American Institute of Certified Public Accountants

December 13, 2002

Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.

Washington, D.C. 20549-0609

Re: SEC File No. S7-43-02, Conditions for Use of Non-GAAP Financial Measures

Dear Mr. Katz:

The American Institute of Certified Public Accountants (the "AICPA") respectfully submits the following written comments on the Securities and Exchange Commission's (the "SEC" or the "Commission") proposed rules regarding the use and reporting of Non-GAAP financial measures in a company's financial statements ("the Proposed Rule"). The AICPA is the largest professional association of certified public accountants in the United States, with more than 350,000 members in business, industry, public practice, government and education.

The AICPA acknowledges the enormous effort put forth by the members and staff of the Commission to implement the provisions of the Sarbanes-Oxley Act of 2002 (the "Act"). We are firmly committed to working with the Commission in accomplishing the timely and effective implementation of the Act and rebuilding the faith of investors who depend on accounting professionals for accurate, clear, timely and relevant financial information. We further acknowledge the very technical nature of the Proposed Rule and our comments. As a result, we stand ready to meet with the Commission and its staff to further clarify any of our recommendations.

We agree with the Commission's efforts to require a reconciliation of non-GAAP financial information to the most directly comparable financial measure. We believe such a reconciliation will provide users with an understanding of non-GAAP financial information in the context of a GAAP framework and will enhance the quality and transparency of non-GAAP financial measures included in Commission filings. We also believe that future efforts to enhance the business reporting model should address both company and investor needs for non-GAAP reporting measures and methods of presentation. Our specific comments to the proposed regulation are provided below.

Proposed Regulation G

Auditor Association With Non-GAAP Measures

Regarding an auditor's association with the reporting of non-GAAP measures in a company's financial statements, we believe that many investors and readers of pro forma data are under the impression that the auditor is associated with such pro forma data and has, in some way, approved the pro forma adjustments or their method of presentation as "proper." These mistaken impressions are likely to continue and users will believe that such information has been subjected to an auditor's examination or review. Accordingly, we believe the final rule should explicitly state that the company's independent accountant need not audit or review the proforma data or reconciliation. Further in this regard, the Commission should require the non-GAAP financial information to be labeled as "Unaudited " and to require companies to disclose in any release of non-GAAP financial information that such pro forma data and the reconciliation has not been reviewed, audited or otherwise acted upon by their independent accountants.

Transition Period

The Commission's proposed rules are silent regarding the effective date for the final rules. We believe that the provisions of the proposed Regulation G should become effective shortly after issuance of the final rule, because Regulation G incorporates current best practices and should not present significant transition challenges to issuers. However, with respect to certain of the proposed amendments to Item 10 of Regulations S-K and S-B, we recommend the Commission provide for a delayed effective date. The amendments to Item 10 could prohibit the disclosure in SEC filings of certain non-GAAP financial measures that some issuers have been disclosing on a routine basis. Moreover, while likely not pervasive, some issuers may have debt covenants, bond indentures, contractual agreements and the like, which require the issuer to disclose specified non-GAAP financial measures in their periodic SEC reports. Should the proposed amendments to Item 10 become effective immediately, compliance with the new rules could cause those issuers to violate existing covenants and incur a technical default on certain obligations. Accordingly, we recommend the Commission specify a delayed effective date for the proposed restrictions on the disclosure of certain non-GAAP financial measures in SEC filings (i.e., Item 10(e)(1)(ii) of Regulation S-K and Item 10(h)(1)(ii) of Regulation S-B), in order to provide issuers adequate time to obtain any necessary modifications to existing agreements in advance.

Application to All Companies that Publicly Disclose Non-GAAP Financial Measures

As proposed, Regulation G would apply only to companies that are required to file reports pursuant to Section 13(a) or 15(d) of the Exchange Act. We believe that Regulation G should apply to all SEC reporting companies that publicly disclose non-GAAP financial measures. We believe such a requirement would enhance the quality and transparency of non-GAAP financial measures reported by all companies.

