[Federal Register Volume 64, Number 7 (Tuesday, January 12, 1999)]
[Rules and Regulations]
[Pages 1728-1735]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-589]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, 240 and 249

[Release Nos. 33-7620; 34-40884; FR54; File No. S7-17-98]
RIN 3235-AH43


Segment Reporting

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

-----------------------------------------------------------------------

SUMMARY: The Commission today is adopting technical amendments to 
conform our reporting requirements with the Financial Accounting 
Standards Board's (``FASB'') Statement of Financial Accounting 
Standards (``SFAS'') No. 131, governing disclosures relating to a 
business enterprise's operating segments.

DATES: Effective Date: The rules will become effective on February 11, 
1999. Compliance Date: Issuers may voluntarily comply with the revised 
rules before the effective date.

FOR FURTHER INFORMATION CONTACT: James R. Budge, Special Counsel, 
Division of Corporation Finance, at (202) 942-2950, Louise M. Dorsey, 
Assistant Chief Accountant, Division of Corporation Finance, at (202) 
942-2960, or Robert F. Lavery, Assistant Chief Accountant, Office of 
the Chief Accountant, at (202) 942-4400, U.S. Securities and Exchange 
Commission, 450 Fifth Street, NW, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission today adopts technical 
amendments to Rules 3-03 \1\ and 12-16 \2\ of Regulation S-X,\3\ Items 
101 \4\ and 102 \5\ of Regulation S-K,\6\ and Schedule 14A \7\ in order 
to conform our reporting requirements with the FASB's recently adopted 
SFAS No. 131. We also are making consistent changes to Form 20-F \8\ 
and to Section 501.06 of the Codification of Financial Reporting 
Policies (``CFRP'').
---------------------------------------------------------------------------

    \1\ 17 CFR 210.3-03.
    \2\ 17 CFR 210.12-16.
    \3\ 17 CFR Part 210.
    \4\ 17 CFR 229.101.
    \5\ 17 CFR 229.102.
    \6\ 17 CFR Part 229.
    \7\ 17 CFR 240.14a-101.
    \8\ 17 CFR 249.220f.
---------------------------------------------------------------------------

I. Background

    In 1976, the FASB issued SFAS No. 14, ``Financial Reporting for 
Segments of a Business Enterprise.'' SFAS No. 14 required corporations 
to disclose certain financial information by ``industry segment'' as 
defined in the statement and by geographic area. In December 1977, we 
adopted amendments to our rules to integrate the information to be 
furnished under SFAS No. 14 with the narrative and financial 
disclosures required in various disclosure forms.\9\
---------------------------------------------------------------------------

    \9\ Release No. 33-5893 (December 23, 1997) (42 FR 65554).
---------------------------------------------------------------------------

    After extensive deliberations, including solicitation of public 
comments, the FASB adopted a number of fundamental changes to its 
standards for segment reporting by publishing SFAS No. 131 in June of 
1997. SFAS No. 131 superseded SFAS No. 14 and established standards for 
reporting information about ``operating segments'' of an enterprise 
rather than following the ``industry segment'' standards that were in 
place previously.
    On June 25, 1998, the Commission proposed for comment a number of 
technical changes to its reporting requirements to accommodate these 
modifications.\10\ Twelve commenters responded to the solicitation for 
public views on the proposed approach. Generally, the commenters were 
supportive of our efforts to conform our rules with the FASB standards. 
We have determined to adopt the rules essentially as proposed. We 
believe that this action is in keeping with our long-standing policy to 
look to the private sector for the promulgation of generally accepted 
accounting principles (``GAAP'').\11\ It also furthers our goal of 
integrating existing accounting information into the narrative 
disclosure in documents mandated by the federal securities laws. This 
release explains the new reporting requirements.
---------------------------------------------------------------------------

    \10\ Release No. 33-7549 (June 25, 1998) (63 FR 35886).
    \11\ Section 101 of the Codification of Financial Reporting 
Policies. The Commission initially issued its administrative policy 
concerning financial statements in 1938 and updated it in 1973 to 
recognize the establishment of the FASB.
---------------------------------------------------------------------------

II. Rule Changes

A. Operating Segment Disclosure

    SFAS No. 14 required, and the Commission's rules and forms have 
required, disclosure along ``industry segment'' lines. An ``industry 
segment,'' as defined by SFAS No. 14, was ``a component of an 
enterprise engaged in providing a product or service or a group of 
related products and services primarily to unaffiliated customers * * * 
for a profit.'' \12\ Recognizing that businesses often evaluate their 
operations using criteria not necessarily related to the products or 
services offered to the public, the FASB replaced the industry segment 
reporting standard with one that requires businesses to

[[Page 1729]]

report financial information on the basis of ``operating segments.'' 
\13\ Under the new accounting standard, an operating segment is a 
component of a business, for which separate financial information is 
available, that management regularly evaluates in deciding how to 
allocate resources and assess performance.\14\ Specifically, SFAS No. 
131 states that an operating segment is a component of a business:
---------------------------------------------------------------------------

    \12\ SFAS No. 14, para. 10.a.
    \13\ We use the proposed terms ``segment'' and ``segments'' as 
well as the phrase ``segments as defined by generally accepted 
accounting principles'' and similar terms or phrases in the rules 
rather than follow the accounting standard's nomenclature of 
``operating segment.'' Registrants should construe these terms to 
mean a component of a business for which GAAP requires separate 
reporting in financial statements.
    \14\ We refer to this below as the ``management approach.''

