CURRENT ACCOUNTING ISSUES AND RELATED DEVELOPMENTSAFFECTING THE DIVISION OF CORPORATION FINANCE

(as of November 20, 1993)

Robert A. BaylessTeresa E. Iannaconi

Karin JohnsonU.S. Securities & Exchange Cqmmission *

Washington, D.C.

AICPA National ConferenceCurrent SEC Developments

January 11 12, 1994Washington, DC

(c) Copyright 1993, All Rights Reserved. This outline has beenand may be used in connection with other programs.

* As a matter of policy, the Commission disclaims responsibilityfor any private publications by any of its employe~s. The viewsexpressed are those of the author, and do not necessarilyrepresent the views of the Commission or the author's colleagueson the staff.

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CURRENT ACCOUNTING ISSUES AND RELATED DEVELOPMENTSAFFECTING THE DIVISION OF CORPORATION FINANCE

(as of November 20, 1993)

I. Rules Recently Proposed or Adopted by the Commission 1A. Simplification of Registration and Reporting

Requirements of Foreign Private Issuers . . . . .. 1B. Requirements Governing Age of Financial Statements

of Foreign Private Issuers . . . . . . . . . . .. 4C. Amendments to Multijurisdictional Disclosure

System and Other Changes Affecting CanadianIssuers . . . . . . . . . . . . . . . . 5

D. Small Business Initiatives . . . . . . . . . . .. 6E. Executive Compensation Disclosure . . . . . . . 11F. EDGAR (Electronic Data Gathering, Analysis and

Retrieval) 14

II. Recently Issued Staff Accounting Bulletins. . . . . . . 16A. Accounting and Disclosures Regarding Discontinued

Operations . . . . . . . . . . . . . . . . 16B. Environmental and Product Liability Loss

Contingencies. . . . . . . . . . . . . . . . . . . 17

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2020

2223

26

2021

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Selection of Discount Rates under SFAS 87 and 106 .Disclosures Regarding the Realization of aDeferred Tax Asset Recognized Pursuant to SFAS109 . . . . . . . . . . . . . . . . . . . . . .Restructuring Charges . . . . . . . . . . .Disclosure of Accounting Policy RegardingAssessment of Recoverability of GoodwillDisclosures about New Accounting StandardsManagement's Discussion and Analysis RecentEnforcement Action . . . . . . . . . . . . . . . .Disclosures about Foreign Operations and ForeignCurrency Transactions . . . . . . . . . . . . . . ."Other Than Temporary" Declines in Value of Debtand Equity Marketable Securities . . . . . . . . .

E.F.

G.

H.

C.D.

III. Other Accounting and Disclosure Issues of CurrentInterest . . . . . . . . . . . . . . . . . . . . .A.B.

IV. Frequent Inquiries Regarding Application of Regulations-x and Other Disclosure Practices . . . . . . . .A. Financial Statements of Businesses Acquired (Rule

3-05) .•.....•....••.••••••B. Financial Statements of Subsidiaries that

Guarantee Securities Issued by Parent Company .

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3031

C. Financial Statements Relating to Third PartyCredit Enhancements . . . . . . . . . . . . . . 33

D. Financial Statements of Real Estate OperationsCollateralizing Significant Loans . . . . . . . . . 34

E. Surviving Company in a Reverse Acquisition 34

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F. Redeemable Equity Securities 0 ••••• 0 0 • 35G. Distributions to Promoters/Owners at or prior to

Closing of IPO . . 0 0 • • 0 • • • 0 • • • • 0 • 0 36Ho Other Changes in Capitalization at or prior to

Closing of IPO 0 0 0 • • • • • • • 0 • • • • • 36Io Calculation of EPS in an Initial Public Offering 37J. Accounting for Shares Placed in Escrow in

connection with an Initial Public Offering 0 0 0 38•

CURRENT ACCOUNTING ISSUES AND RELATED DEVELOPMENTSAFFECTING THE DIVISION OF CORPORATION FINANCE

(as of November 20, 1993)

I. Rules Recently Proposed or Adopted by the Commission

A. Simplification of Registration and ReportingRequirements of Foreign Private Issuers

On November 3, 1993, the Commission proposed amendmentsto streamline the registration, reporting andreconciliation requirements for foreign companies.Among others, revisions have been proposed toSecurities Act Forms F-1, F-2, F-3 and F-4, ExchangeAct Form 20-F and Rule 139 under the Securities Act.

1. Reconciliation Requirements

As part of the proposals to streamline the requirementsthat foreign issuers reconcile their financialstatements to U.S. GAAP, the Commission has proposed toaccept without reconciliation a foreign issuer's cashflow statement prepared in accordance withInternational Accounting Standard No.7, as amended.

In addition, the requirement that a foreign privateissuer reconcile five years of financial informationhas been proposed to be reduced so that first-timeforeign registrants need only reconcile the requiredfinancial statements and selected financial data forthe two most recently completed fiscal years (of thefive years) and any interim periods required in theregistration statement. Forms F-1, F-2, F-3 and F-4also are proposed to be revised to allow registrationof investment grade securities where the simplerreconciliation pursuant to Item 17 of Form 20-F, ratherthan Item 18 reconciliation, is provided.

Another aspect of the proposal streamlines therequirement that foreign private issuers furnishaudited financial statements of significant acquiredbusinesses. Under the proposal, financial statementsof an acquiree would not have to be reconciled unlessthe acquiree exceeds the 30% significance level basedon the size of the registrant's investment in thebusiness, the total assets of the business and thebusiness' pre-tax income relative to amounts reportedin the registrant's most recently audited financialstatements as calculated on a u.s. GAAP basis.Similarly, financial statements of significant equityinvestees would not have to be reconciled unless the

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investee exceeds the 30% significance level, using theinvestment and pre-tax income tests for significance.

Reconciliation also would be streamlined with respectto foreign private issuers that use pro rataconsolidation for certain joint ventures that would beaccounted for under the equity method pursuant to u.s.GAAP. Under the proposals, such an issuer wouldprovide summarized financial information of the currentassets/liabilities, noncurrent assets/liabilities, netsales, gross profit and net income relating to its prorata interest in the joint venture. Separate financialstatements of a joint venture accounted for using thepro rata method would not be required.

Finally, the proposals to streamline reconciliationwould eliminate the following financial statementschedules that are currently required to be furnishedby foreign private issuers:

a. Rule 12-02 - Marketable Securities - OtherInvestments

b. Rule 12-03 Amounts Receivable from RelatedParties and Underwriters, Promoters, and EmployeesOther Than Related Parties

c. Rule 12-05 Indebtedness of and to RelatedParties -Not Current

d. Rule 12-06 Property, Plant and Equipmente. Rule 12-07 Accumulated Depreciation, Depletion

and Amortization of Property, Plant and Equipmentf. Rule 12-08 Guarantees of Securities of Other

Issuers.

2. Registration Requirements

If adopted, the proposed amendments to Form F-3 wouldexpand the class of foreign companies eligible to useshort-form and shelf registration for their securitiesofferings, much as the amendments to Form S-3 describedabove have done for domestic issuers. The amendmentswould shorten the Form F-3 minimum reporting historyrequirement from 36 months to 12 months, and reduce theminimum public float requirement from $300 million to$75 million. (The minimum public float standard forForm F-2 would be similarly reduced from $300 millionto $75 million.) The proposed amendments also wouldextend unallocated shelf registration to foreignissuers to the same extent permitted for domesticissuers. Thus, under the proposal, a Form F-3-eligiblecompany could register debt, equity and othersecurities on a single shelf registration statement,

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without having to specify in the registration statementthe amount of each class of securities to be offered.

It is also proposed that non-convertible investmentgrade securities, whether or not they are debtsecurities, would be permitted to be registered on FormF-2 or F-3 without regard to the issuer's reportinghistory or the public float of the issuer's securities.The proposed revisions also would clarify thatofferings of securities other than traditional debtsecurities may be registered on Form F-3 by majority-owned subsidiaries of Form F-3-eligible issuers if thesecurities are rated investment grade or the parentguarantees the payment obligations on the securities.

With respect to secondary offerings and certain rightsofferings, dividend or interest reinvestment plans,conversions of convertible securities and exercises ofwarrants, the proposed revisions would allow short-formregistration without regard to the public float of theissuer's voting securities. In addition, Form F-3would be revised to allow immediate effectiveness uponfiling for registration statements relating to dividendor interest reinvestment plans.

3. Safe Harbor for Broker-Dealer Research Reports

Rule 139 under the Securities Act provides safe harborprotection from the registration requirements of thatAct with respect to the distribution by broker-dealersof information, opinions or recommendations concerningreporting companies in the process of registration.The conditions for relying on that safe harbor aresimpler where issuers are eligible to use Form F-3based on their public float or their offering ofinvestment grade securities. Because of the reportinghistory required for Form F-3 eligibility, however,broker-dealers publishing research reports on certainsizeable foreign issuers have been foreclosed from thesimpler conditions of the safe harbor and have beenrequired to satisfy the more restrictive conditions torely on the safe harbor.

