FINANCIAL EXECUTIVES INSTITUTE
April 19, 2000
Mr. Jonathan G. Katz
Secretary
U.S. Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549-0609
Subject: File No. S7-03-00
Dear Mr. Katz,
The Committee on Corporate Reporting (“CCR”) of the Financial Executives Institute
appreciates this opportunity to comment on the Securities and Exchange
Commission’s proposed rule, “Supplementary Financial Information.” The Financial
Executives Institute is a professional organization of more than 14,000 CFOs,
controllers, treasurers, and other senior financial executives in the U.S. and Canada,
representing both providers and users of financial information.
Under the Commission’s proposal, detailed roll-forward disclosures and additional
information would be required for (i) all loss contingencies recorded pursuant to FAS
5, including (but not limited to) twelve specific categories suggested by the
Commission, and (ii) any long-lived assets separately captioned on the balance
sheet including goodwill and other intangible assets.

Each major class of loss contingency would require separate presentation. The
classes suggested by the Commission (which are not meant to be all-inclusive)
include a wide-range of items including allowance for doubtful accounts or notes
receivables; allowance for sales returns, discounts and contractual allowances;
unamortized discount or premium; excess of estimated costs over revenues on
contracts (loss contracts); inventory valuation allowance; valuation allowance for
deferred tax assets; liabilities for exit and employee termination costs related to a
restructuring or a business combination; liabilities for costs of discontinued
operations; liabilities for environmental costs; contingent income and franchise
tax liabilities recorded pursuant to FASB Statement 5; product warranty liabilities;
and probable losses from pending litigation. To the extent that such a class is
composed of varying elements, each significant element must be separately
disclosed. The information would be reported for each period for which an
Mr. Jonathan G. Katz
April 19, 2000
Page 2
income statement is presented and would include the opening balance, additions
charged to expense, deductions and other additions not charged to expense
(with explanation) and the closing balance. Any changes in assumptions having
a material effect on the account would have to be described.

Each major class of long-lived assets would require separate presentation, as
would elements of goodwill having significantly different useful lives. The
information would be reported for each period for which an income statement is
presented and would include the opening balance, additions, deductions and the
closing balance. Registrants would also be required to disclose any significant
and unusual asset additions, abandonments, retirements or other adjustments as
well as the nature of changes that are at other than cost. Required disclosures
would also include the method of amortization, estimated useful lives and
salvage values for each long-lived asset account.
CCR members share the Commission’s support for transparent financial reporting,
but within reasonable cost/benefit constraints. Cost/benefit issues must be
considered in order to ensure that limited resources are apportioned to those areas
of financial reporting which will produce the most benefit. The evaluation of costs
must also consider the potential harm to companies and shareholders from
disclosing proprietary or competitive information.
After careful consideration, CCR does not support the Commission’s proposal
because it does not pass the cost/benefit test. The level of detailed disclosures
goes far beyond the reasonable needs of financial statement users and will be costly
to collect and maintain. Additionally, we are extremely concerned about the likely
harm to companies and their shareholders from disclosing proprietary information to
financially interested parties and potential adversaries, particularly with respect to
tax, legal, and environmental reserves.
Needs of Users
Companies are required by existing disclosure rules to provide information about
material events and transactions affecting long-lived assets and loss contingencies,
as well as information about significant accounting policies and assumptions related
to these items. The Commission got it right in 1994, when it rescinded its previously
required detailed fixed asset schedules based upon the overlap with other existing
disclosure requirements, and we do not support the Commission’s current proposal
to reinstate and expand the scope of such schedules. The Commission’s reasoning
in 1994 is equally valid today:
Although comments from financial analysts were generally opposed to
elimination of these schedules, most commenters supported the proposal,
citing the cost of their preparation and audit, and their limited
Mr. Jonathan G. Katz
April 19, 2000
Page 3
usefulness…The Commission believes that adequate quantitative disclosure
regarding property, plant and equipment is elicited by Accounting Principle
Board Opinion No. 12… which requires disclosure of total depreciation
expense for each period and the balances of major classes of depreciable
assets. Where the age of capital assets may be indicative of increasing
maintenance and replacement budgets, the registrant would be expected to
disclose the material reasonably likely effects on operating trends, capital
expenditures and liquidity pursuant to Item 303 of Regulation S-K.1
APB Opinion No. 12 remains in effect today, and there are similar overlaps with
respect to existing disclosure requirements for other long-lived assets and loss
contingencies that would also be covered by the Commission’s current proposal.