     That engages in activities from which it may earn revenues 
and incur expenses (including revenues and expenses relating to 
transactions with other components of the same business);
     Whose operating results are regularly reviewed by the 
enterprise's ``chief operating decision maker'' \15\ to make decisions 
about resources to be allocated to the segment and assess its 
performance; and
---------------------------------------------------------------------------

    \15\ The term ``chief operating decision maker'' identifies a 
function, not a person with that title. This person's function is to 
allocate resources to and assess the performance of the company's 
segments. A chief operating decision maker frequently might be a 
company's chief executive officer or chief operating officer, but it 
also could be a group of decision makers, for example, the company's 
president, executive vice presidents and others.
---------------------------------------------------------------------------

     For which discrete financial information is available.

    Under SFAS No. 131, a company generally must report separately 
information about an operating segment that meets any of the following 
thresholds:

     Its reported revenue, including both sales to external 
customers and intersegment sales and transfers, is 10 percent or more 
of the combined revenue of all reported operating segments, whether 
generated inside or outside of the company; \16\
---------------------------------------------------------------------------

    \16\ The FASB has proposed eliminating the word ``reported'' 
from the phrase ``all reported operating segments.'' See para. 
7.t.(1)(a) of Proposed Statement of Financial Accounting Standards--
Amendment to FASB Statement No. 66, Rescission of FASB Statement No. 
75, and Technical Corrections, File Reference No. 190-A, dated 
October 13, 1998 (``Exposure Draft'').
---------------------------------------------------------------------------

     Its reported profit or loss is 10 percent or more of the 
greater of: (1) the combined reported profit of all operating segments 
that did not report a loss or (2) the combined reported loss of all 
operating segments that did report a loss; or
     Its assets are 10 percent or more of the combined assets 
of all operating segments.\17\
---------------------------------------------------------------------------

    \17\ SFAS No. 131, para. 18.

    SFAS No. 131 not only changed how a business should identify its 
segments, it also changed the types of information to be disclosed for 
each segment. SFAS No. 14 required an issuer to report its revenues, 
operating profit (loss),\18\ and identifiable assets \19\ if a 
segment's revenues, operating profit, or identifiable assets were 10% 
or more of all the industry segments' revenues, operating profits, or 
assets, respectively. Issuers were to reconcile these three items to 
the consolidated amounts in the financial statements. In addition, SFAS 
No. 14 required issuers to report for each segment depreciation, 
depletion and amortization, capital expenditures, equity in net income 
of unconsolidated subsidiary or equity-method investee, and the effect 
of a change in accounting principle on operating profit (loss).
---------------------------------------------------------------------------

    \18\ SFAS No. 14 specifically defined segment operating profit 
to be revenues less all operating expenses, which included 
depreciation and amortization. An issuer was to allocate operating 
expenses that were not directly traceable to a particular segment on 
a reasonable basis among the segments for whose benefit the expenses 
were incurred. The standard required an explanation of the amount 
and nature of any unusual or nonrecurring items added or deducted in 
determining operating profit of a segment. In addition, the standard 
defined any restructuring charges related to a specific segment as 
operating expenses of that segment and issuers were to deduct these 
charges in calculating that segment's operating profit or loss.
    SFAS No. 14 excluded certain items in calculating segment 
profit. They were: General corporate expenses; interest expense 
(except included for financial institutions, insurance and leasing 
operations); equity in income (loss) of unconsolidated subsidiaries 
or equity investees; discontinued operations; extraordinary items; 
and, the effects of changes in accounting.
    \19\ Segment assets included all tangible and intangible assets 
used by the segment, including goodwill, other intangibles, and 
deferred income and expenses.
---------------------------------------------------------------------------

    By contrast, SFAS No. 131 requires that a company provide for each 
reportable segment quantitative disclosure of two basic items--total 
assets and a measure of profit or loss. The new standard defines 
neither segment profit (loss) nor assets. Instead, management must 
determine what they will report based on how they operate their 
business. In addition, companies must disclose the following items for 
each segment, but only if management includes them in measuring segment 
profit or loss:

     Revenues from external customers;
     Revenues from other operating segments;
     Interest income; \20\
---------------------------------------------------------------------------

    \20\ Certain enterprises may report segment interest revenue net 
of interest expense. See SFAS No. 131, para. 27.
---------------------------------------------------------------------------

     Interest expense; \21\
---------------------------------------------------------------------------

    \21\ Id.
---------------------------------------------------------------------------

     Depreciation, depletion and amortization;
     Unusual items;
     Equity in net income of equity method investees;
     Income taxes;
     Extraordinary items; and
     Significant non-cash items other than depreciation, 
depletion, and amortization.