The Commission therefore has proposed to revise theRule 139 safe harbor to provide an alternative offshoretrading history test for offerings by reportingcompanies that would be Form F-3-eligible but for the12-month reporting history condition. Under theproposal, broker-dealers would be able to rely upon thesimpler conditions of the safe harbor with respect tosuch issuers if such issuers have had securities listed

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or quoted on a "designated offshore securities market,"as defined in Rule 902(a) of Regulation S, for at least12 months. As in the case of Form F-3 eligibleissuers, the research reports covered by the revisedsafe harbor would be those distributed with reasonableregularity in the normal course of business.

B. Requirements Governing Age of Financial Statements ofForeign Private Issuers

On June 5, 1991, the Commission published for commentproposed amendments to Regulation S-X Rule 3-19,Securities Exchange Act Rule 15d-2 and Forms F-2 andF-3 which relate to the age of financial statements offoreign private issuers that register securities forsale under the Securities Act. Final amendments wereadopted by the Commission on November 3, 1993. Theamendments generally revise the requirements whichgovern the age of financial statements in registrationstatements to conform such requirements to thefinancial statement updating requirements of the homejurisdictions of a substantial majority of foreignissuers. Such conformity is intended to reduce theimpediments to foreign issuers making securitiesofferings in the United States.

1. Amendments Regarding Age of Financial Statementsand Updating Requirements

The amendments extend the Securities Act and Exchangeregistration statement updating requirement for annualaudited financial statements of foreign private issuersby one month and extend the updating requirement forinterim audited financial statements by four months.In addition, the maximum age of financial statements ina Securities Act filing was extended from six months toten months. Thus, the amendment enables registrationstatements of foreign private issuers to go effectivewith audited financial statements as old as 18 months(as compared to 17 months under the rule previouslyapplicable to foreign issuers), with the most recentinterim statements as old as 10 months (as compared to6 months under the previous rule) .

Under this system, a foreign issuer can haveuninterrupted access to the US public market byproviding within four months following the end of itsfiscal year either its unaudited financial statementsfor that year or unaudited interim financial statementsas of the end of the third quarter of that year.

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2. Amendment to Requirement to Reconcile FinancialInformation Otherwise Provided

Rule 3~19(f) requires interim financial informationthat is made available to shareholders, exchanges orothers on a more frequent basis than that required byRules 3-19(b) and (c) to be included in anyregistration statement filed with the Commission.Prior to the adoption of the recent amendments, therule required this additional information to bereconciled to u.s. generally accepted accountingprinciples (GAAP). The amendments provide that suchadditional information need not be reconciled to u.s.GAAP if adequate narrative disclosures are provided.Specifically, if a registration statement includesreconciled financial statements as of a date whichcomplies with Rules 3-19(b} and (c), more currentfinancial information need not be reconciled to u.s.GAAP provided that any material variation in accountingwhich was not previously disclosed and quantified inthe reconciliation for earlier periods is described andthe quantified effects of the material variation aredisclosed.

3. Other Amendments Relating to Financial StatementUpdating

Other amendments: (1) Clarify language in Forms F-2and F-3 to reflect staff practice of allowingincorporation of interim financial statements filed onForm 6-K (which is not deemed filed otherwise); and (2)amend Rule 15d-2 to permit foreign private issuers tofile special year end financial statement reports(subsequent to the effectiveness of a registrationstatement that did not contain the audited financialstatements for the most recent year end) by the laterof 90 days following the effective date or six monthsfollowing the registrant's fiscal year end. Thisamends the current rule to recognize that foreignissuers are allowed up to six months following the endof the fiscal year within which to file their annualreport including audited year end financial statements.

C. Amendments to Multijurisdictional Disclosure System andOther Changes Affecting Canadian Issuers

1. Changes to Forms and Rules Affecting All CanadianIssuers

Rules and forms preventing certain Canadian issuers,but not other foreign issuers, from using theCommission's foreign integrated disclosure system for

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registration and reporting have been removed inconjunction with the MJDS (Securities Act Release No.702S; November 3, 1993). Form 20-F is now availablefor all Canadian foreign private issuers for annualreports and registration of securities under theExchange Act. Rather than registering on Forms S-l,S-2, S-3 and 8-4 designed for U.S. issuers, allCanadian foreign private issuers are able to registersecurities under the Securities Act on Forms F-l, F-2,F-3 and F-4 on the same basis as other foreign issuers.The exemption from the proxy regulations of Section 14and the share ownership and short-swing profitrecapture provisions of Section 16 is now available toall Canadian foreign private issuers.

2. Retention of Reconciliation Requirement in MJDS

On July 1, 1993, the Commission adopted amendments tothe MJDS (Securities Act Release No. 7004) to providefor retention of the requirement that financialstatements included in filings on Forms F-I0 and 40-Finclude a reconciliation to U.S. GAAP. In connectionwith the adoption of the MJDS in 1991 the Commissionhad provided that the reconciliation requirement wouldcease for certain MJDS filings after July I, 1993unless the Commission acted to retain the requirement.A staff report regarding reconciliation of financialstatements of foreign issuers indicated that therecontinue to be significant differences in accountingprinciples and practices between Canadian and U.S.GAAP. The Commission concluded that the differencesbetween Canadian and U.S. GAAP materially affectreported financial position and results of operationsand related trend information which warrant retentionof the currently existing reconciliation requirements.

D. Small Business Initiatives

On July 30, 1992, and April 27, 1993, the Commissionadopted new rules and forms under the Securities Act of1933, the Securities Exchange Act of 1934, and theTrust Indenture Act of 1939 to facilitate capitalraising by small businesses. Specifically, theCommission revised Regulation A and Rule 504 ofRegulation D to expand the categories of companieseligible to use those exemptions and increased thedollar ceiling for an offering under Regulation A. Inaddition, for "small business issuers" reporting underthe Securities Act and the Exchange Act, the Commissionadopted a system of simplified registration andreporting.

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1. Integrated Disclosure System for Registration andReporting for Small Business Issuers

The Commission adopted a new integrated disclosuresystem for Small Business Issuers. The system consistsof specialized forms under the Securities Act and theExchange Act that reference disclosure requirementslocated in one central depository Regulation 8-B.The new forms adopted by the Commission include formsSB-2, 10-SB, 10-QSB, and 10-KSB. Old Form S-18 hasbeen rescinded. The new disclosure system for smallbusiness issuers is optional: an issuer that wouldqualify as a small business may elect to continue touse the present reporting system.

A small business issuer is defined as a u.s. orCanadian entity that meets all of the following tests:* revenues of less than $25 million,* the aggregate market value of the entity's voting

stock held by non-affiliates (referred to as the"public float") is less than $25 million,

* if the small business issuer is a majority ownedsubsidiary of another company, its parent mustalso meet the definition of a small businessissuer, and

* investment companies are excluded from thedefinition.

An estimated 3,000 reporting public companies fallwithin the definition of a small business issuer.

The information required by Regulation S-B issubstantially the same as that required by old Form S-18. The financial statements required to be includedin small business registration statements and annualreports are an audited balance sheet as of only themost recently completed year end (unless such year endoccurred within the last 90 days) and statements ofoperations and cash flows for each of only the last twofiscal years. Interim financial statements must beprovided if the fiscal year end financial statementsare more than 135 days old. Both annual and interimfinancial statements must comply with generallyaccepted accounting principles, but are not required tocomply with Regulation S-X. Financial statementschedules are not required to be included in filings onsmall business forms. The narrative disclosurerequirements in Regulation S-B generally parallel thoseof Regulation S-K, but where such requirements weresimplified or not omitted by Form S-18, Regulation S-Bgenerally tracks the reduced requirements of Form 8-18.

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In connection with the development of Regulation S-B,Item 17A (disclosures concerning mining operations) ofold Form S-18 has been redesignated as Guide 7 underthe Securities Act and Exchange Act. The Commissionindicated in the adopting release that small businessissuers engaged in operations involving real estate,mining, insurance, banking, utilities, and oil and gasshould also refer to the applicable industry guide. Inaddition, roll-up transactions are required to furnishthe disclosure required by subpart 900 of RegulationS-K.Form SB-2 is the new designated Securities Actregistration form for small business issuers. There isno dollar limit for offerings on Form SB-2 and the formmay be used for both initial and repeat offerings.

For a company entering the Commission's disclosuresystem, either through a securities Act or an ExchangeAct registration statement, its eligibility to use theoptional SB system will depend on the level of itsrevenues in its last full fiscal year, and itscapitalization as of a date within 60 days prior to theoffering in a Securities Act registration statement orthe filing of the registration statement under theExchange Act. The determination as to the reportingcategory at the time a non-reporting company enters thedisclosure system (i.e. the use of Form S-l or Form SB-2) governs all reports relating to the remainder of thefiscal year. After the initial registration statementon Form S-B, a company may continue to report under theSB system until it exceeds the revenue test for twoconsecutive years or the public float test for twoconsecutive years, based on its annual report on Form10-KSB. A small business issuer that elects to fileits initial registration using Form S-l must report forthe remainder of its fiscal year pursuant to RegulationS-K and Regulation S-X.

In order for a company currently reporting with theCommission to enter the SB disclosure system, it mustmeet the definition of a small business issuer for twoconsecutive years. The determination made for areporting company at the end of its fiscal year (afterfiling its Form 10-K or 10-KSB) governs all reportsrelating to the next fiscal year. An issuer may notchange from one category to another with respect to itsreports under the Exchange Act for a single fiscalyear.