For example, APB Opinion No. 17, Intangible Assets, requires disclosure of the
method and period of amortization of an entity’s intangible assets; FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, requires disclosures about impaired assets; SEC Staff
Accounting Bulletin No. 100, Restructuring and Impairment Charges requires
disclosures about impaired assets and restructuring reserves; and APB Opinion No.
20, Accounting Changes requires disclosures about changes in estimates. Other
disclosures about loss contingencies are required by FASB Statement No. 5,
Accounting for Contingencies, as well as by the numerous accounting standards
governing other specific categories of loss contingencies and allowances.
Furthermore, the Commission’s own rules for Management’s Discussion and
Analysis require disclosure about material trends, risks and uncertainties. The
required statement of cash flows also provides significant details about both cash
and non-cash transactions affecting these balances.
We are not aware of widespread or significant lapses in compliance with the current
disclosure requirements. However, enhanced compliance with the existing
disclosure rules would be vastly preferable to more costly, detailed, tabular
disclosures that would encompass both material and immaterial items. If the
Commission believes that the existing disclosure rules are not being followed, then
the solution is improved compliance and enforcement, not more rules.
In support of reinstating the fixed asset schedule, the Commission references an
October 19, 1998 letter from the Association for Investment Management and
Research (“AIMR”). In their letter, the AIMR quotes an analyst who states, “financial
reporting standards must cast their net widely…In order for critical data to be
available when needed, they must be required even when such data are not
especially useful.”2 In a world of finite resources, disclosures that are “not
1
Release 33-7118, Financial Statements of Significant Foreign Equity Investees and Acquired
Foreign Businesses of Domestic Issuers and Financial Schedules (December 13, 1994 [59 FR65632]
2 Letter to Lynn Turner, Chief Accountant, Securities and Exchange Commission from the Financial
Accounting Policy Committee of the Association for Investment Management and Research dated
October 19, 1998.
Mr. Jonathan G. Katz
April 19, 2000
Page 4
especially useful” should be weeded out, not expanded. While we respect the views
of the analyst community, we believe that the Commission’s proposed additional
disclosure requirements for long-lived assets and loss contingencies fall into the
category of information that is “not especially useful.” From a cost/benefit
perspective, these additional disclosures cannot be justified.
Costs of Collecting and Maintaining Data
In estimating the costs of collecting and maintaining the data required to provide the
proposed disclosures, the Commission indicates that it relied on information
provided by a single diversified, multi-division registrant. As illustrated in Table 1,
we took the Commission’s estimates, assumed that the disclosure requirements
would be in place for at least ten years, and discounted using a 7% interest rate.
This produced an estimated compliance cost of approximately $87,000 per registrant
and a grand total of approximately $250,000,000 across the Commission’s estimate
of 2,900 affected registrants. Whatever perceived benefits might be derived from
the Commission’s proposal, they do not justify imposing a $250,000,000 cost on
U.S. shareholders.
This large figure is based on the cost estimates provided in the Commission’s own
proposal. However, many CCR members have indicated that the start-up and
ongoing annual costs of implementing the proposal will be significantly greater than
the Commission’s estimates. This is because the amount of detailed information that
a diversified, multi-divisional company doing business in multiple locations would be
required to capture under the Commission’s proposal is far in excess of what is
currently needed to manage the business or comply with current disclosure
requirements. Although the information to be provided is readily available from
books and records maintained within the organization taken as a whole, the
organizational level at which the detailed information is maintained can significantly
affect the cost of retrieving, analyzing and summarizing the information. The review
and analysis work that would have to be performed at each consolidating level of the
organization would accumulate rapidly, with substantial cost.