A company also must disclose for each segment the amount of investment 
in equity-method investees and total expenditures for additions to 
long-lived assets if it includes the amount in its determination of 
segment assets.\22\
---------------------------------------------------------------------------

    \22\ In its Exposure Draft, the FASB has proposed to modify the 
provisions of Paras. 27 and 28 of SFAS No. 131 to require companies 
to disclose the designated items for each segment, if included in 
the measure of profit or loss reviewed by or otherwise regularly 
provided to the chief operating decision maker. See Paras. 7.t.(3) 
and (4) of the Exposure Draft.
---------------------------------------------------------------------------

    The company must reconcile the totals of the reportable segments' 
amounts for all of these listed items to consolidated amounts. The FASB 
required more items to be disclosed per segment under the new standard 
because analysts have long wanted more information and most of the 
items required should be already available in management reports.
    Today we are amending our narrative and financial reporting rules 
to conform their segment reporting requirements to the FASB's revised 
accounting standards. We retain, however, certain requirements relating 
to disclosure of principal products or services and major customers 
that traditionally have differed from the FASB standards.\23\ We 
address below each of the rule changes.\24\
---------------------------------------------------------------------------

    \23\ See Sections II.A.1.a. and II.B.2.
    \24\ We are alsol adopting several technical amendments to 
update cross references to the new accounting standard. These 
revisions are Rules 3-03(e) and 12-16 of Regulation S-X and Item 
14(b)(2)(ii)(A)(3)(i) of Schedule 14A.
---------------------------------------------------------------------------

1. Description of Business--Item 101
    In the past, Regulation S-K Item 101(b)\25\ required issuers to 
disclose in the business description sections of documents that they 
filed with the Commission financial information based on GAAP's old 
``industry segment'' standard. Under revised Item 101, registrants will 
report segment information in accordance with GAAP's

[[Page 1730]]

new operating segment standard.\26\ Other changes to Item 101 follow.
---------------------------------------------------------------------------

    \25\ 17 CFR 229.101(b).
    \26\ We also retain the provisions allowing an issuer to refer 
to other sections of the registration statement that include the 
required information in order to avoid duplicative disclosure.
---------------------------------------------------------------------------

    a. Principal products or services. Item 101 historically has 
required a discussion, by segment, of the principal products produced 
and services rendered by the issuer, as well as the principal markets 
for and methods of distribution of each segment's products and 
services. On the other hand, GAAP required, and continues to require, 
disclosure of the types of products and services from which each 
segment derives its revenues, without reference to principal markets 
and methods of distribution. We continue to believe that information 
relating to principal markets and distribution methods is useful to 
investors; consequently we are retaining this provision.
    Item 101 further requires registrants to disclose the amounts of 
revenues from each class of similar products and services based on 
quantitative thresholds. Specifically, the issuer must state the amount 
or percentage of total revenue contributed by any class of similar 
products or services that accounted for 10 percent or more of 
consolidated revenue in any of the last three fiscal years, or if total 
revenue did not exceed $50,000,000 during any of those three fiscal 
years, 15 percent or more of consolidated revenue.\27\ SFAS No. 131 
requires disclosure of revenues from external customers for each 
product and service or each group of similar products and services 
unless it is impracticable to do so.
---------------------------------------------------------------------------

    \27\ 17 CFR 229.101(c)(1)(i).
---------------------------------------------------------------------------

    Because SFAS No. 131 requires disclosure regardless of amount, 
unless impracticable, it appears that the new accounting standard may 
require more disclosure than Item 101. Consequently, we sought public 
comment as to whether we needed to maintain the quantitative thresholds 
of Item 101(c)(1)(i). Several commenters advocated eliminating the 
quantitative thresholds and simply relying on the GAAP standard, which 
they said implied a materiality standard for minimum disclosure. We 
believe that SFAS No. 131 will result in disclosure of a range of 
amounts of products and services, depending upon how a company defines 
a class of related products or services. In fact, SFAS No. 131 may 
require disclosure of amounts below the existing 10% threshold of Item 
101. We believe a clearly stated minimum threshold for disclosure is 
desirable to eliminate any possible ambiguity that may result from 
attempts to apply an unwritten materiality threshold to small amounts 
of reportable revenues and is in keeping with the 10% threshold used to 
report segments under SFAS No. 131. We therefore have retained these 
Item 101 thresholds.
     b. Retroactive restatement of information. Item 101 has required 
issuers to restate retroactively previously reported financial 
information when there has been a material change in the way they group 
products or services into industry segments and that change affects the 
reported segment information. By contrast, SFAS No. 131 provides that 
if an issuer changes the structure of its internal organization in a 
manner that causes the composition of its reportable segments to 
change, the issuer must restate the corresponding information for 
earlier periods unless it is impracticable to do so.\28\ In the final 
rule we conform the language of Item 101 with the language of SFAS No. 
131 regarding when a company must restate information.
---------------------------------------------------------------------------

    \28\ See SFAS No. 131, para.34.
---------------------------------------------------------------------------

    c. Appendix A. Item 101 has included an appendix illustrating how 
to present the required industry segment information in tabular form. 
As proposed, we are eliminating this appendix and will rely instead on 
the SFAS No. 131 instructions governing how to present information 
relating to operating segments.
2. Property--Item 102
    Regulation S-K Item 102 requires descriptions of an issuer's 
principal plants, mines, and other ``materially important'' physical 
properties. Companies must identify the industry segment(s) that use 
the described properties.\29\ We are updating the item to reflect the 
new financial statement reporting requirements, as proposed.
---------------------------------------------------------------------------

    \29\ 17 CFR 229.102.