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Notwithstanding an issuer's classification as a smallbusiness, small business issuers are permitted toregister securities on Forms S-2, S-3 and S-8 if theyotherwise meet the eligibility requirements for use ofthose forms. References in those forms to thedisclosure requirements of Regulation S-K will bedeemed to be references to Regulation S-B for smallbusiness issuers. Form 8B-2 is available only for theregistration of securities to be sold for cash.Accordingly, small business issuers wishing to enterbusiness combination transactions which involve theregistration of securities will continue to be requiredto register those transactions on Form 8-4 or Form S-l.If a small business issuer elects, or is required, touse Form 8-1, the filing must contain all thedisclosure requirements of Regulation S-K and thefinancial statements required by Regulation s-x.2. Additional Initiatives Relating to SB Disclosure

System

On April 27, 1993, the Commission adopted additionalrules and forms to ease a small business issuer'stransition from non-reporting to reporting status andto simplify the disclosure requirements for smallbusiness issuers that engage in exempt offerings.

Under the transitional filer rules, a small businessissuer may enter the reporting system using RegulationA disclosure and only one year of audited financialstatements either through an Exchange Act registrationstatement and two years of audited financial statementsfor a public offering of up to $10 million in anycontinuous 12 month period. These small businessissuers would be permitted to meet their subsequentExchange Act reporting requirements using theRegulation A model of disclosure until such time asthey either (I) register more than $10 million in anycontinuous 12 month period, (2) elect to graduate toanother disclosure system, or (3) are no longer smallbusiness issuers.

In order to implement this transitional system,amendments to Forms S-2, 8-4, 10-SB, 10-KSB, and 10-Q8Bwere adopted, in addition to amendments to Schedule 14Aunder the proxy rules. Further a new Securities Actregistration statement, Form 8B-l, was adopted topermit qualifying small business issuers to make smallregistered offerings up to $10 million annually usingthe Regulation A format with two years of auditedfinancial statements.

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Two refinements to the financial statement requirementsfor small business issuers were also adopted. Thefirst provides an automatic waiver of the requirementsfor audited financial statements of specifiedsignificant acquired businesses if the required auditedfinancial statements are not otherwise available. Ifan issuer has other financial statements or informationwhich constitute less than the full audited financialstatements required, such other financial statements orinformation will be required to be provided. If noneof the conditions in the definitions of significantsubsidiary exceeds 20%, and the required auditedfinancial statements are not readily available, anautomatic waiver of the required audited financialstatements would be granted. In addition, if none ofthe conditions in the definitions of significantsubsidiary exceeds 40% and the required auditedfinancial statements are not readily available, anautomatic waiver would be available for the fiscal yearpreceding the latest fiscal year. The secondrefinement widens the initial public offering (IPO)financing window for small business issuers bypermitting them to proceed throughout the first quarterof their fiscal years without having to wait forcompletion of the audit for the preceding fiscal year,rather than update 45 days after fiscal year-end.

3. Changes to Regulation A

The new rule raises the dollar ceiling for a RegulationA offering from $1,500,000 to $5,000,000, including nomore than $1,500,000 in non-issuer resales. TheRegulation A exemption is now available to all U.s. andCanadian issuers not subject to Section 13 or 15(d) ofthe Exchange Act, except the following:* "blank check" companies (issuers having no

specific business or plan),* investment companies required to be registered

pursuant to the Investment Company Act of 1940,* registrants issuing fractional undivided interests

in oil or gas rights or similar interests in othermineral rights,

* registrants disqualified because of the "Bad Boy"disqualification provisions of Section 262 ofRegulation A.

The Commission's safe harbor provisions for forwardlooking information have been revised to apply tostatements made in a Regulation A offering statement.Therefore, good faith projections, with a reasonablebasis, of revenues, income, earnings per share, capitalexpenditures, dividends, capital structure and other

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financial items may be made in Regulation A filingsunder the same conditions as for other Commissionfilings.

As discussed in the March 1992 Proposing Release, oneof the major impediments to a Regulation A financingfor a small start-up or development company was thecosts of preparing the mandated offering statementwithout knowing whether there would be any investorinterest in the company. To remedy this situation, theCommission adopted the proposal to permit companiesrelying on the Regulation A exemption to "test thewaters" for potential interest in the company prior tofiling and delivery of the mandated offering statement.As adopted, the "testing of the waters" must begin witha written solicitation of interests. The solicitationdocument must also be submitted to the commission atthe time of its first use. Although the rulesgenerally provide for a "free writingl1 of thesolicitation document, the document must include thefollowing items:(a) a statement that no money is being solicited, or

will be accepted; that no sales can be made untildelivery and qualification of the offeringcircular, and that indications of interest involveno obligation or commitment of any kind; and

(b) a brief, general identification of the company'sbusiness, products and chief executive officer.

Once the offering statement required by Regulation A isfiled with the Commission, the issuer may not continueto use its written "test the waters" solicitationmaterials.

4. Changes to Rule 504 of Regulation D

As amended in April 1993, Rule 504 permits a publicoffering of up to $1 million in a 12-month period by anon-Exchange Act reporting company subject only to theanti-fraud and other civil liability provisions of thefederal securities laws. The amendment eliminated theconditions regarding state registration previouslyimposed by the Rule. In addition, Rule 504, asamended, permits general solicitation and generaladvertisement in connection with all offers and salesunder the exemption. Rule 504 is not available to"blank checkll companies.

E. Executive Compensation Disclosure

On October 15, 1992, the Commission adopted (SecuritiesAct Release No. 6962) amendments to the executivecompensation disclosure requirements of Item 402 of

12Regulation S-K. The amendments are designed to makecompensation disclosure clearer and more concise, andof greater utility to shareholders. In furtherance ofthis goal, the new rules require strict adherence tothe specified tabular formats for disclosure.

On August 9, 1993, the Commission issued a release(Securities Act Release No. 7009) reporting on thefirst year's experience with the new disclosure rules.In the release, the Commission identified common issuermistakes in complying with the new rules and discussedseveral questions of general application. TheCommission also proposed for comment several refiningand technical amendments to the executive compensationrules. The proposals were adopted in substantially theform proposed on November 22, 1993.

The new rules require disclosure of all compensation tothe named executive officers and directors of theregistrant for services rendered to the registrant inall capacities. The named executive officers consistof the chief executive officer ("CEO") and the otherfour most highly compensated officers (collectively,the "named executive officers"). The amended rulesbroaden the persons covered by the rule to requirecompensation disclosure about named executive officerswho left the company during the last fiscal year.Except for the CEO, disclosure is limited to thoseexecutives with salary and bonus of over $100,000 (anincrease from the former $60,000 threshold) for thelast completed fiscal year.

The Summary Compensation Table is the linchpin of theCommission's revised executive compensation disclosurescheme. It is intended to provide shareholders with acomprehensive overview of the registrant's executivepay practices, identify trends in the registrant'scompensation of its top managers and allow shareholdersto compare such trends with those disclosed by otherregistrants. The Summary Compensation Table coverscompensation of the named executive officers in each ofthe registrant's last three fiscal years, although twoof the columns ("Other Annual Compensation" and thecatch-all "All Other Compensation") may be phased in bycompanies over the first three years of reporting. Inaddition, small business issuers may phase in theentire table over 3 years. The Summary CompensationTable is required to be presented in the tabular formatspecified in Item 402 of Regulation S-K. Specificallythe table contains three specific columns relating toannual compensation (Salary, Bonus, and Other), threespecific columns relating to long-term compensation

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(Restricted Stock Awards, SARS & Options, and Long TermIncentive Payouts), and a final column reporting anycompensation not reported under the any other column.

In addition to the information provided in the SummaryCompensation Table, the new rules require severaladditional tables containing more specific data on thecomponents of compensation disclosed in the SummaryCompensation Table. The five additional tables requirethe registrant provide detailed information concerning:

* Grants of options and SARs to each of the namedexecutives during the last fiscal year.

* Exercises by the named executives of options andSARs during the last fiscal year and the value ofeach of the named executives' outstanding optionsand SARs at year end.

* Awards under long-term incentive plans during thelast fiscal year. Included in this table iscompensation that is based on the registrant'sperformance for a period of more than one year.

* Compensation and disclosures related to pensionand other defined benefit or actuarial plans.

* Disclosures relating to the repricing of optionsor SARs during the last fiscal year.

Further, in order to allow shareholders to comparecompensation trends with those disclosed by otherregistrants, the new rules require a Performance Graphrequiring registrants to provide a line graph comparingthe registrant's cumulative total shareholder return(stock price appreciation plus dividends, on areinvested basis) with a overall stock market returnperformance indicator (such as the S&P 500 stock index)and either a published industry index or registrant-determined peer comparison. Registrants not includedin the S&P 500 may choose another broad equity marketindex for comparison. Registrants have broaddiscretion in determining their peer comparison. Ifthey do not believe a peer comparison is feasible, theymay disclose this belief and compare their shareholderreturn to one or more companies selected on the basisof similar market capitalization.

In addition, the new rules require a Board CompensationCommittee Report on executive compensation whichdiscloses, among other items, the registrant'scompensation policies, including the specificrelationship of corporate performance to executivecompensation (Item 402(k».

