Redford, MI 48239
firstname.lastname@example.org (888) 846-7305 Ext. 4608
April 17, 2000
Chairman Arthur Levitt, Jr.
Commissioner Norman S. Johnson
Commissioner Isaac C. Hunt, Jr.
Commissioner Laura S. Unger
Commissioner Paul R. Carey
U.S. Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Attention: Jonathan G. Katz, Secretary
Re: Proposed Rule - Supplementary Financial Information, Release Nos. 33-7793; 34-42354; File No. S7-03-00
Dear Chairman Levitt and Commissioners Johnson, Hunt, Unger, and Carey:
Webgaap.com ("webgaap") respectfully submits this correspondence commenting on the above noted U.S. Securities & Exchange Commission (the "Commission") Proposed Rule on Supplementary Financial Information (hereinafter "Proposed Rule"). Webgaap is supportive of the Commission's drive to improve the effectiveness of the public financial reporting process. Webgaap recognizes the importance of clear disclosures that provide the investment community with information necessary for them to make informed investment decisions. However, webgaap does not support particular supplementary disclosure provisions included in the Proposed Rule. We believe some requirements called for in the Proposed Rule would place unnecessary burden on the resources of public companies while providing minimal improvements in the financial reporting process. In the following paragraphs we provide support for our positions, specifically communicating our concerns about the level of benefit that would be achieved by requiring supplementary disclosure for normal, reoccurring valuation and loss accounts and our belief that the Proposed Rules would hamper companies ability to provide financial results expeditiously.
BENEFIT OF REQUIRING SUPPLEMENTARY DISCLOSURE FOR NORMAL, REOCCURING RESERVES
The Proposed Rule includes a provision to reposition and expand certain schedule information about valuation and loss accrual accounts (herein referred to as "reserves"). Webgaap does not support the proposed modification.
The Proposed Rule establishes supplementary disclosure requirements for all reserves regardless of the nature and/or frequency of occurrence. Webgaap is concerned with the level of benefit that would be achieved by requiring supplementary disclosures for certain normal or reoccurring reserves that are not typically where earnings management abuses are found. In the past, the large majority of earnings management abuses by select companies have not arisen in normal reserves but rather those reserves that are highly subjective and do not arise as a result of a company's main business activities. For example, restructuring and impairment reserves established for one-time charges have historically been associated with the earnings abuses the Commission is committed to deter. Webgaap supports detailed disclosures for these types of reserves. Such information provides investors with detailed information and narrative discussions about the nature, assumptions and changes within these subjective reserves from period to period. However, such information is already required under SAB 100 "Restructuring and Impairment Charges" and other accounting guidance.
Webgaap does not support the Proposed Rule's additional supplementary disclosures for normal reserves that are a continuing part of a particular company's normal business activities. Such normal reserves are substantially less subjective given the fact that management must analyze and project the amount and changes in these reserves on a regular basis. Such regular analysis and projection establishes a clear historical basis for determining the amount and necessary revisions to such reserves. In other words, these usual reserves are more concrete given the experience management has obtained in developing these reserves on a consistent basis. Further, these normal reserves are consistently reported in filings with the Commission which informed investors, familiar with a company and its industry, use and are aware of the nature and types of these reserves. Informed investors are able to adequately interpret normal reserves in the context of the current and past business environment within which the company finds itself. Further, discussions about significant fluctuations in these reserves must be disclosed in the Management Discussion & Analysis ("MD&A") section of a company's financial filing. Therefore, including additional schedules for these normal reserves would be of little benefit to the financial reporting process.
Webgaap is also concerned about the requirement to disclose supplementary, narrative information about certain reserves that are a normal part of business, but when emphasized in a separate discussion within the financial information may cause undue concern with investors. One such example is litigation reserves. Normal litigation is a consistent risk facing most companies given today's dynamic business environment. While webgaap supports adequate disclosure of significant litigation and other loss contingencies, it is concerned about the effects of disclosing information about routine litigation. Expanded supplementary disclosures may hamper a company's negotiating ability due to it having to disclose sensitive information about ongoing litigation. For instance, a company negotiating with suppliers on product price issues may be at a disadvantage when it has to disclose, in detail certain price reserves established for expected contract losses. In this manner the financial reporting process may actually hinder a company's ability to provide its shareholders with the best possible representation at such negotiations.
Discussion and detailed disclosure of normal reserves established for ongoing litigation and other similar reserves may also create undue concern with investors who wrongfully interpret the detailed supplementary disclosures as a significant problem facing the company. Webgaap believes that the current requirements for footnote disclosure established by Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies" and the SEC MD&A discussion requirements adequately establish effective disclosure requirements for such litigation and other reserves. Webgaap believes that the Commisssion should continue its strategic "crack down" on companies that are not giving adequate disclosures based on the aforementioned guidance rather than establish new, additional supplementary disclosures for these reserves.
PROPOSED RULES WOULD HAMPER OUR ABILITY TO CONTINUE TO PROVIDE EXPEDITIOUS FINANCIAL INFORMATION
Webgaap recognizes investors need for timely, relevant financial information. The investment community has consistently communicated its appreciation for such timely information from public companies. Webgaap believes that the Proposed Rules would hamper the ability of public companies to continue to provide such expeditious financial information considering the level of detail and scope of the required supplementary disclosures.
In order to adequately capture and analyze in great detail data necessary to provide the required supplementary disclosures for all reserves and adequately disclose this information in a way that is not confusing to readers, greater resources and time would be required. While companies should already have a solid handle on the components that make up such reserves the level of detail required by the Proposed Rule would require more information. In order to effectively capture, in narritive form, the information regarding these reserves, public companies would need to exert significant time in clearly discribing the balances and fluctuations required by the Proposed Rule. Such additional resources and the delay in financial reporting must be weighted against the benefit to the investors. Our views on the benefits (and related risks to public companies) is expressed above. However, we again reiterate that the additional supplementary disclosures would add little value to the reporting process.
In closing, webgaap supports the Commission's purpose behind the Proposed Rule, but respectfully requests the Commission to re-examine the scope of reserves included in the Proposed Rule. We also ask that the Commission consider the availability of discussions on significant changes in reserves found in the MD&A section and notes to the financial statements. Webgaap believes that the Proposed Rule would place unnecessary burden on the resources of public companies while providing insignificant improvements in the financial reporting process. If the Commission or its staff would like to discuss our comments further, please contact me at (313) 937-9735 or at email@example.com.
Paul A. Mackey
Chief Executive Officer