3. Management's Discussion & Analysis--Item 303
    Regulation S-K Item 303, which requires management to include a 
discussion and analysis of an issuer's financial condition and results 
of operations, provides:

    Where in the registrant's judgment a discussion of segment 
information or other subdivisions of the registrant's business would 
be appropriate to an understanding of such business, the discussion 
shall focus on each relevant, reportable segment or other 
subdivision of the business and on the registrant as a whole.\30\
---------------------------------------------------------------------------

    \30\ 17 CFR 229.303(a).
---------------------------------------------------------------------------

    The Commission historically has relied on the FASB's definition for 
segment disclosure in Management's Discussion and Analysis (``MD&A''). 
The Commission intends to continue to rely on the FASB's standards, 
thereby allowing issuers to use the management approach under SFAS No. 
131. No rule change is necessary. Under the language in Item 303, a 
multi-segment registrant preparing a full fiscal year MD&A should 
analyze revenues, profitability (or losses) and total assets of each 
significant segment in formulating a judgment as to whether a 
discussion of segment information is necessary to an understanding of 
the business.
    While we are not adopting changes to the language of Item 303, we 
are amending CFRP 501.06.a, which provides informal guidance about 
MD&A. The revisions conform the Codification's language with that of 
SFAS No. 131, and adds a new footnote, that reads:

    Where consistent with the registrant's internal management 
reports, SFAS No. 131 permits measures of segment profitability that 
differ from consolidated operating profit as defined by GAAP, or 
that exclude items included in the determination of the registrant's 
net income. Under SFAS No. 131, a registrant also must reconcile key 
segment amounts to the corresponding items reported in the 
consolidated financial statements in a note to the financial 
statements. Similarly, the Commission expects that the discussion of 
a segment whose profitability is determined on a basis that differs 
from consolidated operating profit as defined by GAAP or that 
excludes the effects of items attributable to the segment also will 
address the applicable reconciling items in Management's Discussion 
and Analysis. For example, if a material charge for restructuring or 
impairment relates to a specific segment, but is not included in 
management's measure of the segment's operating profit or loss, 
registrants would be expected to discuss in Management's Discussion 
and Analysis the applicable portion of the charge, the segment to 
which it relates and the circumstances of its incurrence. Likewise, 
the Commission expects that the effects of management's use of non-
GAAP measures, either on a consolidated or segment basis, will be 
explained in a balanced and informative manner, and the disclosure 
will include a discussion of how that segment's performance has 
affected the registrant's GAAP financial statements.

    Several commenters said that the footnote as proposed could be read 
to require registrants to reconcile the internal measure of segment 
profitability to pre-tax income from continuing operations by segment, 
which partial reconciliation by segment would go significantly beyond 
the requirements of SFAS No. 131. We have revised this language, as set 
out above,

[[Page 1731]]

to clarify that we are not requiring any incremental reconciliation of 
segment profit beyond what SFAS No. 131 requires. The note now makes it 
clear that we expect a narrative discussion in MD&A of items that 
affect the operating results of a segment but that are not included in 
segment operating profit defined by management.
4. Form 20-F
    Form 20-F is the registration statement and annual report for 
foreign private issuers promulgated under the Securities Exchange Act 
of 1934 (``Exchange Act'').\31\ Form 20-F has permitted a foreign 
registrant that presents financial statements according to United 
States GAAP to omit SFAS No. 14 disclosures if it provides the 
information required by Item 1 of the form. As proposed, we are 
replacing the reference to SFAS No. 14 with one to SFAS No. 131.\32\
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78a et seq.
    \32\ See Instruction 3 to Item 17 of Form 20-F. One commenter 
suggested also referencing International Accounting Standard 14 in 
this instruction. In light of the technical nature of this 
rulemaking, we believe that we should reexamine this suggestion in 
connection with substantive rulemaking projects involving this form 
that may arise in the future rather than adopt a provision that was 
not introduced in the proposals.
---------------------------------------------------------------------------

    Item 1 of Form 20-F requires registrants to disclose sales and 
revenues by categories of activity and geographical areas, as well as 
to discuss each category of activities that provide a disproportionate 
contribution to total ``operating profit'' of the registrant. We are 
not changing these requirements.

B. Other Reporting Requirements

    SFAS No. 14 also set standards for disclosure of certain 
enterprise-wide information where the issuer did not provide the 
information in the segment disclosure, and Regulation S-K reflected 
those standards. As we proposed, we are updating our rules to conform 
with the revised requirements of SFAS No., 131, as we explain below.
1. Geographic Areas
    Regulation S-K Item 101(d) has required an issuer to disclose for 
each of the issuer's last three fiscal years the amounts of revenue, 
operating profit or loss, and identifiable assets attributable to each 
of its geographic areas. It also required disclosure of the amount of 
export sales in the aggregate or by appropriate geographic area to 
which the issuer makes sales.
    Under SFAS No. 131, issuers must disclose revenues from external 
customers deriving from:

     The issuer's country of domicile;
     All foreign countries in total from which the issuer 
derives revenues; and
     An individual foreign country, if material.