Potential Harm from Disclosing Proprietary Information
CCR members are extremely concerned about the harm to companies and their
shareholders that would likely result from disclosing proprietary information to
financially interested parties and potential adversaries, particularly with respect to
tax, legal, environmental, and similar loss contingencies.
As noted above, companies are required by existing disclosure rules to provide
information about material events and transactions affecting loss contingencies, as
well as information about significant accounting policies and assumptions related to
Mr. Jonathan G. Katz
April 19, 2000
Page 5
these items. The Commission’s proposal would go far beyond those existing
requirements by requiring detailed information about movements in virtually every
loss accrual account.
The incremental information that would be provided under the Commission’s
proposal would be immaterial from the perspective of the shareholder, but could be
very significant to financially interested parties who could take advantage of
disclosed information to strengthen their negotiating position versus the company.
For example, a loss accrued by a company could be seen by adversaries as an
admission of liability or the starting point for settlement negotiations. In addition,
there are many lawsuits brought against companies for nuisance value or simply to
induce settlements, many of which are without merit. The Commission’s proposal
could increase the incidence of such lawsuits by providing a needless level of
detailed disclosures and “red flags” upon which opponents could pounce.
In our view, it will not be practicable for companies to disclose gross movements in
individual categories of reserves without giving away proprietary information or
increasing the risk of nuisance suits. Furthermore, we do not see how the
information that would be required under the proposal could be described at an
aggregate level in any meaningful way. Disclosed increases or decreases in legal,
tax or environmental reserves could reveal a company’s negotiating plan, litigation
strategy, or tax return position to financially interested parties who could benefit from
such disclosure at the expense of the company’s shareholders. This type of
information would normally be protected by attorney-client privilege. Considerable
harm to the company could result from these disclosures.
The Commission’s proposal creates a very unlevel playing field, by requiring one
side to reveal its hand while the other side does not. In addition, details on inventory
and warranty allowances and other disclosures of proprietary information will unfairly
benefit U.S. and non-U.S. competitors who are not subject to these disclosure
requirements.
We are in no way suggesting that material information should be withheld from
shareholders. Our concern is that the level of detail proposed by the Commission
goes far beyond those needs, to the extent of potential harm to the company and its
shareholders. The Commission’s proposal does not document a widespread
demand for these detailed disclosures, and existing disclosure requirements are
already in place to ensure that all material items are disclosed. In view of the
concerns expressed above, we do not see a strong argument for additional
disclosures in this area.
Mr. Jonathan G. Katz
April 19, 2000
Page 6
Responses to Specific Questions
Our comments on the specific questions raised by the Commission are set out
below.
1. Are there other specific loss accrual or valuation accounts that should be
added to the list of accounts identified within proposed Item 302(c)?
No. In fact, we do not believe that the Commission should combine such disparate
types of loss accruals into a single disclosure requirement. It would be more
sensible for disclosures to be tailored to the underlying nature of the loss accrual,
rather than a “one-size-fits-all” approach.
2. Should specific percentage tests be used to trigger specific account
disclosures within the proposed rules? For example, should disclosure of
loss accrual account activity be required only when the balance sheet item
and change during the period exceeds a certain pre-established numerical
threshold (for example, 5% of total assets or 3% of pretax income)? If so,
what is an appropriate threshold?
Yes, a materiality threshold should be provided. SEC Staff Accounting Bulletin No.
99, Materiality, provides guidelines for assessing materiality that do not depend on
numerical thresholds. However, given the broad scope of the Commission’s
proposal, we believe that a quantitative threshold is necessary to identify those items
that are sufficiently material to warrant the level of detailed disclosure that would be
required.
The proposal indicates that the disclosure about long-live assets would be required
to support the account balances of any long-lived asset separately captioned on the
balance sheet. This builds on the existing Regulation S-X requirements for separate
disclosure of asset and liability categories that exceed 5% of total assets and
liabilities, respectively. Similarly, we believe that any new disclosure requirements
for loss accrual and valuation accounts should be limited to individual categories
which exceed 5% of total liabilities.