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The information required by the option/SAR repricingtable, the Board Compensation Committee Report, and theperformance graph need not be provided in any filingsother than the registrant's proxy or informationstatement relating to an annual meeting of securityholders at which directors are to be elected (orspecial meeting or written consents in lieu of suchmeeting). Such information will not be deemedincorporated by reference into any filing under theSecurities Act or Exchange Act, except to the extentthat the registrant specifically incorporates it byreference.

Small business issuers eligible to use the smallbusiness integrated disclosure system will be requiredto provide only the summary compensation table, theoption and SAR grant and exercise tables (omittingoption valuation information), the long-term incentiveplan awards table, and disclosure concerning option orSAR repricing (omitting the lO-year repricing history),named executive officer employment contracts andtermination/severance arrangements, and directorcompensation (see Item 402 to Regulation S-B, asamended). Small businesses not electing to use thesmall business integrated disclosure system maynonetheless provide this more streamlined disclosurepursuant to Item 402(a) (1) (i) of Regulation S-K. Inaddition, small business issuers are eligible to fileunder the rules in effect prior to the effective dateuntil May I, 1993.

F. EDGAR (Electronic Data Gathering, Analysis andRetrieval)

On February 23, 1993, the Commission issued fourreleases adopting the rules that had been proposed inJuly 1992 requiring most documents processed by theDivisions of Corporation Finance and InvestmentManagement to be filed electronically by directtransmission, diskette, or magnetic tape. The releasesalso contain phase-in schedules to bring registrants(as well as parties making filings with respect tothese registrants) onto the EDGAR system. That phase-in began on April 26, 1993. The new rules becameeffective April 26, except the provisions relating toFinancial Data Schedules were delayed -- originallyuntil November I, 1993, but due to technicaldifficulties the staff will not expect filers tofurnish the schedule until the second quarter of 1994.The rules were published in the Federal Register onMarch 18, 1993. The EDGAR Filer Manual was publishedin the Federal Register on April 9, 1993.

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The first release (Securities Act Release No. 6977)explains the EDGAR system generally and sets forthrules and procedures that apply to electronicsubmissions by the Division of Corporation Finance andin some cases, to those processed by the Division ofInvestment Management. The second release (InvestmentCompany Act Release No. 19284) adopts rules specific toelectronic submissions made by investment companies.The third release (Public Utility Holding Company ActRelease No. 25746) adopts rules specific to electronicsubmissions made by public utility holding companiesand their subsidiaries. The fourth release (SecuritiesAct Release No. 6980) relates to the payment of filingsfees, by both paper and electronic filers, to theCommission's lockbox depository at Mellon Bank inPittsburgh, Pennsylvania pursuant to Rule 3a of theRules Relating to Informal and Other Procedures.

The EDGAR pilot has been operational since September24, 1984. Through the closing of the EDGAR Pilot onJuly 14, 1992, the Commission received over 116,000electronic filings from over 1800 filers. The newEDGAR system began receiving live filings by the formerEDGAR participants (IITransitional Filersll) on July 15,1992. On April 26, 1993, the temporary rules weresuperseded by the new rules adopted in February 1993.The new rules, including the most recent version of theEDGAR Filer Manual, will govern the preparation andtransmission of electronic submissions. Section35A(c) (5) of the Exchange Act requires that mandatedfilings from a "significant test group" of registrantsbe received and reviewed by the Commission for at leastsix months before the final adoption of any rulerequiring electronic filing by registrants.Accordingly, the rules adopted in February 1993 arereferred to as "interim rules."

The "significant test group" was phased in betweenApril and December 1993, in four groups. The firstgroup began phase-in on April 26, 1993. Group CF-Olconsists of approximately 230 companies mostlyTransitional Filers, with a few additional volunteers.The second group, Group CF-02, consisting ofapproximately 700 registrants whose filings areprocessed by the Division of Corporation Finance, beganmandated electronic filing on July 19, 1993. The thirdgroup (Group CF-03) and fourth group (Group CF-04) ofthe significant test group consist of approximately 700and 900 registrants, respectively, whose filings areprocessed by the Division.

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After the significant test group has successfully filedfor at least six months, the Commission will adoptfinal EDGAR rules modified to reflect the experiencegained during that period. Regi.strants will then bephased in, in groups of approximately 500, every threemonths (except for the first calendar quarter of everyyear), with any new registrants or others not named inthe phase-in schedule included in the last group phasedin. This residual category does not include foreignprivate issuers or foreign governments, which will notbe required to file on EDGAR at this time, althoughthey will be considered if they wish to volunteer.

II. Recently Issued Staff Accounting BulletinsA. Accounting and Disclosures Regarding Discontinued

OperationsOn November 4, 1993, the staff issued Staff AccountingBulletin No. 93 ("SAB 93") which expresses certainviews of the staff regarding accounting and disclosuresrelating to discontinued operations and relatedmatters. The issues addressed by SAB 92 are summarizedbelow:** A plan to dispose of a segment does not satisfy theconditions of APB 30 for presentation of the segment asdiscontinued if management has not determined theparticular method of disposition.** A segment should not be reported as a discontinuedoperation unless discontinuation of all the componentsof that segment is likely to be complete within a yearof the measurement date. However, an orderlyliquidation of a segment over a period that exceeds oneyear may be reported as a discontinued operationprovided that the registrant ceases accepting newbusiness (other than that which it is obligated bycontract or regulation to accept) within twelve monthsof the measurement date, and that the results ofoperations through final termination of the businesscan be estimated with reasonably accuracy.** The results of operations of a segment of abusiness that has been sold should not be reportedwithin discontinued operations if the registrantretains significant influence (as defined by APB 18)over its operations through minority ownership.** Subsequent writedowns of securities received asconsideration upon the sale of a disposed segmentshould be classified within continuing operations.** Subsidiaries intended for disposal that do notsatisfy the criteria for presentation as discontinuedoperations should continue to be consolidated unlessmatters outside the control of the registrant are

17indicative that control does not rest presently withthe registrant or is likely to be lost as a result ofevents outside the registrant's control.** A registrant with a continuing reporting duty underthe Exchange Act should not account for the spin-off ofa subsidiary by restating its financial statements topresent the spun-off entity as if it had never been asubsidiary (ie., a change in reporting entity).** MD&A should include disclosure of known trends,events and uncertainties involving discontinuedoperations that may materially affect the registrant'sliquidity, financial condition, and results ofoperations (including net income) between themeasurement date for accounting purposes and the datewhen the material risks of those operations will betransferred or otherwise terminated. Contingentliabilities, such as product or environmentalliabilities, that may remain with the registrantnotwithstanding disposal of the underlying businessshould be disclosed in the financial statementspursuant to SFAS 5 and discussed in MD&A pursuant toItem 303 of Regulation S-K.

B. Environmental and Product Liability Loss Contingencies

On June 8, 1993, the staff issued Staff AccountingBulletin No. 92 ("SAB 92") which expresses certainviews of the staff regarding accounting and disclosuresrelating to loss contingencies. This SAB pertains toall loss contingencies, but provides additionalguidance for environmental and product liabilities.

The SAB states that offsetting a claim for recoverythat is probable of realization against a probablecontingent liability in the balance sheet ordinarily isnot appropriate. This view is consistent with theconsensus reached by the Emerging Issues Task Force(EITF) on Issue No. 93-5 that indicated that anenvironmental liability should be evaluated separatelyfrom any potential claim for recovery. Any lossarising form the recognition of an environmentalliability should be reduced by a potential claim onlywhen that claim is probable of realization. Since therisks and uncertainties associated with the liabilityare different from those associated with any potentialrecovery from third parties, the staff believes thatthe liability and the probable recovery should bepresented separately on the face of the balance sheet.The staff will not object to net presentation until theadoption of FIN 39 (to be applied to fiscal yearsbeginning after December 15, 1993) provided that thenotes to the financial statements disclose the gross

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amount of each component of the net liability. Thestaff believes there is a rebuttable presumption thatno asset should be recognized for a claim for recoveryfrom a party that is asserting that it is not liable toindemnify the registrant. Registrants that overcomethat presumption should disclose the amount of recordedrecoveries that are being contested and discuss thereasons for concluding that the amounts are probable ofrecovery.

The EITF also reached a consensus to Issue 93-5 statingthat discounting of environmental liabilities isappropriate only when the aggregate obligation and theamount and timing of the payments are fixed or reliablydeterminable. That consensus sets forth criteria fordiscounting and disclosure requirements wherediscounting is appropriate. The staff believes anestimate that represents the minimum in a range ofequally likely outcomes, pursuant to FIN 14, does notqualify for discounting. The EITF could not reach aconsensus on the appropriate discount rate. The staffbelieves that the rate applicable is that rate wherethe liability could be settled in an arm's lengthtransaction. If that rate is not readily determinable,the SAB states that the rate should not exceed theinterest rate on risk free monetary assets havingmaturities comparable to that of the liability.

Registrants should avoid boiler plate disclosuresregarding the possible impact of significantuncertainties. For example, a statement that thecontingency is not expected to have a material effecton financial condition could be incomplete or confusingif the possible loss would be material to an investorbased on another reasonable measure, such as onerelating to liquidity or operating results. Further,this representation implies that management hasdetermined the range of possible loss. If it isreasonably possible that the outcome of uncertaintiesmay result in a liability exceeding the accruedliability by an amount which would be material,paragraph 10 of SFAS 5 requires disclosure of thatrange of reasonably possible loss or a clear statementthat a range cannot be estimated.