An issuer also must disclose the basis for attributing revenues from 
external customers to individual countries.
    The new accounting standard also requires an issuer to disclose 
long-lived assets other than financial instruments, long-term customer 
relationships of a financial institution, mortgage and other servicing 
rights, deferred policy acquisition costs, as well as deferred tax 
assets located in its country of domicile and in all foreign countries, 
in total, in which the enterprise holds assets. If assets in an 
individual foreign country are material, an issuer must disclose those 
assets separately.\33\
---------------------------------------------------------------------------

    \33\See SFRAS No. 131, para.38. 
---------------------------------------------------------------------------

    We are revising our disclosure requirements to conform entirely 
with the new accounting standard. Consequently, issuers, even those 
whose segments are defined by geography, will continue to report 
designated information based on geographic areas, unless the 
information is already provided as part of the reportable operating 
segment information required by the accounting standards.\34\ 
Consistent with SFAS No. 131, the rules no longer will require 
companies to disclose geographic information relating to profitability, 
unless their segments are defined by geographic areas, or export sales.
---------------------------------------------------------------------------

    \34\ See SFAS No. 121 para.36. We are eliminating Appendix B of 
Regulation S-K Item 101. We also revise Instruction 2 to Item 101, 
which provides guidance about materiality analyses based on 
``interperiod comparability,'' to reflect the elimination of the 
requirements to disclose the quantitative geographic information 
once required by SFAS No. 14.
---------------------------------------------------------------------------

2. Major Customers
    Since the adoption of SFAS No. 14, GAAP has required disclosure of 
revenues from major customers.\35\ SFAS No. 131 now requires issuers to 
disclose the amount of revenues from each external customer that 
amounts to 10 percent or more of an enterprise's revenue as well as the 
identity of the segment(s) reporting the revenues. The accounting 
standards, however, have never required issuers to identify major 
customers. On the other hand, Regulation S-K Item 101 historically has 
required naming a major customer if sales to that customer equal 10 
percent or more of the issuer's consolidated revenues and if the loss 
of the customer would have a material adverse effect on the issuer and 
its subsidiaries.\36\ We continue to believe that the identity of major 
customers is material information to investors. This disclosure allows 
a reader to better assess risks associated with a particular customer, 
as well as material concentrations of revenues related to that 
customer. Consequently, we retain this Regulation S-K requirement, as 
we proposed.
---------------------------------------------------------------------------

    \35\ SFAS No. 30 amended SFAS No. 14 and retained this provision 
to disclose revenue from major customers.
    \36\ 17 CFR 229.101(a)(l)(vii).
---------------------------------------------------------------------------

C. Segment Information Added to Interim Reports

    GAAP historically has not required segment reporting in interim 
financial statements. In SFAS No. 131, the FASB changed its position. 
Under the new accounting standards, issuers must include in condensed 
financial statements for interim periods the following information 
about each reportable segment:

     Revenues from external customers;
     Intersegment revenues;
     A measure of segment profit or loss;
     Total assets for which there has been a material change 
from the amount disclosed in the last annual report;
     A description of differences from the last annual 
report in the basis of segmentation or in the basis of measurement 
of segment profit or loss; and
     A reconciliation of the total of the reportable 
segments' measures of profit or loss to the enterprise's 
consolidated income before income taxes, extraordinary items, 
discontinued operations, and the cumulative effect of changes in 
accounting principles.\37\
---------------------------------------------------------------------------

    \37\ The FASB also amended Accounting Principles Board Opinion 
No. 28 (``APB No. 28''), governing interim financial reporting, to 
reflect this change. The stated purpose of APB No. 28 is ``to 
clarify the application of accounting principles and reporting 
practices to interim financial information, including interim 
financial statements and summarized interim financial data of 
publicly traded companies issued for external reporting purposes.'' 
APB No. 28para.1.

    Thus, for the first time, issuers must disclose in their interim 
financial statements, including those filed with the Commission, 
condensed financial information about the segments they have chosen as 
reportable segments for purposes of their annual reports.\38\
---------------------------------------------------------------------------

    \38\ SFAS No. 131, para.33 currently states that segment 
information must be included in ``condensed financial statements of 
interim periods issued to shareholders.'' Since this language has 
caused some confusion relating to when segment information is 
required, the FASB has proposed, as a technical amendment, 
eliminating the words ``issued to shareholders'' to make it clear 
that the information is to be provided in all interim financial 
statements, regardless of whether delivered to shareholders. See 
Exosure Draft para.7.t.(5). We understood this to be the FASB's 
interpretation of this requirement before we issued the proposals 
and we will expect to see segment information in all interim 
financial statements filed with the Commission.
---------------------------------------------------------------------------

    SFAS No. 131 is effective for fiscal years beginning after December 
15,

[[Page 1732]]

1997.\39\ The FASB specified, however, that issuers need not apply the 
new provisions to interim financial statements in the initial year of 
application, but they must report comparative information for interim 
periods in that initial year in financial statements for interim 
periods in the second year of application.\40\ Consequently, through 
the Rules of General Application of Regulation S-X, which state that 
financial statements not prepared in accordance with GAAP will be 
presumed to be misleading or inaccurate,\41\ we expect to begin to see 
comparative segment information reported in filings made by companies 
whose fiscal years ended after December 15, 1998 in their filings 
relating to their first quarter ending after March 15, 1999. A calendar 
year end company would provide comparative interim segment information 
beginning in its March 31, 1999 interim financial statements. No 
changes to our rules are necessary to implement the FASB's changes in 
this regard.
---------------------------------------------------------------------------

    \39\ SFAS No. 131 para.40.
    \40\ Id.
    \41\ See 17 CFR 210.4-01(a)(1).
---------------------------------------------------------------------------