3. Should the placement of the proposed data be moved within MD&A or to
some other section of the filing to enhance the prominence of the
disclosures?
In many cases, existing GAAP or SEC disclosure requirements will dictate where
these disclosures should be located. The Commission’s proposal should not disturb
these existing disclosures or require redundant disclosures. With respect to
incremental disclosures that might be required solely in response to the
Commission’s proposal, we agree with the proposal that such disclosures should be
Mr. Jonathan G. Katz
April 19, 2000
Page 7
provided as supplementary financial information outside of the audited financial
statements and MD&A.
4. Should presentation of the proposed data be limited to the Form 10-K?
Yes. It is our understanding that, under current SEC rules, disclosures of
Supplementary Financial Information must be included in the Annual Report to
Shareholders. If the Commission imposes additional disclosure requirements in this
area, presentation should be limited to the Form 10-K and not extended to the
Annual Report.
5. Should the disclosure requirements be restricted to those registrants that
exceed a certain size or meet some other threshold? If so, what would be
the appropriate threshold?
We do not believe that the burden imposed by the proposal would fall
disproportionately on smaller companies. Therefore we do not believe that a size
threshold would be appropriate.
6. Are there circumstances where registrants may appropriately exclude
disclosure about loss accruals related to litigation because of concerns
about confidentiality while still conforming with GAAP? If so, please
describe such circumstances in detail.
Please see our comments above under “Potential Harm from Disclosing Proprietary
Information.” As noted therein, our concerns are not limited to litigation reserves but
extend to other types of loss contingencies including tax and environmental
reserves.
7. Should the disclosures concerning valuation and loss accrual account
activity be required when interim financial statements are presented?
No. Our concerns about the cost/benefit deficiencies of the proposal would be
multiplied if the information was required to be disclosed more frequently than on an
annual basis.
8. Should the disclosures concerning changes in property, plant, equipment,
and intangible assets and related accumulated depreciation, depletion, and
amortization be required when interim financial statements are presented?
Please see response to Question 7 above.
********************
Mr. Jonathan G. Katz
April 19, 2000
Page 8
In addition to the comments noted above, we are concerned that the Commission’s
proposal does not include a proposed effective date for the new disclosure
requirements. In our view, the information that would be required under the proposal
is not currently available, and considerable lead time would be required to institute
the necessary data capture processes and procedures. In addition, it would not be
practicable to go back and capture data for prior periods. Accordingly, while we do
not support the proposed disclosure requirements, we encourage the Commission to
make any new disclosures effective on a prospective basis, with adequate lead-time
for modifying information systems. In our view, the additional disclosure
requirements arising from the Commission’s proposal could not realistically be
implemented earlier than for year 2002 reporting.
We would be pleased to discuss our views further with the Commission.
Sincerely,
Philip D. Ameen
Philip D. Ameen
Chairman
FEI Committee on Corporate Reporting
Attachment
TABLE 1
Analysis of SEC Cost Estimates for Supplementary Financial Disclosures
Year
1
2
3
4
5
6
7
8
9
10
NPV @ 7%
Hours
247 $
17
17
17
17
17
17
17
17
17
Reserves
Cost
30,875
2,125
2,125
2,125
2,125
2,125
2,125
2,125
2,125
2,125
Hours
133 $
35
35
35
35
35
35
35
35
35
Assets
Cost
16,625
4,375
4,375
4,375
4,375
4,375
4,375
4,375
4,375
4,375
Total Per Registrant
Hours
Cost
380 $
52
52
52
52
52
52
52
52
52
47,500
6,500
6,500
6,500
6,500
6,500
6,500
6,500
6,500
6,500
87,079
Total for 2,900 Registrants
Hours
Cost
1,102,000
150,800
150,800
150,800
150,800
150,800
150,800
150,800
150,800
150,800
$
137,750,000
18,850,000
18,850,000
18,850,000
18,850,000
18,850,000
18,850,000
18,850,000
18,850,000
18,850,000
252,527,690