From: Michelle Chan-Fishel [mchan@foe.org] Sent: Friday, July 19, 2002 2:12 PM To: rule-comments@sec.gov Subject: File No. S7-16-02 Friends of the Earth 1025 Vermont Ave., NW Third Floor Washington, DC 20005-6303 July 19, 2002 Mr. Jonathan G. Katz, Secretary U.S. Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0609 Re: SEC File # S7-16-023 Dear Secretary Katz, Friends of the Earth (FoE) writes in response to the Security Exchange Commission's proposed rule regarding Disclosure in MD&A About the Application of Critical Accounting Policies. Friends of the Earth is an environmental policy organization that monitors environmental financial accounting issues. FoE is also involved in the Corporate Sunshine Working Group, a national alliance of investors and public interest organizations working for the enforcement and expansion of SEC corporate social and environmental disclosure requirements. Because the Commission's proposed rule calls for disclosure of critical accounting policies that involve questions of how companies make assumptions about the probability and estimatability of uncertain matters, it could impact how registrants record environmental liabilities, estimate the cost of environmental remediation, and account for future environmental expenditures. General comments In general, we are encouraged that the Commission is more broadly interested in improving MD&A disclosure in the area of trend information. Better trend-related data is not only important for enabling investors to "see the company through the eyes of management," but it also will enhance environmental disclosure (providing, for example, better information on material trends in consumer and market demand, pending regulation, and scientific evidence that a company's products or services may be harmful to human health or the environment). Enhanced environmental disclosure is important because companies systemically underreport material environmental information, both as required through existing SEC rules and as demanded by investors. In addition, we believe that enhanced discussion of critical accounting policies will provide investors with important information when companies adapt higher standards of estimation and disclosure. For example, in 2002 the American Society for Testing and Materials (ASTM-International) concluded a several-year, multi-stakeholder effort to develop environmental cost estimation and disclosure protocols. We understand that the ASTM embarked on this effort at the request of the SEC and members of Congress, and hope that these standards will become integrated into GAAP. The ASTM estimation standard (E-2137) gives guidance to companies on how to provide the most robust estimation of environmental costs and liabilities through determining Expected Values, Most Likely Values, a Range of Values and Minimum Values. The ASTM disclosure standard (E-2173) calls for materiality to be measured based on aggregate rather than individual environmental liabilities. Because FoE encourages companies to adopt current best practice in environmental accounting, we support the SEC's proposal as it would notify investors when registrants change accounting policies. Particular comments regarding foreign private issuers FoE believes that foreign private issuers using the International Accounting Standards promulgated by the IASB may provide less robust environmental disclosure than those companies using U.S. GAAP. As noted in the SEC's discussion of the application of its proposal to foreign private issuers, "both non-U.S. GAAP and U.S. GAAP may require recognition of liabilities for environmental or mass tort claims. However, the methodologies, assumptions and judgments necessary to estimate the amount to recognize may be significantly different under the two GAAPs." With respect to environmental matters, US GAAP provides registrants with important guidance on how to determine the probability and estimability of environmental liabilities. For example, AICPA Statement of Position 96-1 provides guidance on recognizing, measuring and disclosing environmental liabilities; FASB Interpretation Number 5 requires accrual of a contingent liability if the loss is probable and reasonably estimable; and the SEC's SAB 92 and FASB Financial Interpretation Number 14 provide additional guidance as to what "reasonably estimable" means. This kind of specific instruction regarding assumptions and methodologies for estimating uncertain matters minimizes what President Bush has now famously termed "the gray area" associated with accounting. Therefore, FoE supports foreign private issuers including the proposed disclosure for critical accounting estimates related to the application of U.S. GAAP. Sincerely, Michelle Chan-Fishel Friends of the Earth mchan@foe.org Michelle Chan-Fishel Green Investments Program Friends of the Earth - US 1847 Berkeley Way Berkeley CA 94703 tel 510 848 5932 x315 or 510 848 1155 x315 fax 510 848 1008 www.foe.org