III. Certain Findings

    We requested comment on whether the proposed revisions, if adopted, 
would have an adverse effect on competition or would impose a burden on 
competition that is neither necessary nor appropriate in furthering the 
purposes of the Securities Act and the Exchange Act. No commenter 
addressed this issue. In complying with our responsibilities under 
section 23(a)(2) of the Exchange Act, we have determined that there 
will be no adverse effect on competition and that the rule changes will 
not impose any unnecessary burden on competition that is not 
appropriate in furthering the purposes of the federal securities 
laws.\42\
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    We also find that our action will promote efficiency, competition 
and capital formation by making our disclosure standards uniform with 
the accounting standards. This is in keeping with our responsibilities 
under section 2(b) of the Securities Act \43\ and section 3(f) of the 
Exchange Act.\44\
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 77b(b).
    \44\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

IV. Cost-Benefit Analysis

    We anticipate that these rule changes will not impose any new 
regulatory costs on registrants, since the changes simply conform our 
disclosure requirements with current accounting principles, to which 
registrants are already subject. To the contrary, registrants will 
benefit from the obligation to follow uniform standards rather than 
potentially conflicting ones.

V. Regulatory Flexibility Act Certification

    Pursuant to section 605(b) of the Regulatory Flexibility Act,\45\ 
Arthur Levitt, Chairman of the Commission, certified that the 
amendments proposed in this release would not, if adopted, have 
significant impact on a substantial number of small entities. The 
reason for this certification is that the amendments conform rules and 
forms to GAAP, as amended, to which registrants are already subject. We 
included the certification in the proposing release as Attachment A.
---------------------------------------------------------------------------

    \45\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

VI. Paperwork Reduction Act \46\
---------------------------------------------------------------------------

    \46\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    We determined that information collection burden hours will not 
change as a result of the technical amendments adopted today.

VII. Codification Update

    The ``Codification of Financial Report Policies'' announced in 
Financial Reporting Release No. 1 (April 15, 1982) (47 FR 21028) is 
updated to:
    1. Modify Section 501 by revising Section 501.06.a. to read as 
follows:

.a. Segment Analysis

    In formulating a judgment as to whether a discussion of segment 
information is necessary to an understanding of the business, a multi-
segment registrant preparing a full fiscal year MD&A should analyze 
revenues, profitability, and the cash needs of its significant 
segments.\47\ To the extent any segment contributes in a materially 
disproportionate way to those items, or where discussion on a 
consolidated basis would present an incomplete and misleading picture 
of the enterprise, segment discussion should be included. This may 
occur, for example, when there are legal or other restrictions upon the 
free flow of funds from one segment, subsidiary, or division of the 
registrant to others; when known trends, demands, commitments, event, 
or uncertainties within a segment are reasonably likely to have a 
material effect on the business as a whole; when the ability to dispose 
of identified assets of a segment may be relevant to the financial 
flexibility of the registrant; and in other circumstances in which the 
registrant concludes that segment analysis is appropriate to an 
understanding of its business.
    The following example illustrates segment disclosure for a 
manufacturer with two segments. The two segments contributed to segment 
profit amounts that were disproportionate to their respective revenues. 
The registrant discusses sales and segment profit trends, factors 
explaining such trends, and where applicable, known events that will 
impact future results of operations of the segment.
---------------------------------------------------------------------------

    \47\ Where consistent with the registrant's internal management 
reports, SFAS No. 131 permits measures of segment profitability that 
differ from consolidated operating profit as defined by GAAP, or 
that exclude items included in the determination of the registrant's 
net income. Under SFAS No. 131, a registrant also must reconcile key 
segment amounts to the corresponding items reported in the 
consolidated financial statements in a note to the financial 
statements. Similarly, the Commission expects that the discussion of 
a segment whose profitability is determined on a basis that differs 
from consolidated operating profit as defined by GAAP or that 
excludes the effects of items attributable to the segment also will 
address the applicable reconciling items in Management's Discussion 
and Analysis. For example, if a material charge for restructuring or 
impairment relates to a specific segment, but is not included in 
management's measure of the segment's operating profit or loss, 
registrants would be expected to discuss in Management's Discussion 
and Analysis the applicable portion of the charge, the segment to 
which it relates and the circumstances of its incurrence. Likewise, 
the Commission expects that the effects of management's use of non-
GAAP measures, either on a consolidated or segment basis, will be 
explained in a balanced and informative manner, and the disclosure 
will include a discussion of how that segment's performance has 
affected the registrant's GAAP financial statements.

[[Page 1733]]



                                              Net Sales by Segment
----------------------------------------------------------------------------------------------------------------
                                                          Year 3                    Year 2              Year 1
                                                ----------------------------------------------------------------
             Segments               ($ million)  Percent  of               Percent  of               Percent  of
                                                    total     ($ million)     total     ($ million)     total
----------------------------------------------------------------------------------------------------------------
Segment I.........................          585           55          479           53          420           48
Segment II........................          472           45          433           47          457           52
                                   -----------------------------------------------------------------------------
      Total Sales.................         1057          100          912          100          877          100
----------------------------------------------------------------------------------------------------------------

Year 3 vs. Year 2

    Segment I sales increased 22% in Year 3 over the Year 2 period. The 
increase included the effect of the acquisition of Corporation T. 
Excluding this acquisition, sales would have increased by 16% over Year 
2. Product Line A sales increased by 18% due to a 24% increase in 
selling prices, partially offset by lower shipments. Product Line B 
sales increased by 35% due to a 17% increase in selling prices and a 
15% increase in shipment volume.
    Segment II sales increased 9% due to a 12% increase in selling 
prices partly offset by a 3% reduction in shipment volume.