Registrants are reminded that, notwithstandingsignificant uncertainties affecting the measurement ofcontingencies, management may not delay loss accrualuntil only a single amount can be reasonably estimated.If management is able to determine that the amount ofthe liability is likely to fall within a range and noamount within the range can be determined to be the

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better estimate, the registrant should record theminimum amount of the range pursuant to FIN 14.Measurement of a liability for environmental clean-upshould be based on currently enacted laws andregulations and on existing technology. A registrantshould consider all available evidence including itsown and other companies' prior experience in cleaningup contaminated sites and data released by EPA. Thestaff believes information necessary to support areasonable estimate or range of loss may be availableprior to the performance of any detailed remediationstudy. Estimates of costs associated with alternativeremediation strategies may provide a reasonable basisto recognize a minimum probable loss.Information necessary to an understanding of materialuncertainties affecting both the measurement of theliability and the realization of recoveries should befurnished. This may include the following: the extentto which unasserted claims are reflected in any accrualor may affect the magnitude of the contingency; theextent to which joint and several liability with otherparties may affect the magnitude of the contingency,including disclosure of the aggregate expected cost toremediate sites where the likelihood of contribution byother significant parties has not been established; thenature and terms of cost-sharing arrangements withother PRPs; the extent to which disclosed butunrecorded contingent losses are subject to recoverythrough insurance, indemnification arrangements, orother third parties, with disclosure of the limitationsof that recovery; the extent to which insurancecoverages are subject to dispute; and the effects onthe company's liquidity and capital resources ofexpected expenditures in light of the expected timingof reimbursement by third parties.Registrants may succeed to a material contingentliability as a result of a business combination. Ifthe registrant is awaiting additional informationnecessary for the measurement of a contingency of theacquired company during the allocation period specifiedby SFAS 38, the registrant should disclose that thepurchase price allocation is preliminary. In thiscircumstance, the registrant should describe the natureof the contingency and furnish other availableinformation which will enable a reader to understandthe magnitude of any potential accrual and the range ofreasonably possible loss. Discussion of thecontingency is likely to be warranted in MD&A.

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The BAB advises registrants operating in a rateregulated environment that the recordation of aliability for a loss contingency does not automaticallygive rise to a regulatory asset. Registrants aredirected to the criteria for asset recognition inparagraph 9 of SFAS 71. The SAB indicates thatrecognition of a contingent loss should not be delayeduntil the registrant is advised by the regulator as towhether such costs are allowable for rate makingpurposes.

III. Other Accounting and Disclosure Issues of Current Interest

A. Selection of Discount Rates under SFAS 87 and 106

General interest rates have been declining in recentmonths, indicating a likelihood that many companieswill reduce the discount rate from that used in theirlast annual financial statements. Registrants arereminded that discount rates selected to measureobligations for pension benefits and post retirementbenefits other than pensions are expected to reflectthe current level of interest rates at the measurementdate. The guidance in paragraph 186 of SFAS 106, whichis applicable to discount rates selected under bothSFAS 106 and 87, states that" [t]he objective ofselecting assumed discount rates is to measure thesingle amount that, if invested at the measurement datein a portfolio of high-quality debt instruments, wouldprovide the necessary future cash flows to pay thebenefit obligation when due." That paragraph furtherstates that, to the extent that a company must considerexpected reinvestment rates available in the future toestimate a discount rate applicable to expected cashflows, "[t]hose rates should be extrapolated from theexisting yield curve at the measurement date."Companies must reevaluate the discount rate at eachmeasurement date (at least annually). "If the generallevel of interest rates rises or declines, the assumeddiscount rate should change in a similar manner."FASB's guidance refers to high-quality, fixed-rate debtinstruments. The staff believes a "high-quality"security is generally considered to be one receiving arating no lower than the second highest rating given bya recognized rating agency (for example, "Mil).

B. Disclosures Regarding the Realization of a Deferred TaxAsset Recognized Pursuant to SFAS 109

SFAS 109 ("Accounting for Income Taxes") requiresrecognition of future tax benefits attributable to taxnet loss carryforwards and deductible temporary

21differences between financial statement and income taxbases of assets and liabilities. Deferred tax assetsmust be reduced by a valuation allowance if, based onthe weight of available evidence, it is more likelythan not that some portion or all of the benefits willnot be realized. Notes to financial statements mustdisclose the amount of the valuation allowance andchanges therein. If a registrant has recognized a netdeferred tax asset that is material to stockholdersequity, it may be necessary to discuss uncertaintiessurrounding realization of the asset and materialassumptions underlying management's determination thatthe net asset will be realized. If the asset'srealization is dependent on material improvements overpresent levels of consolidated pre-tax income, materialchanges in the present relationship between incomereported for financial and tax purposes, or materialasset sales or other nonroutine transactions, adescription of these assumed future events, quantifiedto the extent practicable, should be furnished in theMD&A. For example, the minimum annualized rate bywhich taxable income must increase during the tax NOLcarryforward period should be disclosed if realizationof the benefit is dependent on taxable income higherthan currently reported. Also, if significantobjective negative evidence indicates uncertaintyregarding realization of the deferred asset, thecountervailing positive evidence relied upon bymanagement in its decision not to establish a fullallowance against the asset should be identified.

Material changes in the allowance for realization of adeferred tax asset from one period to the next alsoshould be fully explained in MD&A, highlighting changesin assumptions and environmental factors thatnecessitated the change.

C. Restructuring Charges

In recent years, a number of registrants haverecognized charges to income that are characterized as"restructuring charges." Registrants that recognizethese and other infrequent or unusual charges to incomeshould ensure that filings include sufficientexplanation of the nature and amounts of materialcomponents of the charge, and the likely effects of therestructuring plan on future reported results andliquidity.

Amounts of asset write-downs and other noncashprovisions should be distinguished from provisions madein anticipation of probable cash expenditures. The

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periods in which material cash outlays are anticipatedand their source of funding should be identified.Provisions and write-downs that would have beenrecognized even if management did not adopt a formalrestructuring plan should be disclosed and discussedseparately from those charges arising solely as aresult of that discretionary decision.Likely effects of the restructuring (reduceddepreciation, reduced employee expense, etc.) should bequantified, and the initial period in which thoseeffects are expected to be realized should beidentified. If the cost savings are expected to beoffset by anticipated increases in other expenses orreduced revenues, this should be discussed.In periods after a restructuring has been recognized,material changes in the accrued balance (either as aresult of expenditures or changes in estimates) shouldbe discussed in MD&A. If actual savings anticipated bythe restructuring are not achieved as expected, MD&Ashould discuss this outcome, its reasons, and itslikely effects on future results.The staff may be expected to challenge theappropriateness under GAAP of restructuring chargesthat include provisions for suboptimal performance,allocated overhead, or other indirect costs.Provisions that are incurred and recognized solely as aresult of management's adoption of a restructuring planshould include only the specific incremental and directcosts and activities clearly identifiable with the planthat can be estimated with reasonable accuracy.SFAS 5 does not permit provisions for generalcontingencies or losses that are not probable, or forliabilities or asset impairments that have not beenincurred as of the latest balance sheet date.Accordingly, many costs that can be anticipated bymanagement as a result of its business plans are notrecognizable in the current period but must berecognized in the period in which they are incurred.MD&A should include discussion of the likely effects ofmanagement's plans on future operating results to theextent material.

D. Disclosure of Accounting Policy Regarding Assessment ofRecoverability of GoodwillIn periods subsequent to the recognition of goodwill orother intangible assets, companies are required byparagraph 31 of APB 17 to evaluate continually whether

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later events and circumstances warrant revisedestimates of useful lives or recognition of asignificant charge-off of carrying amounts. Thestandard does not specify a particular quantitativemethodology for measuring the existence or extent of animpairment. In the near future, the FASB is expectedto expose for public comment a proposed standardaddressing the recognition and measurement ofimpairment of long-lived assets and intangibles,including goodwill. In the absence of guidance of thisissue, a number of different methodologies have beenemployed by public companies to measure an impairmentof goodwill. Until a final standard is adopted, thestaff expects that different accounting practices willcontinue to be followed. In this environment, thestaff believes public companies should consider theapplicability of paragraph 12 of APB 22, which callsfor disclosure of accounting methods that a companyselects from existing acceptable alternatives, to thecompany's method of assessing and measuring impairmentof goodwill and similar intangibles. This disclosurewould be expected, in particular, of companies thatreport unamortized goodwill that is significantrelative to equity or that recognize goodwillamortization that is very material relative to pre-taxincome. The dis9losure of the accounting policy shouldaddress the manner in which recoverability is assessedand how impairment would be measured. Conclusionsregarding the impairment of goodwill and uncertaintiesaffecting its recoverability should be consistent withdisclosures in management's discussion and analysis ofoperations and financial position.