Applicability of Limited Exception for Foreign Private Issuers

The Proposed Rule provides a limited exception for foreign private issuers if certain conditions are satisfied. One of the conditions is that "the disclosure is made by or on behalf of the registrant only outside of the United States, or is included in a written communication that is released by or on behalf of the registrant only outside the United States." We recommend that the Commission further clarify the applicability of this condition. The use of faxes and e-mail has effectively eliminated the significance of national borders in disseminating information. However, it is our understanding that where a company physically sends information, not its ultimate intended source of communication, will be the key determining factor in the eligibility to rely on the limited exception. To illustrate, it is our understanding that under the proposed rules, if a German company sends a press release to Dow Jones in the United States, it would be subject to the requirements of Regulation G. If, instead, the company sends the press release to a Dow Jones office in London, it would not be subject to Regulation G because of the limited exception. This is true even though the company expects that the press release will be distributed in the US. The adopting release should specifically address a situation in which a non-US company sends out a press release to a news source physically located outside the United States for which it is expected that the information will be distributed in the United States.

Effect of Limited Exception for Foreign Private Issuers on U.S. Investors

We believe that the disclosure requirements under Regulation G provide the investor with useful information. The Commission's proposed rules address a concern of investor confusion over the use of non-GAAP measures. We agree with this concern as investors could be confused when reading a press release by a company that has relied upon the limited exception and presented non-GAAP information that excludes the disclosures required by Regulation G.

We do not believe that eliminating the limited exception for foreign private issuers would deprive US investors of non-GAAP financial measures. Companies that want to disclose such information, because they believe it would be useful to investors, can and will disclose such information. The incremental disclosures required by Regulation G would not preclude many companies from providing such information. We recognize that the Commission may conclude that because of the territorial principle that it cannot require the application of Regulation G if the disclosure is made outside of the United States. To reduce possible investor confusion, we offer two suggestions for the Commission's consideration:

  1. Companies could be required to disclose the GAAP that is the basis for the non-GAAP measure. For example, a U.K. company that presents a non-GAAP measure that is based on U.K GAAP should disclose that fact. This would allow an investor to clearly understand that it is not based on US GAAP.

  2. Companies could be required to provide the disclosures stipulated by Regulation G to be included in the Form 6-K that is submitted to the Commission that contains the press release.

For those companies that are not relying on the limited exception, the Commission should consider expanding the requirements of Regulation G to stipulate that disclosure should be provided of the GAAP that is being used for purposes of the reconciliation of the non-GAAP information. In this regard, the Commission should indicate that the reconciliation should be to the GAAP in the primary financial statements, and that it is not necessary to additionally reconcile the non-GAAP amounts to the US GAAP reconciled amounts.

Proposed Amendments to Item 10 of Regulation S-K, Item 10 of Regulation S-B and Form 20-F

Placement of Non-GAAP Financial Measures in a Commission Filing

We believe non-GAAP financial measures should be presented in a separate section of a Commission filing. Such a placement would assist users by reducing the chance of confusion as to the type of measures being presented. It would also reduce the risk of giving non-GAAP measures undue prominence in Commission filings.

Comparative Reporting

We agree with the SEC's proposal that if a company presents a non-GAAP measurement for a previous completed fiscal period, it should also present that same non-GAAP measurement in future filings where the previous period is compared to a recent completed fiscal period. In other words, non-GAAP financial information would be treated in a similar fashion for comparable periods.

Non-GAAP Per Share Measures

The SEC's proposal would prohibit the reporting of non-GAAP per share measures. We are concerned about the potential for exploitation of alternative non-GAAP EPS measures, or the possibility of confusion or misunderstanding by users with the existence of various EPS measures. However, we also recognize that certain alternative per share measures could provide some users with additional meaningful earnings data. The Commission should consider both the potential risks and benefits such information may provide to investors. If in the final rule the Commission decides to permit companies to report certain non-GAAP per share measures, we strongly recommend such measures be accompanied by a required a reconciliation to the most directly comparable GAAP per share measures. This treatment would be similar to the proposed requirement to reconcile non-GAAP financial measures to the comparable financial measure or measures calculated and presented in accordance with GAAP.