Year 2 vs. Year 1

    Segment I sales increased 14% in Year 2. Product Line A sales 
increased 22%, in spite of a slight reduction in shipments, because of 
a 23% increase in selling prices.
    Product Line B sales declined 5% due mainly to a 7% decrease in 
selling prices, partially offset by higher shipments.
    The 5% decline in Segment II sales reflected a 3% reduction in 
selling prices and a 2% decline in shipments.
    The substantial increases in selling prices of Product Line A 
during Year 3 and Year 2 occurred primarily because of heightened 
worldwide demand which exceeded the industry's production capacity. The 
Company expects these conditions to continue for the next several 
years. The Company anticipates that shipment volumes of Product Line A 
will increase as its new production facility reaches commercial 
production levels in Year 4.
    Segment II shipment volumes have declined during the past two years 
primarily because of the discontinuation of certain products that were 
marginally profitable and did not have significant growth potential.

                                                Profit by Segment
----------------------------------------------------------------------------------------------------------------
                                                          Year 3                    Year 2              Year 1
                                                ----------------------------------------------------------------
             Segments               ($ million)  Percent  of               Percent  of               Percent  of
                                                    total     ($ million)     total     ($ million)     total
----------------------------------------------------------------------------------------------------------------
Segment I.........................          126           75          108           68           67           55
Segment II........................           42           25           51           32           54           45
Segment Profit....................          168          100          159          100          121          100
----------------------------------------------------------------------------------------------------------------

Year 3 vs. Year 2

    Segment I profit was $18 million (17%) higher in Year 3 than in 
Year 2. This increase includes the effects of higher sales prices and 
slightly improved margins on Product Line A, higher shipments of 
Product Line B and the acquisition of Corporation T. Excluding this 
acquisition, Segment I profit would have been 11% higher than in Year 
2. Partially offsetting these increases are costs and expenses of $11 
million related to new plant start-up, slightly reduced margins on 
Product Line B and a $9 million increase in research and development 
expenses.
    Segment II profit declined $9 million (18%) due mainly to 
substantially higher costs in Year 3 resulting from a 23% increase in 
average raw material costs which could not be fully recovered through 
sales prices increases. The Company expects that Segment II margins 
will continue to decline, although at a lesser rate than in Year 3 as 
competitive factors limit the Company's ability to recover cost 
increases.

Year 2 vs. Year 1

    Segment I profit was $41 million (61%) higher in Year 2 than in 
Year 1. After excluding the effect of the $34 million non-recurring 
charge for the early retirement program in Year 1, Segment I profit in 
Year 2 was $18 million (27%) higher than in Year 1. This increase 
reflected higher prices and a corresponding 21% increase in margins on 
Product Line A, and a 17% increase in margins on Product Line B due 
primarily to costs reductions resulting from the early retirement 
program.
    Segment II profit declined about $3 million (6%) due mainly to 
lower selling prices and slightly reduced margins in Year 2.
    2. Replace paragraphs .01, .02 and .03 of Section 503 with new 
paragraph .01, to include the text of Section I of this release 
captioned ``Background'' and with new paragraph .02 to include the text 
of Section II.B.2 of this release captioned ``Major Customers.''
    The Codification is a separate publication of the Commission. It 
will not be published in the Code of Federal Regulations.

VIII. Statutory Basis

    The Commission proposes the rule changes explained in this release 
pursuant to sections 6, 7, 8, 10 and 19(a) of the Securities Act and 
Sections 3, 12, 13, 14, 15(d) and 23(a) of the Exchange Act.

List of Subjects in 17 CFR Parts 210, 229, 240 and 249

    Accounting, Registration requirements, Reporting and recordkeeping 
requirements, Securities.

Text of the Rules

    Accordingly, the Commission amends Title 17, Chapter II of the Code 
of Federal Regulations as follows:

[[Page 1734]]

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL 
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 
1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT 
COMPANY ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

    1. The authority citation for part 210 continues to read as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77aa(25), 
77aa(26), 78j-1, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 
79e(b), 79j(a), 79n, 79t(a), 80a-8, 80a-20, 80a-29, 80a-30, 80a-
37(a), unless otherwise noted.

    2. By amending Sec. 210.3-03 by revising the first sentence of 
paragraph (e) to read as follows:


Sec. 210.3-03  Instructions to income statement requirements.

* * * * *
    (e) Disclosures regarding segments required by generally accepted 
accounting principles shall be provided for each year for which an 
audited statement of income is provided. * * *
    3. By amending Sec. 210.12-16 by revising footnote one to the table 
to read as follows:


Sec. 210.12-16  Supplementary insurance information.