E. Disclosures about New Accounting Standards

1. Before Adoption by the Registrant

Staff Accounting Bulletin 74 (Topic 11:M) discussesdisclosures that a registrant should provide in itsfinancial statements and/or in management's discussionand analysis regarding the impact that recently issuedaccounting standards will have on its financialstatements when the standard is adopted in a futureperiod. Disclosures that should be considered includea brief description of the standard and its anticipatedadoption date, the method by which the standard will beadopted, the impact that the standard will have on thefinancial statements to the extent reasonablyestimable, and any other effects that are reasonablylikely to occur (eg., changes in business practices,changes in availability or cost of capital, violationsof debt covenants, etc.). In this regard, registrants

24should consider the effects of not only standardsrecently issued by the FASB, but also Statements ofPosition and Practice Bulletins issued by the AICPA andconsensus positions of the EITF.2. Adoption of New Standard in Interim PeriodRule 10-01(a) (5) of Regulation s-x permits registrantsto omit from interim reports on Form 10-Q footnotedisclosures that would be repetitive of information-included in the annual financial statements, exceptthat disclosures about material contingencies mustalways be furnished. The rule also indicates that ifevents occur subsequent to the fiscal year-end, such asa change in accounting principles and practices,informative disclosure shall be made. Registrantsshould describe the accounting change and its impactpursuant to APB 28, as amended by SFAS 3. In addition,the staff believes the interim financial statementsshould include, to the extent applicable, alldisclosures identified by the adopted standard asrequired to be included in annual financial statements.If the change in accounting principle is made in aperiod other than the first quarter of the year, noamendment of prior filings is required; however, arestatement of each of the prior quarter's resultsshould be included in the filing for the quarter inwhich the new accounting principle is adopted pursuantto SFAS 3. If the new accounting principle is appliedretroactively to prior years, the prior comparableinterim quarters should be presented on a restatedbasis also.

F. Management's Discussion and Analysis - RecentEnforcement ActionThe Commission announced that on March 31, 1992,administrative proceedings under the Exchange Act wereinstituted against Caterpillar Inc. (flCaterpillarfl)forviolations of Section 13(a) of the Exchange Act andRules 13a-1 and 13a-13 promulgated thereunder.Simultaneously with the institution of theseproceedings, the Commission accepted Caterpillar'sOffer of Settlement in which it consented to the entryof a Cease and Desist Order. (ReI. No. 34-30532).The Commission determined that Caterpillar failed toadequately disclose the importance of its Braziliansubsidiary's 1989 earnings to Caterpillar's overallresults of operations in the MD&A portion ofCaterpillar's 10-K for the year ended December 31,1989. The Commission also determined that Caterpillar

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failed to adequately disclose known trends anduncertainties regarding its Brazilian operations in its1989 10-K and in its Report on Form 10-Q for thequarter ended March 31, 1990.The Commission's Order requires Caterpillar to ceaseand desist from violating Section 13(a) of the ExchangeAct and Rules 13a-1 and 13a-13 thereunder, andimplement and maintain procedures designed to ensurecompliance with the MD&A requirements.The Commission previously issued an interpretiverelease (ReI. No. 33-6835; May 18, 1989) on MD&A (Item303 of Regulation S-K). The release sets forth theCommission's views regarding several disclosure mattersthat should be considered by registrants in preparingMD&As. The release emphasized the distinction betweenprospective information that is required to bedisclosed, and voluntary forward-looking disclosure.The release states that if there is a known trend,demand, commitment, event or uncertainty, managementmust make two assessments to determine what prospectiveinformation is required.First management must determine whether the knowntrend, demand, commitment, event or uncertainty islikely to come to fruition. If management determinesthat it is not reasonably likely to occur, nodisclosure is required.Second, if management cannot make the determinationthat the event is not likely to occur, it must evaluateobjectively the consequences of the known trend,demand, commitment, event or uncertainty, on theassumption that it will come to fruition. Disclosureis then required unless management determines that amaterial effect on the registrant's financial conditionor results of operations is not reasonably likely tooccur. Each final determination resulting from theassessments made by management must be objectivelyreasonable, viewed as of the time the determination ismade. The release clarifies that the safe harbor rulesapply not only to voluntary forward-looking statements,but also to prospective information that is required tobe disclosed.The release also provides interpretive guidanceregarding the following matters: long and short-termliquidity and capital resources analysis; materialchanges in financial statement line items; requiredinterim period disclosure; MD&A analysis on a segmentbasis; participation in high yield financing, highly

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leveraged transactions or non-investment grade loansand investments; the effects of federal financialassistance upon the operations of financialinstitutions; and preliminary merger negotiations.

G. Disclosures about Foreign Operations and ForeignCurrency Transactions

An increasing number of registrants conduct materialoperations outside their home country and enter intomaterial transactions denominated in currencies otherthan the currency in which their financial statementsare reported. These registrants should reviewmanagement's discussion and analysis and the notes tofinancial statements to ensure that disclosures aresufficient to inform investors of the nature and extentof the currency risks to which the registrant isexposed and to explain the effects of changes inexchange rates on its financial statements. SFAS 14requires quantitative disclosures regarding exportrevenues and foreign operations. MD&A should includediscussion of the historical and reasonably likelyfuture effects of changes in currency exchange rates onrevenues, costs, and business practices and plans.Identification of the currencies of the environments inwhich material business operations are conducted isrecommended. Discussion of foreign operations in adisaggregated manner may be necessary, particularlywith respect to businesses operating in a highlyinflationary environment or if operating cash flows ofa foreign operation are not available for legal oreconomic reasons to meet the registrant's other shortterm cash requirements. Registrants also shouldquantify the extent to which trends in amounts reportedin their financial statements are attributable tochanges in the value of the reporting currency relativeto the functional currency of the underlyingoperations, and any materially different trends inoperations or liquidity that would be apparent ifreported in the functional currency should be analyzedAFinally, registrants should identify material unhedgedmonetary assets, liabilities or commitments denominatedin currencies other than the operation's functionalcurrency, and strategies for management of currencyrisk should be described.

H. "Other Than Temporary" Declines in Value of Debt andEquity Marketable Securities

During 1991 and 1992, the Commission institutedproceedings and issued cease and desist orders againstfour financial institutions for violations of Sections

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13{a), 13(b) (2) (A) and (B) of the Exchange Act andRules 12b-20, 13a-1 and 13a-13 thereunder in connectionwith financial statements and disclosures concerninginvestment securities which had experienced other thantemporary declines in market value. (See Fleet/NorstarFinancial Group, Release No. 34-29557; Excel Bancorp,Inc., Release No. 34-29675; Abington Bankcorp, Inc.,Release No. 34-30614; Presidential Life Corporation,Release No. 34-31934). In each of these situations,the registrant reported an investment securitiesportfolio at a carrying value that substantiallyexceeded the market value of the securities. In eachcase, the registrant accounted for certain marketdeclines as temporary.

Generally accepted accounting principles provide thattemporary declines in the value of non-currentinvestment securities generally may be recognizedthrough adjustments to a valuation allowance accountwithin stockholders' equity. However, Statement ofFinancial Accounting Standard No. 12, Accounting forCertain Marketable Securities (SFAS 12), requires thata determination be made as to whether a decline inmarket value below cost as of the balance sheet date ofan individual security is "other than temporary". Ifthe decline is judged to be other than temporary, thecost basis of the individual security must be writtendown to a new cost basis and the amount of the writedown must be accounted for as a realized loss. The newcost basis is not changed for subsequent recoveries inmarket value.

In each of these cases the registrant held a portfolioof equity and/or debt securities which had substantialand continuing unrealized losses. Staff AccountingBulletin No. 59 (BAB 59) sets forth the staff's viewsconcerning the evaluation of some of the factors which,individually or in combination, indicate that a declinein market value below an investor's carrying value isother than temporary and that a write down of thecarrying value is required. These factors are: (a)the length of time and the extent to which the marketvalue has been less than cost; (b) the financialcondition and near term prospects of the issuer,including any specific events which may influence theoperations of the issuer such as changes in itstechnology that may impair earnings potential of theinvestment or the discontinuance of a segment of thebusiness that may affect the future earnings potential;and (c) the intent and ability of the holder to retainits investment in the issuer for a period sufficient toallow for any anticipated recovery in market value.

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Pursuant to SAB 59, "unless evidence exists to supporta realizable value equal to or greater than thecarrying value of the investment, a write downaccounted for as a realized loss should be recorded."The Commission stated in the Fleet/Norstar order that"Recoveries that cannot be reasonably expected to occurwithin an appropriate period should not be consideredin the assessment of realizable value."

In each of these cases the Commission concluded thatthe registrant had failed to timely recognize losses onother than temporary declines in investments.

IV. Frequent Inquiries Regarding Application of Regulation S-Xand Other Disclosure Practices

A. Financial Statements of Businesses Acquired (Rule 3-05)

1. Definition of a business. Identified byevaluating whether there is sufficient continuity ofoperations so that disclosure of prior financialinformation is material to an understanding of futureoperations. (See Rule Il-Ol(d) of Regulation S-X.)There is a presumption that a separate entity,subsidiary, or division is a business; a lessercomponent may be a business, too. Consideration shouldbe given to --

* whether the nature of the revenue producingactivity will remain generally the same;

* whether the facilities, employee base,distribution system, sales force, customerbase, operating rights, productiontechniques, or trade names remain after theacquisition.

2. Tests of Significance. Rule 1-02.v. describesthree tests of significance that must be applied todetermine the level at which an acquisition issignificant for purposes of determining the number ofyears for which financial statements of the acquireeare required. Significance of the acquiree isdetermined by comparing the most recent pre-acquisitionannual statements of the acquired business to theregistrant's pre-acquisition consolidated statements asof the end of the most recently completed fiscal yearfor which audited financial statements are filed withthe Commission.

