[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