light of the Commission's initiatives to accelerate filing deadlines. You have also asked for comments on potential areas where the scope of the proposed rules could be expanded. As we believe the current proposal is already too cumbersome, any expansion of the scope of the proposal would only compound the issues. We also have comments on specific proposals as outlined below. 1. The rules as proposed could require disclosure of information about strategic plans or unasserted claims that would give an undue advantage to third parties. This would not be in the best interests of stockholders. 2. There are some types of accounting estimates for which it is not possible to do a valid sensitivity analysis. An invalid analysis would not provide meaningful information to the investor. 3. Requiring detailed discussion of critical accounting estimates by segment would add to the disclosure burden and would not necessarily add value for the investor. 4. Disclosure about management's discussion of critical accounting estimates with the audit committee does not belong in MD&A, but rather in the audit committee's report in the proxy statement. 5. Requiring auditor examination and reporting on critical accounting estimates disclosure in MD&A would not significantly improve disclosure. Each of these is discussed in more detail in the sections that follow. Discussion and Analysis 1. Disclosure of information that would give an undue advantage to third parties is not in the best interests of stockholders. a. Strategic forward-looking information. We believe that the proposed rules requiring quantification of factors underlying critical accounting estimates and the related sensitivity analysis that are outlined in this Release could require disclosure of strategic forward-looking information that represents trade secrets or confidential information that the company has a legitimate interest in keeping from its competitors. Examples of strategic forward-looking information that has not previously been required to be disclosed include: cash flow forecasts for specific businesses, assumed growth rates and market share assumptions that may be factors in the analysis of tangible and intangible assets for impairment. Although investors might be interested in the information, the company's competitors would be even more interested. It is not in the stockholders' interests to require disclosure of strategic forward-looking information that would put the company at a competitive disadvantage. With sufficient cautionary statements, safe harbor protection against private legal actions may be available, but there is no safe harbor that prevents the use of the information by competitors to the company's and the stockholders' disadvantage. We suggest that the proposed rules be changed to specify that the company not be required to quantify factors that represent strategic forward-looking information that would put the company at a competitive disadvantage. Alternatively, the rules could clarify that significant factors of a strategic nature could be discussed qualitatively and a sensitivity analysis or a range of estimates could be provided which does not actually disclose the level of the strategic factor. For example, regarding estimates related to goodwill impairment analysis, a company could disclose: "If we had reduced our revenue growth rate assumption for this business by X%, the recorded value of assets would have exceeded the fair value of the business and we would have had to perform the second step of the impairment analysis. In that case, a significant portion of our $Y in goodwill would have been considered impaired." b. Unasserted claims. The rules, as proposed, could require companies to disclose very detailed information about contingencies that represent unasserted claims or pending or threatened litigation. This detailed disclosure could give an undue advantage to claimants and plaintiffs that may assert claims against the company, which would clearly not be in the best interest of the company's stockholders. Existing disclosure requirements related to contingencies under FAS 5 already address the information needs of investors. We recommend that unasserted claims and pending or threatened litigation be excluded from the scope of required disclosures about critical accounting policies. 2. Valid sensitivity analysis is not possible for certain accounting estimates. It is possible to perform a sensitivity analysis in the examples provided in the proposed rules, where the estimates vary in a quantifiable way in relation to a significant variable: warranty costs to the price of copper, product returns to the amount of channel inventory, and valuation of fixed assets in a business to the cash flows forecasted for that business. For Intel's assessment of goodwill for impairment, identified as a critical accounting estimate, a sensitivity analysis related to cash flows and the drivers of cash flows can be performed in terms of a percentage change for significant variables. It is not possible to perform a valid sensitivity analysis for some estimates, particularly those that represent a cumulatively material impact from a series of individually immaterial calculations or judgments that do not have a direct or linear relationship to a specific variable. One of the critical accounting estimates identified in Intel's 2001 annual report, the valuation of non-marketable equity