From: Canup, Barbara [barbara.canup@intel.com] Sent: Monday, December 09, 2002 1:17 AM To: 'rule-comments@sec.gov' Subject: File No. S7-42-02 -- Release Nos. 33-8144; 34-46767 December 9, 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. S7-42-02 -- Release Nos. 33-8144; 34-46767 Disclosure in Management's Discussion and Analysis about Off-Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments Dear Mr. Katz: Intel Corporation is pleased to submit this letter with our comments on Securities and Exchange Commission ("SEC" or "Commission") Release Nos. 33-8144 and 34-46767. Executive Summary The rules as proposed would require disclosure related to off-balance sheet arrangements in a separately captioned subsection of MD&A. They would also require disclosure regarding aggregate contractual obligations (on and off-balance sheet) and contingent liabilities and commitments; however, this information could be placed wherever deemed appropriate. The Commission appears to be treating these as separate requirements although there is considerable overlap. Off-balance sheet arrangements would be included in the contractual obligations table and contingent liabilities are referenced in both sections of the proposed rules. We believe that there is a lack of clarity as to how definitions and exclusions, materiality thresholds and other instructions apply to the two separate sections of the proposed rules. In addition, we believe that providing this related information in separate sections of MD&A may be confusing to the reader and that an integrated disclosure of on and off-balance sheet obligations with consistent definitions would be more informative. Discussion and Analysis Contingent Liabilities We find the requirements related to contingent liabilities particularly confusing. Contingent liabilities are a subset under "Off-Balance Sheet Arrangements," which are then defined as contractual obligations. Under "Contractual Obligations and Contingent Liabilities and Commitments," a distinction is made between contractual obligations and contingent liabilities. In the latter case, does the Commission intend to distinguish between non-contingent contractual obligations and contingent contractual obligations, or does the Commission intend to have a broader definition of contingent liabilities for this purpose? The proposed rules specify that contingent liabilities arising out of litigation, arbitration or regulatory actions (not related to off-balance sheet arrangements) are not off-balance sheet arrangements. Would these items be required to be included in the tabular or textual disclosure on contingent liabilities and commitments? The examples given (lines of credit, standby letters of credit, guarantees and standby repurchase obligations) appear to be contractual in nature and items that would be off-balance sheet arrangements, implying a narrower definition. We believe that a definition limiting the disclosure requirement to contingent liabilities arising out of contractual arrangements and excluding the items noted above would be helpful and allow for more consistent disclosures by companies under the proposed rules. The two sets of rules also appear to have different provisions for measuring contingent liabilities. Contingent liabilities that are not probable are included under the disclosure of off-balance sheet arrangements, implying a maximum exposure measurement. Under the tabular or textual disclosure requirement, they may be presented at an expected amount, a range of amounts or maximum amount. We believe that the most meaningful and least confusing disclosure would be provided under rules that used consistent definitions and specified disclosure requirements for on and off-balance sheet non-contingent contractual obligations, and contingent liabilities and commitments to the extent that they are related to off-balance sheet arrangements and are contractual in nature. This would clarify and simplify the definitions and the disclosure and would also be consistent with the provisions of the Sarbanes-Oxley Act. Liabilities at Less than Maximum Exposure The rules would include in the definition of off-balance sheet arrangements any liabilities as to which the amount recognized in the financial statements is less than the reasonably possible maximum exposure, unless recorded at fair value. It is not clear how this would apply in some circumstances. Would this apply to zero coupon or deep discount debt, and would the maximum exposure be the face value or the difference between carrying value and fair value? Was the intent to include here a mark-to-market of all debt carried below face value or below market value? Would warranty obligations recorded at an estimated probable amount meet the definition of a liability under a contractual arrangement recorded at less than the reasonably possible maximum exposure? Materiality Threshold The Commission has asked for comments as to whether the proposed more than "remote" disclosure threshold for off-balance sheet arrangements is appropriate. It would be confusing to the reader to use different thresholds to assess contingent liabilities for disclosure of off-balance sheet arrangements versus the requirement regarding contractual obligations and contingent liabilities and commitments. We believe it would be more informative to use the "reasonably likely" standard for off-balance sheet arrangements and thus have a consistent standard throughout MD&A. However, it would not be appropriate to amend the current MD&A rules to lower the existing "reasonably likely" threshold for other disclosure in order to achieve consistency. Contractual Obligations We agree with the conclusion that the off-balance sheet arrangement disclosure requirements should only apply to contractual arrangements. Disclosure should not be required until an unconditionally binding definitive agreement, subject only to customary closing conditions, exists or when settlement of the transaction occurs if there is no such agreement. In our comment letter on the proposed new Form 8-K items, we noted that disclosure of letters of intent and other "non-binding agreements" would likely result in misleading disclosure of speculative transactions, could cause competitive harm and could prejudice the ability to complete the transactions. We believe that such speculative transactions are not appropriate for disclosure either in MD&A or on Form 8-K. Quarterly Disclosure The proposed rules specify that the tabular disclosure of contractual obligations does not need to be repeated in quarterly reports on Form 10-Q and instead the registrant may discuss material changes. The Commission should consider specifying that to the extent it has not materially changed, disclosure regarding off-balance sheet arrangements and contingent liabilities would also not have to be repeated quarterly. We believe the investors' interests would be better served by drawing attention to material changes on a quarterly basis rather than by lengthy redundant disclosure. * * * 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 408-653-7939, or you can contact John Hertz, Accounting Policy Controller, at 503-696-7476. /s/ Barbara C. Canup Barbara C. Canup External Reporting Controller