* * * * *
    \1\ Segments shown should be the same as those presented in the 
footnote disclosures called for by generally accepted accounting 
principles.
* * * * *

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

    4. The authority citation for Part 229 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 
77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll(d), 79e, 
79n, 79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise 
noted.
* * * * *
    5. By amending Sec. 229.101 (Item 101 of Regulation S-K) by 
revising the introductory text of paragraph (b), paragraph (b)(1) and 
paragraph (d); in paragraphs (c)(1) the introductory text, (c)(1)(i), 
(c)(1)(ii), (c)(1)(iv), and (c)(1)(v), by revising the term ``industry 
segment'' to read ``segment''; in paragraph (c)(1) the introductory 
text and in Instruction 1 in the Instructions to Item 101, by revising 
the term ``industry segments'' to read ``segments''; by revising 
Instruction 2 to Item 101, and by removing Appendix A--Industry 
Segments, and Appendix B--Foreign and Domestic Operations and Export 
Sales.


Sec. 229.101 (Item 101)  Description of business.

* * * * *
    (b) Financial information about segments. Report for each segment, 
as defined by generally accepted accounting principles, revenues from 
external customers, a measure of profit or loss and total assets. A 
registrant must report this information for each of the last three 
fiscal years or for as long as it has been in business, whichever 
period is shorter. If the information provided in response to this 
paragraph (b) conforms with generally accepted accounting principles, a 
registrant may include in its financial statements a cross reference to 
this data in lieu of presenting duplicative information in the 
financial statements; conversely, a registrant may cross reference to 
the financial statements.
    (1) If a registrant changes the structure of its internal 
organization in a manner that causes the composition of its reportable 
segments to change, the registrant must restate the corresponding 
information for earlier periods, including interim periods, unless it 
is impracticable to do so. Following a change in the composition of its 
reportable segments, a registrant shall disclose whether it has 
restated the corresponding items of segment information for earlier 
periods. If it has not restated the items from earlier periods, the 
registrant shall disclose in the year in which the change occurs 
segment information for the current period under both the old basis and 
the new basis of segmentation, unless it is impracticable to do so.
* * * * *
    (d) Financial information about geographic areas. (1) State for 
each of the registrant's last three fiscal years, or for each fiscal 
year the registrant has been engaged in business, whichever period is 
shorter:
    (i) Revenues from external customers attributed to:
    (A) The registrant's country of domicile;
    (B) All foreign countries, in total, from which the registrant 
derives revenues; and
    (C) Any individual foreign country, if material. Disclose the basis 
for attributing revenues from external customers to individual 
countries.
    (ii) Long-lived assets, other than financial instruments, long-term 
customer relationships of a financial institution, mortgage and other 
servicing rights, deferred policy acquisition costs, and deferred tax 
assets, located in:
    (A) The registrant's country of domicile;
    (B) All foreign countries, in total, in which the registrant holds 
assets; and
    (C) Any individual foreign country, if material.
    (2) A registrant shall report the amounts based on the financial 
information that it uses to produce the general-purpose financial 
statements. If providing the geographic information is impracticable, 
the registrant shall disclose that fact. A registrant may wish to 
provide, in addition to the information required by paragraph (d)(1) of 
this section, subtotals of geographic information about groups of 
countries. To the extent that the disclosed information conforms with 
generally accepted accounting principles, the registrant may include in 
its financial statements a cross reference to this data in lieu of 
presenting duplicative data in its financial statements; conversely, a 
registrant may cross-reference to the financial statements.
    (3) A registrant shall describe any risks attendant to the foreign 
operations and any dependence on one or more of the registrant's 
segments upon such foreign operations, unless it would be more 
appropriate to discuss this information in connection with the 
description of one or more of the registrant's segments under paragraph 
(c) of this item.
    (4) If the registrant includes, or is required by Article 3 of 
Regulation S-X (17 CFR 210), to include, interim financial statements, 
discuss any facts relating to the information furnished under this 
paragraph (d) that, in the opinion of management, indicate that the 
three year financial data for geographic areas may not be indicative of 
current or future operations. To the extent necessary to the 
discussion, include comparative information.

Instructions to Item 101

* * * * *
    2. Base the determination of whether information about segments 
is required for a particular year upon an evaluation of interperiod 
comparability. For instance, interperiod comparability would require 
a registrant to report segment information in the current period 
even if not material under the criteria for reportability of SFAS 
No. 131 if a segment has been significant in the immediately 
preceding period and the registrant expects it to be significant in 
the future.
* * * * *

[[Page 1735]]

Appendix A and B [Removed]

    6. By amending Sec. 229.102 by revising the term ``industry 
segment(s)'' in the introductory paragraph to read ``segment(s), as 
reported in the financial statements,''.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    7. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 
80b-11, unless otherwise noted.


Sec. 240.14a-101  [Amended]

    8. By amending Sec. 240.14a-101(Schedule 14A) in Item 
14(b)(2)(ii)(A)(3)(i) by revising the phrase ``industry segments'' to 
read ``segments''.

PART 249--FORM, SECURITIES EXCHANGE ACT OF 1934

    9. The authority citation for part 249 continues to read in part as 
follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted:
* * * * *


Sec. 249.220f  (Form 20-F) [Amended]

    10. By amending Form 20-F (referenced in Sec. 249.220f) by removing 
the term ``SFAS 14'' from Instruction 3 to Item 17 and inserting the 
term ``SFAS No. 131'' in its place.

    Note: The text of Form 20-F does not, and the amendment will 
not, appear in the Code of Federal Regulations.

    By the Commission.

    Dated: January 5, 1999.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-589 Filed 1-11-99; 8:45 am]
BILLING CODE 8010-01-P