20th December 2002
Jonathan G. Katz, Secretary
File No. S7-43-02
We welcome the opportunity to comment on the recent rule changes proposed by the Securities and Exchange Commission (the Commission) in relation to Section 401(b) of the Sarbanes-Oxley Act of 2002 (the Act) dealing with the use of non-GAAP financial measures. Overall we support the efforts of the Commission in tying to provide workable detailed rules and guidance for implementation under the Act. However we are concerned that the proposed changes to Item 10 of Regulation S-K which are to be incorporated into Form 20-F could have a significant adverse effect on the way in which GlaxoSmithKline (GSK) communicates financial information to all of its shareholders, including those based in the USA. GSK, and before its formation, both Glaxo Wellcome and SmithKline Beecham, prepares one Annual Report for its shareholders which incorporates all of the information required both in the UK, for its primary listing, and also in the USA under Form 20-F. This is to ensure that all shareholders are able to receive full and identical financial information, as far as is practicable, at the same time. We believe that anything that jeopardises this approach would be a retrograde step.
Our detailed comments on the proposed rules are set out below:-
We understand that the rules are expected to be finalised in late January 2003 and apply to filings related to the period ended 31 December 2002. Given that there are a number of issues and areas where further guidance would be helpful arising from the proposed rules, particularly in relation to the annual reports of foreign registrants, we are concerned that there will be very little time to assess and implement the rules once finalised. GSK's Audit Committee has already considered a first draft of the 2002 Annual Report and endorsed the structure and outline contents of that Report.
If implemented as drafted, these rules could give rise to some significant changes very late in the Annual Report preparation and approval process. As a result we would request the Commission to consider deferring the application of these new rules, at least in respect of foreign registrants where we believe there to be more issues, to accounting periods ending after 31 December 2002.
(ii) Prohibition of non-GAAP per share measures
Under UK GAAP, paragraphs 73 and 74 of FRS 14 'Earnings per share' contemplate entities presenting other per share measures in addition to the basic and diluted earnings per share figures required by the Standard, and deal with the disclosures required when these other per share measures are presented. Similarly, paragraphs 51 and 52 of IAS 33 'Earnings per share' contemplate other per share measures being provided by entities. Indeed, paragraph 52 actually encourages such additional disclosures.
An example of a non-GAAP per share measure used by GSK is constant exchange rate (CER) growth of earnings per share. As a multi-national group, GSK earns substantial proportions of its revenue in currencies other than its reporting currency of sterling and incurs substantial, but different, proportions of its costs in currencies other than sterling. Therefore in order to present shareholders and potential investors with information on the underlying performance of the Group, GSK, in common with a number of other companies in a similar situation, calculates and discloses growth rates, including with respect to earnings per share, on a CER basis. Management firmly believes that this is a useful measure of business performance and actually a better measure than growth rates calculated merely on the sterling reported values of items. This is evidenced by the fact that the Group-wide bonus plans and performance related share incentive plans use earnings per share growth rates calculated on a CER basis.
We believe that in proposing the outright prohibition of non-GAAP per share measures, the Commission is stepping out of line with other major standard setters and regulators. In our view, the proposed prohibition is too draconian a response to an issue perceived perhaps more keenly in the USA than elsewhere, and that enhanced quantitative reconciliation, no greater prominence and explanation of rationale behind presenting the non-GAAP measure are sufficient. Accordingly we would request the Commission to reconsider the proposed prohibition of non-GAAP per share amounts.
(iii) Prohibition of presenting non-GAAP financial measures in financial statements unless "expressly permitted" under home GAAP
Paragraph (e)(1)(ii) of proposed Item 10 of Regulation S-K prohibits the presentation of non-GAAP financial measures in financial statements prepared in accordance with GAAP, except that foreign private issuers may do so if, among other things, the non-GAAP financial measure is "expressly permitted" under home GAAP. We believe the exception permitting presentation of the non-GAAP financial measure in the financial statements only if it is "expressly permitted" under home GAAP is too limiting. A number of non-GAAP financial measures as defined by the Commission, or their presentation in the financial statements, may be contemplated by the registrant's home GAAP or not be prohibited by the registrant's home GAAP. Whether either of those circumstances would satisfy the "expressly permitted" condition for their exemption from the restrictions of paragraph (e)(1)(ii) is unclear. Accordingly we would request that the Commission revise the wording of paragraph 1 of the Instruction to paragraph (e) to delete the word "expressly".
(iv) Definition of "GAAP"
Under the proposed rules "GAAP" refers to US GAAP except in the case of foreign registrants where "references to GAAP also include the principles under which those primary financial statements are prepared" (emphasis added). Where a non-GAAP financial measure is required to be reconciled to the relevant GAAP measure it would appear that the non-GAAP financial measure is required to be reconciled both to US GAAP and to the home GAAP. We hope that this requirement is an unintentional effect of the drafting of the rules. We would suggest that the Commission makes it clear, in respect of foreign registrants, that if a non-GAAP financial measure is presented in the registrant's (non-US) primary financial statements it should be reconciled to the relevant measure under that GAAP and that if a non-GAAP financial measure is presented in either a US GAAP reconciliation or financial statements presented under US GAAP it should be reconciled to the relevant US GAAP measure.
(v) Application of proposed Regulation G to GSK's quarterly Results Announcements
At present GSK makes quarterly Results Announcements and communicates these to shareholders and potential investors in a number of ways. These include: an announcement to the London Stock Exchange, a press release issued in the UK, a telephone conference held in the UK but which can be accessed by parties from anywhere in the world, presentation of the Announcement and tele-conference presentation materials on the company website, submission of the announcement to the New York Stock Exchange and a press release issued in the USA. Our interpretation of the exemption to Regulation G provided to foreign registrants is that GSK would be able to claim this exemption were it not for the press release issued in the USA. It would therefore be possible for GSK to avoid the application of Regulation G merely by not issuing a press release in the USA. This, however, could delay the dissemination of that information to US shareholders and potential investors by removing the US media's access to an immediate press release issued in the USA. The resolution of this issue could be achieved by removing the exemption to Regulation G available to foreign registrants, something which the Commission has accepted is not viable, or by exempting foreign registrants from Regulation G entirely, in respect of the publication and communication of all financial information using home GAAP, except Annual Reports on Form 20-F, such as is the case with the exemptions for foreign registrants from Regulation FD and the Proxy Rules for US registrants.
We believe that there will be no significant increase in risk to US investors if foreign registrants are exempted entirely from Regulation G in respect of financial information presented under home GAAP to all shareholders and potential investors, i.e. not exclusively to a US audience, except in filings on Form 20-F, and request the Commission to consider this full exemption.
If you require any further clarification of any of the points raised in this letter or wish to discuss them further please do not hesitate to contact the undersigned.