Application of Proposed Requirements to Foreign Private Issuers' Reports on Form 20-F

We note that the proposed rules provide an exemption for non-GAAP measures included in filings made by foreign private issuers that would otherwise be prohibited, but that are expressly permitted under the GAAP used in the primary financial statements. We recommend that the Commission clarify and expand how the term "expressly permitted" will be interpreted. The accounting standards in many countries allow the disclosure of what would be characterized as a non-GAAP measure. For example, in the UK, companies are allowed to disclose various earning per share amounts based on the guidance included in FRS 3 - Reporting Financial Performance. Many companies disclose on the face of the financial statements an alternative EPS number that adjusts for certain items - depreciation, exceptional items, etc. The specific alternative EPS amount, which is an amount defined by the company, is not expressly permitted by FRS 3, but the concept that an alternative EPS amount can be disclosed on the face of the income statement is expressly permitted by FRS 3. The adopting release should address whether, in this type of situation, the disclosure would be considered to have been expressly permitted by the GAAP used in the primary financial statements.

The issue of non-GAAP per share disclosures in the financial statements of foreign private issuers was recently discussed at the May 23, 2002 meeting of the AICPA International Practices Task Force. Presented below is an extract of the highlights from that meeting that summarizes the conclusions reached by the Task Force and the SEC observers:

The Task Force concluded that provided registrants complied fully with the requirements of home country GAAP in presenting alternative per share amounts, such measures could be presented in SEC filings, if appropriately described.

As to disclosure, it was noted that UK FRS 3 contained disclosure provisions when presenting alternative per share measures. The following is an excerpt from paragraph 25 of the UK standard, FRS 3:

If an additional earnings per share calculated at any other level of profit is presented it should be presented on a consistent basis over time and, wherever disclosed, reconciled to the amount required by the FRS. Such reconciliation should list the items for which an adjustment is being made and disclose their individual effect on the calculation. The earnings per share required by the FRS should be at least as prominent as any additional version presented and the reason for calculating the additional version should be explained. The reconciliation and explanation should appear adjacent to the earnings per share disclosure, or a reference should be given to where they can be found.

The Task Force agreed that, at a minimum, disclosure similar to the above should be included in an SEC filing when alternative performance measures are presented. Such disclosures should ensure that the performance measures used are not misleading.

We recommend that the Commission modify the proposed rule to be in line with the conclusions of the AICPA International Practices Task Force and thus require an explanation and reconciliation of non-GAAP information rather than prohibit such non-GAAP information.

Regardless of the Commission's rules, foreign private issuers will disclose non-GAAP measures in the financial statements included in their annual reports that are distributed to all shareholders. Accordingly, US shareholders will receive financial statements that include non-GAAP measures. Prohibiting companies from disclosing such information in Commission filings that are distributed in the annual report to shareholders will not enhance investor protection. We believe investor protection can best be met by having companies provide the appropriate disclosures in the filings made with the Commission.

We believe the exception regarding the disclosure of a non-GAAP amount in the financial statements should be permitted based on whether the disclosure is allowed, as opposed to whether it is expressly permitted under the GAAP used in the primary financial statements, provided that disclosures similar to that presented above are included in the financial statements.

Application of Proposed Requirements to Filings by Canadian Issuers Under the MJDS on Form 40-F

While not commenting on the continuation of the MJDS, we believe that the requirement to disclose such information is inconsistent with the principles of the MJDS system. Securities Act Release No. 6902 that established MJDS states that qualifying Canadian companies can meet the Commission's reporting requirements by providing disclosure documents prepared in accordance with the requirements of the Canadian securities regulatory authority. The concept is that with the exception of the requirement to provide reconciliation to US GAAP, the document filed with the SEC is simply a wrap of the document submitted to the Canadian regulators that has been prepared in accordance with the Canadian requirements. By requiring this disclosure, the Commission would be deviating from the fundamental principle of the establishment of MJDS. Since the adoption of the MJDS system over ten years ago, the Commission has made far more significant changes to the reporting requirements that apply to foreign private issuers without modifying the MJDS system.

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Representatives of the AICPA would be pleased to discuss these comments with you at your convenience.

Respectfully submitted,

William F. Ezzell, CPA
Chairman, Board of Directors
  Barry C. Melancon, CPA
President and CEO