For a combination accounted for as a purchase, compareregistrant's investment in (or consideration paid for)

29acquiree and advances to (including loans andreceivables) to registrant's consolidated assets;

a. Contingent consideration should be consideredas part of the total investment in the acquireeunless its payment is deemed remote.

b. For a pooling or reorganization, compare thenumber of shares exchanged to registrant'soutstanding shares immediately before combination;

c. Compare registrant's share of acquiredentity's total assets to the registrant'sconsolidated assets;

d. Compare registrant's equity in the acquiredentity's income from continuing operations beforetaxes to that of registrant.

* If registrant's income for the most recentfiscal year is 10% or more lower than averageof last five fiscal years, average income ofthe registrant may be used for thiscomputation. Loss years should be assignedvalue of zero in computing numerator for thisaverage, but denominator should be "5". Thisrule is not applicable if the registrantreported a loss, rather than income, in thelatest fiscal year. The acquiree's incomemay not be averaged pursuant to this rule.

e. Other guidance:** If the aggregate of all "insignificant"

businesses exceed 20% in any condition above,financial statements for the majority (combined ifappropriate) should be furnished for most recentfiscal year and the latest interim periodpreceding the acquisition.** If the acquisition was consummated shortly

after the most recent fiscal year and theregistrant files its Form 10-K for that yearbefore the due date of the Form 8-K (including the60 day extension), significance may be evaluatedrelative to that fiscal year.** If the registrant has previously made a

significant acquisition and it was fully reportedon Form 8-K, significance test may be applied tothat pro forma data rather than historicalpre-acquisition data. The acquired business forwhich the test is made is not considered part ofthe registrant's base in determining significance.** If a registrant increases its investment in a

business relative to the prior year, the tests ofsignificance should be based on the increase in

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the registrant's proportionate interest in assetsand net income during the year, rather than thecumulative interest to date.** Significance should be evaluated on basis of

U.S. GAAP, rather than the foreign GAAP of theacquirer or acquiree.** Ordinary receivables not acquired should

nevertheless be included in tests of significanceon the theory that working capital will berequired after the acquisition.** Registrant's assets may not be increased by

pro forma effect of anticipated public offeringproceeds for purposes of significance tests.f. Registrants may request staff interpretationin unusual situations or obtain relief wherestrict application of the rules and guidelinesresults in a requirement that is unreasonableunder the circumstances.

3. Division or Lesser Component Acquired. The staffmay accept audited statements of assets and liabilitiesacquired and revenues and expenses directly related tothe business where the registrant can demonstrate thatit is impracticable to prepare the full financialstatements required by Regulation S-X, and theregistrant includes this explanation in the filing.Unallocated items (corporate overhead, interest, taxes)may be excluded from these statements, but the amountsexpected after the acquisition should be reflected inthe pro forma statements.4. Special Rule Applicable to an IPO. SAB 80 (Topicl:J) is an interpretation of Rule 3-05 for applicationin the case of initial public offerings involvingbusinesses that have been built by the aggregation ofdiscrete businesses that remain substantially intactafter acquisition. The guidance is intended to ensurethat the registration statement include not less thanthree, two and one year(s) of audited financial state-ments of not less than 60%, 80% and 90%, respectively,of the constituent businesses that will comprise theregistrant on an ongoing basis.

B. Financial Statements of Subsidiaries that GuaranteeSecurities Issued by Parent CompanyIt is increasingly common for an offering of parentdebt or preferred equity securities to be guaranteed byone or more of its subsidiaries. Typically, theguarantee is full and unconditional; and thus covers100% of the parent's debt servicing obligations on the

primary (guaranteed) security. Further, the guaranteegenerally is enforceable by the holder of theguaranteed security directly against the guarantor-subsidiary's assets without first taking action againstthe parent-obligor.Under the Securities Act, each guarantee (as well asthe guaranteed security) must be covered by aneffective registration statement. Rule 3-l0(a) ofRegulation s-x requires financial statements ofguarantors of registered securities to be included inthe registration statement. The non-financialstatement disclosures in registration statements areset forth in Regulation S-K. Moreover, the guarantorsubsidiary, like its parent, will be required to fileperiodic reports pursuant to section l5(d) of theExchange Act at least for the fiscal year during whichthe Securities Act registration statement becameeffective. .Generally, separate disclosure and reporting by aguarantor subsidiary is required. In certaincircumstances, however, the staff will accept aregistrant's proposal to include other disclosures inlieu of full separate audited financial statements ofthe guarantor subsidiary, and take no-action withrespect to a guarantor that does not file separateExchange Act reports. Issuers seeking such reliefordinarily should address their requests to the Officeof the Chief Counsel of the Division of CorporationFinance prior to filing a registration statement.Topic 1.G. of the Staff Accounting Bulletins (SAB 53)provides relief from the general requirement of fullseparate disclosure and reporting by subsidiary-issuerswhere investors rely upon the parent's guarantee forthe repayment of principal and interest on thesubsidiary-issuer's guaranteed securities. However,Topic 1.H. states as a general rule that separatefinancial statements for a subsidiary-guarantor and aparent-issuer would be material to investors. Thestaff, however, in certain circumstances wheresubsidiary-guarantors are present, has provided reliefbased upon the materiality of the full financialinformation provided to investors. In all cases, it isthe issuer's responsibility to include full andcomplete disclosure of (1) the legal aspects of theguarantee arrangement that would be material for ainvestor to evaluate the sufficiency of the guarantee,(2) financial information in sufficient detail to allowinvestors to determine the nature of the assets heldby, and the operations and cash flows of, each of the

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issuers, including the investors' priority position inthe event of a default by the issuers, and (3) anysignificant restrictions on the parent's ability toobtain funds from its subsidiaries by dividend or loan.Notwithstanding the general rule of Topic l.H., thestaff has stated, in Anheuser-Busch, that the threelevels of disclosure set forth in Topic l.G. will beapplied to those situations in which the subsidiary isa guarantor of its parent's debt or preferred equitysecurities. If the registered security is guaranteedby all direct and indirect subsidiaries of the parentcompany and the parent has no operations or assetsseparate from its investment in its subsidiaries, thestaff generally would not require the registrationstatement to include any audited financial informationof the guarantor subsidiaries provided that theregistrant indicates the basis for their omission. Ifthe registered security is guaranteed by all direct andindirect consolidated subsidiaries of the parent butthe parent does have other assets or operations, thestaff generally will accept, in lieu of separatefinancial statements of the guarantor subsidiaries,either summarized parent-only financial information orsummarized combined financial information of theguarantor subsidiaries provided in an audited note tothe parent's financial statements. The alternativedisclosures described in this paragraph have also beenaccepted where the nonguarantor subsidiaries areinconsequential (i.e., when the assets, pre-tax incomeand parent's net investment in the nonguarantorsubsidiaries on an individual and combined basis isless than 3%) .The staff has addressed all other circumstances basedupon the materiality of the information in the light ofthe particular terms and conditions of the guarantees.In circumstances in which the security is guaranteed ona full, unconditional, and joint and several basis byone or more of the issuer's wholly owned subsidiaries,the financial information required in the note to theparent's financial statements ordinarily should beconsolidating condensed financial statements whichdepict, in separate columns, the parent company, theguarantor subsidiaries (on a combined basis), and thenonguarantor subsidiaries (on a combined basis), withan additional column reflecting eliminatingadjustments. Additional columns may be necessary ifthe enforceability of the guarantees may be affecteddifferently under the laws of the foreign or domesticjurisdictions in which they can be enforced.

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Registrants should follow the general guidance in Rule10-01 of Regulation S-X concerning the form and contentof condensed financial statements. However, thecondensed consolidating financial information should bein sufficient detail to allow investors to determinethe nature of the assets held by, and the operationsand cash flows of, each of the consolidating groups andinclude a discussion of any significant restrictions onthe parent's and the guarantors' ability to obtainfunds from their subsidiaries by dividend or loan.Additional financial and narrative information aboutindividual guarantors should be disclosed if theinformation would be material for an investor toevaluate the sufficiency of the guarantee.

If one or more of the guarantor subsidiaries is notwholly owned or if one or more of the guarantees is notfull, unconditional, and joint and several, the staffwill expect the issuer to furnish full auditedfinancial statements of the guarantor subsidiariespursuant to Rule 3-10.

c. Financial Statements Relating to Third PartyCredit Enhancements

Third party credit enhancements differ slightly fromguarantees. A guarantee running directly to thesecurity holder is a security within Section 2(1) ofthe Securities Act. A guarantor is a co-issuer underthe Securities Act and provides required business andfinancial information and signs the registrationstatement. A third party credit enhancement is anagreement between a third party and the issuer or atrustee. A party providing credit enhancementgenerally is not a co-issuer. However, if aninvestor's return is materially dependent upon thethird party credit enhancement, the staff requiresadditional disclosure. The disclosure must providesufficient information about the third party to permitan investor to determine the ability of the third partyto fund the credit enhancement. In most cases, thethird party's audited financial statements presented inaccordance with generally accepted accountingprinciples would be required. However, if suchfinancial statements are not available, alternativepresentations may be acceptable. For example,statutory financial statements of insurance companiesserving as credit enhancers may be accepted.

