[Federal Register Volume 63, Number 26 (Monday, February 9, 1998)]
[Rules and Regulations]
[Pages 6474-6476]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3121]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 211

[Release No. SAB 98]


Staff Accounting Bulletin No. 98

AGENCY: Securities and Exchange Commission.

ACTION: Publication of Staff Accounting Bulletin.

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SUMMARY: This staff accounting bulletin revises the views of the staff 
contained in certain topics of the staff accounting bulletin series to 
be consistent with the provisions of certain accounting standards 
recently adopted by the Financial Accounting Standards Board. Topics 
include: Topic 1.B--Allocation of Expenses and Related Disclosure in 
Financial Statements of Subsidiaries, Divisions or Lesser Business 
Components of Another Entity; Topic 3.A--Convertible Securities; Topic 
4.D--Earnings Per Share Computations in an Initial Public Offering; 
Topic 6.B.1--Income or Loss Applicable to Common Stock; and Topic 
6.G.1--Selected Quarterly Financial Data (Item 302(a) of Regulation S-
K).

EFFECTIVE DATE: February 3, 1998.

FOR FURTHER INFORMATION CONTACT: Cody L. Smith, Office of the Chief 
Accountant (202-942-4400), Kenneth T. Marceron, Division of Corporation 
Finance (202-942-2960), Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The statements in staff accounting bulletins 
are not rules or interpretations of the Commission, nor are they 
published as bearing the Commission's official approval. They represent 
interpretations and practices followed by the Division of Corporation 
Finance and the Office of the Chief Accountant in administering the 
disclosure requirements of the Federal securities laws.

    Dated: February 3, 1998.
Margaret H. McFarland,
Deputy Secretary.

PART 211--[AMENDED]

    Accordingly, Part 211 of Title 17 of the Code of Federal 
Regulations is amended by adding Staff Accounting Bulletin No. 98 to 
the table found in Subpart B.

Staff Accounting Bulletin No. 98

    The staff hereby amends the following in the Staff Accounting 
Bulletin Series:
    (a) Topics 1.B.2 and 1.B.3, regarding the allocation of expenses 
and related

[[Page 6475]]

disclosure in financial statements of subsidiaries, divisions or lesser 
business components of another entity to eliminate instructions to 
delete historical EPS in the entity's financial statements;
    (b) Topic 3.A, regarding the presentation of supplemental earnings 
per share in a convertible security registration to remove the 
reference to APB Opinion No. 15, Earnings Per Share, and remind 
registrants of the pro forma requirements of Regulation S-X;
    (c) Topic 4.D, regarding the computation of earnings per share in 
an initial public offering (IPO) to revise instructions regarding the 
dilutive effects of stock issued for consideration below the IPO price 
or options and warrants to purchase common stock with exercise prices 
below the IPO price. New guidance highlights the treatment that should 
be given to the dilutive effect of common stock or options and warrants 
to purchase common stock issued for nominal consideration (referred to 
as nominal issuances);
    (d) Topic 6.B.1, regarding the presentation of income or loss 
applicable to common stock to clarify the Topic's continuing 
applicability to all registrants and to suggest a presentation format 
for registrants that elect to present a single statement of income and 
comprehensive income; and
    (e) Topic 6.G.1, regarding selected quarterly financial data to 
replace the terms ``primary'' and ``fully diluted'' with ``basic'' and 
``diluted.''