securities, is an example of an estimate for which a sensitivity analysis cannot be done. The impairment review involves a highly judgmental analysis of the portfolio, on a company-by-company basis. The analysis assesses, for example, each investee's financial condition, the existence of subsequent rounds of financing and the impact of any relevant contractual equity-related preferences, as well as the investee's historical results of operations, and projected results and cash flows. The result is a separate decision as to impairment for each security. The cumulative impairment amount resulting from the series of impairment decisions does not bear a quantifiable relationship to any variable. General equity market movements may have an impact on the prospects for an investee, but a sensitivity analysis of the impact of equity markets on these impairments would not be valid and could potentially mislead the investor. The proposed rules provide an alternative of presenting the upper and lower ends of the range of reasonably possible estimates that the Commission assumed the company "likely determined in formulating its recorded critical accounting estimate." In the case of a series of separate similar judgments that do not have a direct relationship to a quantifiable variable, we have generally not determined upper and lower ends of a range of estimates. Requiring such disclosure would most likely result in the establishment of arbitrary ranges that do not provide meaningful information. We recommend that the proposed rules be modified to specify that the company should provide either a sensitivity analysis or a range of estimates, or it should state that a meaningful sensitivity analysis is not possible and explain the reason. 3. Discussion of critical accounting estimates by operating segment may increase the quantity of disclosure without providing meaningful information for the investor. Overloading MD&A with a large quantity of data does not necessarily serve to inform the investor. We agree that it is appropriate to indicate whether a critical accounting estimate affects all operating segments or only particular segments. For an estimate such as impairment of an asset, it would also be appropriate to indicate when such an analysis has resulted in a charge that affects only a particular segment. However, we believe that detailed discussion of critical accounting estimates by segment, including sensitivity analysis and changes in the estimate over time, would create a vast quantity of detailed disclosure that could obscure important matters rather than inform on them. In particular, for companies such as Intel that operate primarily in one industry, applying the accounting policy disclosure requirements by operating segment would not add value for the investor. Instead it would increase the cost of complying with the rules and increase the risk of overwhelming the reader. It could also be counterproductive in light of the Commission's objective to accelerate filing deadlines. 4. Disclosure about the discussion of critical accounting estimates with the audit committee belongs in the report of the audit committee. The Commission has requested comments as to whether the company should be required to disclose in MD&A the discussion of each critical accounting estimate with the audit committee. We believe it would be more appropriate to amend Item 306 of Regulation S-K to require the report of the audit committee in the proxy statement to disclose whether the audit committee has reviewed and discussed with management the development and disclosure of significant accounting estimates. While it may also be appropriate to expand the Item 306 required disclosure to cover the audit committee's review of all MD&A disclosure with management, we believe it is not necessary to require the discussion of critical accounting estimates to be specifically called out as one of the bases for the audit committee's recommendation to include the financial statements in the annual report. 5. Auditor examination of critical accounting estimate disclosure in MD&A is not appropriate. We believe that requiring that the critical accounting estimates disclosure in MD&A undergo a special auditor examination and report would not result in significantly improved disclosure in MD&A. Current standards already require the auditors to read MD&A and consider the consistency of the information presented and in practice, the auditors are already likely to be consulted on the identification of critical accounting policies and the related disclosure. We also think it is inappropriate to focus a specific audit requirement on just the disclosures on critical accounting estimates in MD&A without any evidence that this special treatment is warranted. Such a requirement would increase costs of complying with little added benefit and also increase the time pressure to meet existing, let alone accelerated, filing deadlines. * * * We thank you for consideration of our views and we would be pleased to discuss the issues further at your convenience. I can be contacted at 408-765-1444, or you can contact Barbara Canup, External Reporting Controller, at 408-653-7939, or John Hertz, Accounting Policy Controller, at 503-696-7476. /s/ Andy D. Bryant Andy D. Bryant Executive Vice President Chief Financial and Enterprise Services Officer Intel Corporation 2200 Mission College Blvd. Santa Clara, CA 95052-8119