July 24, 2002

Via U.S. Mail and Electronic Filing

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

Re: Proposed Disclosure Requirements in Management's Discussion and Analysis about the Application of Critical Accounting Policies, Release No. 33-8098; 34-45907; File No. S7-16-02

Dear Mr. Katz:

The Investment Counsel Association of America1 appreciates the opportunity to submit comments related to the Commission's proposed disclosure about critical accounting estimates and the initial adoption of accounting policies that have a material impact on an issuer's financial presentation.2

ICAA members manage trillions of dollars in assets for institutional and individual investors, and require clear and complete accounting information from issuers to make appropriate investment decisions on behalf of their clients. The accounting information provided in an issuer's Management's Discussion and Analysis ("MD&A") is an important focus of our members in terms of evaluating and assessing that issuer as an investment prospect. We believe that the proposals will provide an improved understanding of an issuer's financial condition through the eyes of management, and will arm investment managers and others with better information to assess an issuer's accounting practices. The ICAA strongly supports the Commission's aim of making higher quality and more insightful financial information available to investors and the securities markets.

A. Critical Accounting Estimates

The proposal would require, in a new section in the MD&A, detailed information about critical accounting estimates. The proposals generally require three types of detailed disclosure for each critical accounting estimate: (i) disclosure that provides the reader with sufficient information to understand the estimate, including the methodology used, the assumptions underlying the estimate, and trends that may affect the estimate; (ii) information related to the impact of changes in the estimates, including quantitative discussion of the impact of the use of either different material assumptions or of high or low ends of an estimated range, and a quantitative and qualitative discussion of management's history of changing its critical accounting; and (iii) a statement as to whether senior management discussed the development, selection and disclosure of the estimates with the issuer's audit committee.

1. Definition of Critical Accounting Estimate

The ICAA generally supports the definition of "critical accounting estimate" as proposed. An accounting estimate would be considered critical under the proposals if: (i) it is based on assumptions about matters that are highly uncertain, requiring the exercise of significant judgment by management; and (ii) the reasonable use of a different estimate in the current period or reasonably likely changes in the estimate from period to period would have a material impact on the issuer's financial presentation. The ICAA agrees that this definition is designed appropriately to identify accounting estimates that have a reasonably high potential to materially affect an issuer's financial presentation.

2. Description of Accounting Estimates

The proposals would require issuers to "identify and describe the accounting estimate in such a way that it gives the appropriate context for investors reading that section and reflects management's view of the importance of the critical accounting estimate."3 We support this proposal and further recommend that the Commission clearly require issuers to provide enough context to allow analysts to compare accounting estimates and policies regarding these estimates across industry sectors. For example, it would be very helpful for an issuer to discuss what input variables or estimates are typical or standard in the issuer's sector and how the issuer's input estimates compare with those of other issuers in the industry.

3. Quantitative Disclosures

The proposals require a presentation of quantitative information: (i) to demonstrate the sensitivity of financial results to changes made in connection with each critical accounting estimate; and (ii) relating to historical changes in an issuer's critical accounting estimates in the past three years. The proposal includes two choices of changes an issuer may assume for purposes of the sensitivity analysis: (a) it may assume that it changed the most material assumptions underlying the critical accounting estimate and discuss the results of these changes; or (b) it could choose to assume that the critical accounting estimate itself changes. The issuer is permitted to determine the amount of the change that it assumes for purposes of this analysis.

4. Management Discussion with the Audit Committee

The proposals would require senior management to discuss the critical accounting estimates with the audit committee of the issuer's board of directors. We strongly support this proposal and agree that this type of safeguard has great potential to improve the quality and the transparency of disclosure by acting as a catalyst for discussion between audit committees and senior management.

5. Disclosure Relating to Segments

Assessing the relative strengths and weaknesses of an issuer's business segments may be extremely important in weighing an investment decision. The proposals require disclosure regarding the impact of critical accounting estimates on segments of an issuer's business. The ICAA agrees such disclosure would be beneficial, as it would allow investors to determine which reported segments' results are dependent on management's subjective estimates.

B. Quarterly Updates

We support the requirement that issuers evaluate and update necessary critical accounting estimates on a quarterly basis. This requirement will allow investors and financial analysts to evaluate these important indicators on a more current basis.

C. Adoption of Accounting Policies

The proposals generally require each public company issuer to disclose information about its initial adoption of an accounting policy that has a material impact on its financial presentation, unless such adoption was required by a new accounting standard or other generally accepted accounting guidance. The proposals require disclosure related to: (i) the events or transactions that gave rise to the adoption; (ii) the accounting principle adopted; and (iii) the impact on the issuer's financial presentation.

D. Disclosure Presentation

We strongly support the Commission's proposal that the information be presented in a separate section of the MD&A, with appropriate cross-references to applicable sections, rather than integrating the material throughout the existing structure.

E. Further MD&A Proposals

We applaud the Commission's commitment to continue to improve MD&A disclosures, and we appreciate an opportunity to express our specific views in this respect.

The ICAA strongly supports the Commission's efforts to rebuild investor confidence in the securities markets through improvements to the financial reporting system for publicly traded companies. The Commission's proposed enhancements to the quality and content of MD&A disclosure is a significant step toward improving the ability of investors to understand issuer financial statements. We appreciate the opportunity to comment on this important proposal and would be pleased to provide any additional information.


General Counsel

cc: Harvey L. Pitt, Chairman
Isaac C. Hunt, Jr., Commissioner
Cynthia A. Glassman, Commissioner
Paul F. Roye, Director, Division of Investment Management

1 The ICAA is a not-for-profit association that consists exclusively of SEC-registered investment adviser firms. Founded in 1937, our current membership is comprised of approximately 300 firms that collectively manage more than $3 trillion in assets for a wide variety of institutional and individual clients. For more information please visit www.icaa.org.
2 Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies, Release Nos 33-8098; 34-45907 (May 10, 2002) ("Proposal").
3 Proposal at 16.