TOPIC 1: FINANCIAL STATEMENTS

* * * * *
    B. Allocation of expenses and related disclosure in financial 
statements of subsidiaries, divisions or lesser business components of 
another entity
* * * * *
    2. Pro forma financial statements and earnings per share
    Question: What disclosure should be made if the registrant's 
historical financial statements are not indicative of the ongoing 
entity (e.g., tax or other cost sharing agreements will be terminated 
or revised)?
    Interpretive Response: The registration statement should include 
pro forma financial information that is in accordance with Article 11 
of Regulation S-X and reflects the impact of terminated or revised cost 
sharing agreements and other significant changes.
    3. Other matters
    Question: What is the staff's position with respect to dividends 
declared by the subsidiary subsequent to the balance sheet date?
    Interpretive Response: The staff believes that such dividends 
either be given retroactive effect in the balance sheet with 
appropriate footnote disclosure, or reflected in a pro forma balance 
sheet. In addition, when the dividends are to be paid from the proceeds 
of the offering, the staff believes it is appropriate to include pro 
forma per share data (for the latest year and interim period only) 
giving effect to the number of shares whose proceeds will be used to 
pay the dividend. A similar presentation is appropriate when dividends 
exceed earnings in the current year, even though the stated use of 
proceeds is other than for the payment of dividends. In these 
situations, pro forma per share data should give effect to the increase 
in the number of shares which, when multiplied by the offering price, 
would be sufficient to replace the capital in excess of earnings being 
withdrawn.

TOPIC 3: SENIOR SECURITIES

* * * * *
    A. Convertible Securities
    Facts: Company B proposes to file a registration statement covering 
convertible securities.
    Question: In registration, what consideration should be given to 
the dilutive effects of convertible securities?
    Interpretive Response: In a registration statement of convertible 
preferred stock or debentures, the staff believes that disclosure of 
pro forma earnings per share (EPS) is important to investors when the 
proceeds will be used to extinguish existing preferred stock or debt 
and such extinguishments will have a material effect on EPS. That 
disclosure is required by Article 11, Rule 11-01(a)(8) and Rule 11-
02(a)(7) of Regulation S-X, if material.

TOPIC 4: EQUITY ACCOUNTS

* * * * *
    D. Earnings Per Share Computations in an Initial Public Offering
    Facts: A registration statement is filed in connection with an 
initial public offering (IPO) of common stock. During the periods 
covered by income statements that are included in the registration 
statement or in the subsequent period prior to the effective date of 
the IPO, the registrant issued for nominal consideration \1\ common 
stock, options or warrants to purchase common stock or other 
potentially dilutive instruments (collectively, referred to hereafter 
as ``nominal issuances'').
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    \1\ Whether a security was issued for nominal consideration 
should be determined based on facts and circumstances. The 
consideration the entity receives for the issuance should be 
compared to the security's fair value to determine whether the 
consideration is nominal.
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    Prior to the effective date of Statement of Financial Accounting 
Standards No. 128 (SFAS 128), Earnings per Share, the staff believed 
that certain stock and warrants \2\ should be treated as outstanding 
for all reporting periods in the same manner as shares issued in a 
stock split or a recapitalization effected contemporaneously with the 
IPO. The dilutive effect of such stock and warrants could be measured 
using the treasury stock method.
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    \2\ The stock and warrants encompassed by the prior guidance 
were those issuances of common stock at prices below the IPO price 
and options or warrants with exercise prices below the IPO price 
that were issued within a one-year period prior to the initial 
filing of the registration statement relating to the IPO through the 
registration statement's effective date.
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    Question 1: Does the staff continue to believe that such treatment 
for stock and warrants would be appropriate upon adoption of SFAS 128?
    Interpretive Response: Generally, no. Historical EPS should be 
prepared and presented in conformity with SFAS 128.
    In applying the requirements of SFAS 128, the staff believes that 
nominal issuances are recapitalizations in substance. In computing 
basic EPS for the periods covered by income statements included in the 
registration statement and in subsequent filings with the SEC, nominal 
issuances of common stock should be reflected in a manner similar to a 
stock split or stock dividend for which retroactive treatment is 
required by paragraph 54 of SFAS 128. In computing diluted EPS for such 
periods, nominal issuances of common stock and potential common stock 
\3\ should be reflected in a manner similar to a stock split or stock 
dividend.
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    \3\ SFAS 128 defines potential common stock as ``a security or 
other contract that may entitle its holder to obtain common stock 
during the reporting period or after the end of the reporting 
period.''
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    Registrants are reminded that disclosure about materially dilutive 
issuances is required outside the financial statements. Item 506 of 
Regulation S-K requires tabular presentation of the dilutive effects of 
those issuances on net tangible book value. The effects of dilutive 
issuances on the registrant's liquidity, capital resources and results 
of operations should be addressed in Management's Discussion and 
Analysis.
    Question 2: Does reflecting nominal issuances as outstanding for 
all historical periods in the computation of earnings per share alter 
the registrant's responsibility to determine whether compensation 
expense must be recognized for such issuances to employees?

