Michael Holliday Room 6G-232 Corporate Counsel Lucent Technologies Inc. 600 Mountain Avenue Murray Hill, NJ 07974 July 31, 1998 Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Re: File No. S7-17-98 Dear Mr. Katz: We appreciate the opportunity on behalf of Lucent Technologies Inc. to provide comments in connection with the Proposed Rules under the Securities Act of 1933 and Securities Exchange Act of 1934, to conform the Commission's disclosure requirements to the new segment reporting standards published by the Financial Accounting Standards Board in Statement of Financial Accounting Standards No. 131 (SFAS 131). Lucent believes that, with the suggested changes and clarifications described below, the Commission's Proposed Rules adequately implement the new accounting requirements of SFAS 131. Similar Products and Services In addition to reporting revenues by operating segments, both the Proposed Rules and SFAS 131 (para. 37) require reporting revenues by class or group of similar products and services. The Commission has asked whether it should maintain the 10% of consolidated revenues quantitative threshold of Item 101(c)(l)(i) of Regulation S-K for reporting revenues by class of similar products and services, or provide a different or no quantitative threshold. The Commission should retain the 10% threshold. That would maintain comparability with prior reporting and provide uniformity of reporting among issuers, and would be consistent with SFAS 131. Although para. 37 of SFAS 131 provides that product and service revenues do not have to be disclosed where impracticable to do so, it does not specify a disclosure threshold amount. However, all disclosures under SFAS 131 are subject to the qualification that immaterial items do not need to be reported. Therefore, it would be consistent with SFAS 131 for the Proposed Rules to specify a threshold reporting amount below which disclosure is not required. Para. 37 applies only where the operating segment is not based on a group of similar products and services. Where the operating segment is based on a group of similar products and services, the group revenues already are disclosed as part of the segment disclosures. In that case, SFAS 131 applies a 10% of revenues test for reporting. Similarly, under SFAS 14, the predecessor to SFAS 131, reportable industry segments are based on related products and services and SFAS 14 applies a 10% of revenues test for reporting. Finally, the Commission's existing rule applied a 10% test for classes of similar products or services. Generally, 10% of revenues has been applied as the appropriate threshold for reporting. Furthermore, we are not aware of any dissatisfaction with the historical 10% test. The term "immaterial" is subjective, but retaining the 10% threshold would first, bring an objective standard and second, adopt a standard that has been historically applied and accepted for materiality. In addition, continuing the 10% threshold will preserve comparability with prior reporting and result in uniform reporting among issuers. Information About Major Customers In addition, the Commission should take this opportunity to conform S-K Item 101(c)(l)(vii) to SFAS 131 para. 39 by eliminating the requirement that an issuer identify major customers by name, while keeping in place the requirement to disclose total revenues of over 10% to a single customer, the segment or segments involved and any relationship to the issuer. This information without the customer's name will still disclose the issuer's extent of reliance on a single customer and permit users to assess past performance and future prospects while avoiding the possible competitive harm both to the issuer and the customer from identifying the customer by name. Identifying major customers by name is not essential for investors to determine and evaluate the existence of significant concentrations of risk. Also, there is the further protection that customers would be identified in MD&A disclosures of a known uncertainty under S-K Item 303(a)(3)(ii) if, for example, a major customer was in financial difficulty. Accordingly, the Commission should propose elimination of the requirement to identify major customers by name in Item 101(c)(l)(vii). -1- Technical Clarifications Finally, we suggest that the Commission make the following technical clarifications. Reportable Segments, Immaterial Items To insure conformity to SFAS 131, the Proposed Rules should specify that references to "segments" in the Proposed Rules mean "reportable segments," and that issuers need not report immaterial items. This could be accomplished by adding the following new instruction to the Instructions to Item 101. 4. References to segments in Item 101 mean an "operating segment" as defined in SFAS No. 131. In addition, Item 101 does not require reporting of immaterial items. Initial Application to Interim Financial Statements SFAS 131 is effective for fiscal years beginning after December 15, 1997. The last paragraph of Section II.C of the Release states that interim financial statements for periods ending on or after March 15, 1999 will be presumed misleading or inaccurate as not being prepared in accordance with GAAP if they do not include comparative segment information. While that statement is appropriate for issuers with calendar fiscal years, it does not apply to issuers with non-calendar fiscal years. SFAS 131 does not apply to interim financial statements until the second year of application, although comparative interim information for the initial year must be included at that time. Issuers with, for example, a September 30 fiscal year are not required to include the new segment information in interim financial statements until the period ending December 31, 1999. It would be helpful if the Commission would make that clarification in the release adopting the final Rules. Reconciliation on a Total Segment Basis Segment information on revenues, profit or loss, assets and other items is not required by SFAS 131 to conform to GAAP or be reported on the same basis as the consolidated financial statements. In such a case, SFAS 131 para. 32 requires reconciliation on a total segment basis to the corresponding items in the consolidated financial statements. The Commission proposes to add a footnote to the Codification of Financial Report Policies Section 501.06.a to require reconciliation in the same cases. SFAS 131 provides for the reconciliation to be on a total segment basis. The Commission states that the footnote would conform Section 501.06.a with SFAS 131 and gives no indication that the Commission intends to make any change from SFAS 131 on this point. However, the proposed footnote (Section II.A.3 of the Release) could be read to require reconciliation on an individual segment basis. Although we read the footnote to allow reconciliation on a total segment basis, we suggest that, in order to avoid any doubt and to insure that all issuers report under the same ground rules, the Commission should add the following sentence at the end of the footnote. An issuer may provide reconciliation and related discussion and explanation on a total segment basis in accordance with paragraph 32 of SFAS 131. x x x x x We believe that the Commission's Proposed Rules, together with the changes and clarifications discussed above, will facilitate the application of SFAS 131 to filings under the Securities Acts. Please feel free to call the undersigned at 908-582-8801 if you have any questions on our comments. Very truly yours, Michael J. Holliday Michael J. Holliday Corporate Counsel