The staff considers the following factors in assessingthe sufficiency of the disclosure in this area: (i)amount of the credit enhancement in relation to the

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issuer's income; (ii) duration of the creditenhancement; (iii) conditions precedent to theapplication of the credit enhancement; and (iv) otherfactors that indicate a material relationship betweenthe credit enhancer and the purchaser's anticipatedreturn.

D. Financial Statements of Real Estate OperationsCollateralizing Significant LoansSeparate financial statements of real estate operationscollateralizing significant loans are required pursuantto SAB 71:* Acquisition, development and construction (AnC)loans: If over 10% of offering proceeds (or totalassets, if greater) have been or will be invested in ansingle acquisition, development, and construction loan,financial statements of the property securing the loanshould be provided in '33 Act filings. Also, where nosingle loan exceeds 10%, but the aggregate of suchloans exceed 20%, a narrative description of theproperties and arrangements is required. In '34 Actreports, the requirement for full financial statementsis triggered at the 20% level, but summarizedinformation is required at the 10% level.* Other loans: If over 20% of offering proceeds (ortotal assets, if greater) have been or will be investedin a single loan (or in several loans on relatedproperties to the same or affiliated borrowers),financial statements of the property securing the loanare required in '33 and '34 Act filings.

E. Surviving Company in a Reverse AcquisitionAPB No. 16, paragraph 70 states in part "...thatpresumptive evidence of the acquiring corporation in acombination effected by an exchange of stock isobtained by identifying the former common stockholderinterests of a combining company which either retain orreceive the larger portion of the voting rights in thecombined corporation. That corporation should betreated as the acquirer unless other evidence clearlyindicates that another corporation is the acquirer ..."SAB Topic 2A affirms the above principle and discussessome of the factors which may rebut the normalpresumption.In December 1989, the Emerging Issues Committee of theCanadian Institute of Chartered Accountants reached aconsensus concerning Reverse Takeover Accounting whichis compatible with the guidance included in Topic 2A.The EIC consensus indicates that the post reverse-

35acquisition comparative historical financial statementsshould be those of the "legal" acquiree, withappropriate footnote disclosure concerning the changein the capital structure.The merger of a private operating company into a non-operating public shell corporation is considered by thestaff to be essentially a capital transaction, ratherthan a business combination. That is, it is equivalentto the issuance of stock by the private company for thenet monetary assets of the shell corporation,accompanied by a recapitalization. The accounting isidentical to that resulting from a reverse acquisition,except that no goodwill or other intangible should berecorded.

F. Redeemable Equity SecuritiesThe staff considers the guidance in SX 5-02, FRC 211,SAB 3C, and SAB 6B(l) to be applicable to all equitysecurities (not only preferred stock) the cashredemption of which is outside the control of theissuer. For example, the guidance is applicable tocommon stock and common stock options and warrants thatare subject to a put, and to stock subject torescission rights.Redeemable equity securities should be presentedseparately from "stockholders' equity" if they areredeemable at the option of the holder, or at a fixeddate at a fixed price, or redemption is otherwisebeyond the control of registrant. The presentation isrequired even if the likelihood of the redemption eventis considered remote. Disclosures include title ofsecurity, carrying amount, and redemption amount onface of balance sheet; in notes, disclose generalterms, redemption requirements in each of thesucceeding five years, number of shares authorized,issued and outstanding.Redeemable securities are initially recorded at theirfair value. In subsequent periods, the security shouldbe accreted to the redemption amount using the interestmethod (unless the likelihood of redemption is remoteor the earliest date which redemption may legally occuris indeterminable). The amount of periodic accretionreduces income applicable to common shareholders in thecalculation of EPS. [SAB 3C] If accretion is material,separate disclosure of income applicable to commonshareholders on the face of the income statement isrequired. [SAB 6B(1)] If the redemption amount iscurrently redeemable and variable {eg., baaed on market

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value of common stock), the security should be adjustedto its full redemption value at each balance sheetdate. The staff believes that any extinguishment ofredeemable securities for consideration that exceedsthe carrying amount of the securities at that timeshould be treated as a reduction of income applicableto common shareholders.

G. Distributions to Promoters/Owners at or prior toClosing of IPO [SAR Topic l.B.3]If a planned distribution to owners (whether declaredor not, whether to be paid from proceeds or not) is notreflected in the latest balance sheet but would besignificant relative to reported equity, a pro formabalance reflecting the distribution (but not givingeffect to the offering proceeds) should be presentedalong side the historical balance sheet in the filing.If a distribution to owners (whether already reflectedin the balance sheet or not, whether declared or not)is to be paid out of proceeds of the offering ratherthan from the current year's earnings, historical pershare data should be deleted and pro forma per sharedata should be presented (for the latest year andinterim period only) giving effect to the number ofshares whose proceeds would be necessary to pay thedividend. For purposes of this SAB, a dividenddeclared in the latest year would be deemed to be incontemplation of the offering with the intention ofrepayment out of offering proceeds to the extent thatthe dividend exceeded earnings during the previoustwelve months.

H. Other Changes in Capitalization at or prior to Closingof IPOGenerally, the historical balance sheet or statement ofoperations should not be revised to reflect conversionsor term modifications of outstanding securities thatbecome effective after the latest balance sheet datepresented in the filing, although pro forma datapresented along side of the historical statements (asdiscussed below) may be necessary. However, if theregistrant and its independent accountants elect topresent a modification or conversion as if it hadoccurred at the date of the latest balance sheet (withno adjustment to earlier periods), the staff ordinarilywill not object unless the original instrument legallyaccrues interest or dividends or accretes towardredemption value after that balance sheet date, or ifthe terms of the conversion do not confirm the

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historical carrying value at the latest balance sheetas current value.If the terms of outstanding equity securities willchange subsequent to the date of the latest balancesheet and the new terms result in a material reductionof permanent equity, or if redemption of a materialamount of equity securities will occur in conjunctionwith the offering, the filing should include a proforma balance sheet (excluding effects of offeringproceeds) presented along side of the historicalbalance sheet giving effect to the change incapitalization.If a conversion of outstanding securities will occursubsequent to the latest balance sheet date and theconversion will result in a material reduction ofearnings applicable to common shareholders (excludingeffects of offering), the staff will not object to thedeletion (or inclusion solely in the notes to financialstatements) of historical earnings per share if suchinformation is not meaningful. Pro forma EPS for thelatest year and interim period should be presentedgiving effect to the conversion (but not the offering) .

I. Calculation of EPS in an Initial Public Offering [SABTopic 4D]In the Initial Offering Document: All stock, optionsand warrants issued within one year prior to filing ofthe registration of an entity's initial public offeringof its equity securities are deemed outstanding for allperiods presented (in the manner of a stock split),except that the registrant may assume that thedifference between the IPO offering price and theamount received for the stock or the exercise price ofthe options is applied to repurchase outstanding sharesin the manner of the "treasury stock method" outlinedin APB 15. (However, the "modified treasury stockmethod" described in APB 15 should not be applied,regardless of the proportion of equity represented bycheap stock, options, and warrants.) In periods priorto the offering, these securities should be deemedoutstanding even if anti-dilutive (ie., when theregistrant reports a loss) .In filings subsequent to the IPO: Stock, options andwarrants deemed outstanding in the IPO pursuant to theSAB should continue to be deemed outstanding in allperiods prior to the year in which the IPO is declaredeffective. In calculations of EPS for the fiscal yearin which the IPO became effective, shares, options and

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warrants issued within one year prior to the IPOeffective date should continue to be deemed outstandingas prescribed by the SAB throughout the interim periodincludes in the IPO prospectus. The determination ofcommon stock and equivalents outstanding in remainderof the fiscal year (and in all subsequent reportingperiods) should be determined on a basis consistentwith APB 15. That is, outstanding options and warrantsshould be included in the EPS computation only if theyhave a dilutive effect; the application of the treasurystock method should not assume the IPO price to be themarket price.For example: Assume an option granted on January 1,with the IPO containing March 31 interims; an exerciseprice of $1; a IPO price of $2; and a weighted averagemarket price at year-end of $3. Using the treasurystock method, the option represents one-halfoutstanding share in the first quarter and two-thirdsshare in the last three quarters; or five-eighths sharefor the full year.

J. Accounting for Shares Placed in Escrow in connectionwith an Initial Public OfferingIn order to facilitate an initial public offering bysome companies, underwriters have requested certainpromoter/shareholder groups (or all shareholders of aclosely held company) to place their shares in escrow,with subsequent release of the shares contingent uponthe registrant's attainment of certain performance-based goals. Although these shares are legallyoutstanding and are reported as such on the face of thebalance sheet, the staff considers the escrowed sharesto be "contingent shares" for purposes of calculatingearnings per share under APB 15. In addition, thestaff views the placement of shares in escrow as arecapitalization by promoters similar to a reversestock split. The agreement to release the shares uponthe achievement of certain criteria is presumed by thestaff to be a separate compensatory arrangement betweenthe registrant and the promoters. Accordingly, thefair value of the shares at the time they are releasedfrom escrow should be recognized as a charge to incomein that period. However, no compensation expense needbe recognized with respect to shares released to aperson that has had no relationship to the registrantother than as a shareholder (for example, is not anofficer, director, employee, consultant or contractor),and that is not expected to have any other relationshipto the company in the future.