[[Page 6476]]

    Interpretive Response: No. Registrants must follow generally 
accepted accounting principles in determining whether the recognition 
of compensation expense for any issuances of equity instruments to 
employees is necessary.\4\ Reflecting nominal issuances as outstanding 
for all historical periods in the computation of earnings per share 
does not alter that existing responsibility under GAAP.
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    \4\ As prescribed by Accounting Principles Board Opinion No. 25, 
Accounting for Stock Issued to Employees, and Statement of Financial 
Accounting Standards No. 123, Accounting for Stock-Based 
Compensation, and related interpretations.
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TOPIC 6: INTERPRETATIONS OF ACCOUNTING SERIES RELEASES

* * * * *
    B. Accounting Series Release No. 280--General Revision of 
Regulation S-X
    1. INCOME OR LOSS APPLICABLE TO COMMON STOCK
    Facts: A registrant has various classes of preferred stock. 
Dividends on those preferred stocks and accretions of their carrying 
amounts cause income applicable to common stock to be less than 
reported net income.
    Question: In ASR No. 280, the Commission stated that although it 
had determined not to mandate presentation of income or loss applicable 
to common stock in all cases, it believes that disclosure of that 
amount is of value in certain situations. In what situations should the 
amount be reported, where should it be reported, and how should it be 
computed?
    Interpretive Response: Income or loss applicable to common stock 
should be reported on the face of the income statement \1\ when it is 
materially different in quantitative terms from reported net income or 
loss \2\ or when it is indicative of significant trends or other 
qualitative considerations. The amount to be reported should be 
computed for each period as net income or loss less: (a) dividends on 
preferred stock, including undeclared or unpaid dividends if 
cumulative; and (b) periodic increases in the carrying amounts of 
instruments reported as redeemable preferred stock (as discussed in 
Topic 3.C) or increasing rate preferred stock (as discussed in Topic 
5.Q).
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    \1\ If a registrant elects to follow the encouraged disclosure 
discussed in paragraph 23 of Statement of Financial Accounting 
Standards No. 130, Reporting Comprehensive Income, and displays the 
components of other comprehensive income and the total for 
comprehensive income using a one-statement approach, the registrant 
must continue to follow the guidance set forth in Topic 6.B.1. One 
approach may be to provide a separate reconciliation of net income 
to income available to common stock below comprehensive income 
reported on a statement of income and comprehensive income.
    \2\ The assessment of materiality is the responsibility of each 
registrant. However, absent concerns about trends or other 
qualitative considerations, the staff generally will not insist on 
the reporting of income or loss applicable to common stock if the 
amount differs from net income or loss by less than ten percent.
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TOPIC 6: INTERPRETATION OF ACCOUNTING SERIES RELEASES

* * * * *
    G. ACCOUNTING SERIES RELEASE Nos. 177 and 286--Relating to 
Amendments to Form 10-Q, Regulation S-K, and Regulation S-X Regarding 
Interim Financial Reporting
* * ** *
    1. SELECTED QUARTERLY FINANCIAL DATA (ITEM 302(a) OF REGULATION S-
K)
* * * * *
    a. Disclosure of Selected Quarterly Financial Data
* * * * *
    Question 4: What is meant by ``per-share data based upon such 
income'' as used in Item 302(a)(1)?
    Interpretive Response: Item 302(a)(1) only requires disclosure of 
per share amounts for income before extraordinary items and cumulative 
effect of a change in accounting. It is expected that when per share 
data is calculated for each full quarter based upon such income, the 
per share amounts would be both basic and diluted. Although it is not 
required by the rule, there are many instances where it would be 
desirable to disclose other per share figures such as net earnings per 
share and the per share effect of extraordinary items also. Where such 
disclosure is made, per share data should be both basic and diluted.

[FR Doc. 98-3121 Filed 2-6-98; 8:45 am]
BILLING CODE 8010-01-P