[Federal Register Volume 65, Number 20 (Monday, January 31, 2000)]
[Unknown Section]
[Pages 4585-4593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1969]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, and 249

[Release Nos. 33-7793; 34-42354; File No. S7-03-00]
RIN 3235-AH86


Supplementary Financial Information

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Commission is proposing to reposition certain schedule 
information currently required under Rule 12-09 of Regulation S-X 
within a new Item 302(c) of Regulation S-K to specify the disclosures 
to be provided by registrants concerning changes in valuation and loss 
accrual accounts. The Commission also is proposing to add another new 
Item 302(d) of Regulation S-K to elicit certain information concerning 
tangible and intangible long-lived assets and related accumulated 
depreciation, depletion, and amortization. A new Item 8C also would be 
added to the recently revised Form 20-F. The rule proposals are 
intended to provide investors with more transparent, better detailed 
disclosures

[[Page 4586]]

concerning changes in valuation and loss accrual accounts and in the 
underlying accounting assumptions and more detailed information to 
assess the effects of useful lives assigned to long-lived assets.

DATES: Comments should be received by April 17, 2000.

ADDRESSES: Please send three copies of your comment letter to Jonathan 
G. Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0609. Interested persons also may 
submit comments electronically at the following e-mail address: [email protected]. All comment letters should refer to File No. S7-03-
00; please include this file number in the subject line if you use e-
mail. Anyone can inspect and copy the comment letters in our Public 
Reference Room at 450 Fifth Street, NW, Washington, DC 20549-0609. We 
will post electronically submitted comment letters on the Commission's 
Internet Web Site (www.sec.gov).

FOR FURTHER INFORMATION CONTACT: John W. Albert, Associate Chief 
Accountant, or Richard L. Rodgers, Professional Accounting Fellow, 
Office of the Chief Accountant, at (202) 942-4400, or Louise M. Dorsey, 
Assistant Chief Accountant, Division of Corporation Finance, at (202) 
942-2960, U.S. Securities and Exchange Commission, 450 Fifth Street, 
NW, Washington, DC 20549-0609.

SUPPLEMENTARY INFORMATION: The Commission is proposing to reposition 
certain schedule information currently required under Rule 12-09 of 
Regulation S-X \1\ within a new Item 302(c) of Regulation S-K \2\ to 
specify the disclosures concerning valuation and loss accrual accounts 
to be provided by registrants. The Commission also is proposing to add 
another new Item 302(d) of Regulation S-K \3\ to elicit additional 
information concerning tangible and intangible long-lived assets and 
related accumulated depreciation, depletion, and amortization. The 
proposed addition of Item 302(c) is intended to provide investors with 
more transparent, better detailed disclosures concerning changes in 
valuation and loss accrual accounts and in the underlying accounting 
assumptions. Similarly, the proposed addition of Item 302(d) is 
intended to provide investors with more detailed information concerning 
the financial reporting effects of useful lives assigned to long-lived 
assets. Because of the repositioning of valuation and loss accrual 
account disclosure within proposed Item 302(c), Schedule II of Rule 5-
04 (Applicable to Commercial and Industrial Companies) \4\ and Schedule 
V of Rule 7-03 (Applicable to Insurance Companies) \5\ would be 
eliminated. Also due to the proposed repositioning, a new Item 8C of 
Form 20-F \6\ would be added to require presentation of supplementary 
financial information.
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    \1\ 17 CFR 210.12-09.
    \2\ 17 CFR 229.302(c).
    \3\ 17 CFR 229.302(d).
    \4\ 17 CFR 210.5-04.
    \5\ 17 CFR 210.7-03.
    \6\ 17 CFR 249.220f. Form 20-F was revised significantly as 
explained in Release No. 33-7745 (September 28, 1999). These 
amendments will be effective as of September 30, 2000. The proposed 
amendments would be incorporated into the revised Form 20-F, Item 
8C.
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I. Background

    Many participants in and observers of the financial reporting 
process, including the Commission, have noted an apparent increase in 
abusive ``earnings management'' by public companies.\7\ While it is 
recognized that management may properly determine the timing of 
earnings recognition from certain arms-length transactions (such as the 
sale of an appreciated asset) or deferral of expense recognition (by 
delaying expenditures for advertising or maintenance), examples of 
abusive ``earnings management'' have been occurring with increased 
frequency. Some observers contend that the apparent increased incidence 
of ``earnings management'' is in response to an increased pressure to 
meet earnings estimates in today's markets. With current price-earnings 
ratios at an all-time high, failure to meet analysts' expectations by 
even small amounts can have a significant negative effect on market 
capitalization, which in turn can affect management's ability to retain 
key employees and grow and operate the business. In response to such 
factors, the Commission has initiated a series of coordinated actions 
to address issues related to earnings management. A key element of this 
action plan addresses the problems caused by a lack of transparency in 
some aspects of financial reporting.
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    \7\ See Remarks by SEC Chairman Arthur Levitt, ``The Numbers 
Game,'' to the NYU Center for Law and Business, New York, NY, 
September 28, 1998.
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    Problems attributable to lack a transparency noted by observers of 
the financial reporting process include, but are not limited to:
     Failure to comply with the disclosure requirements for 
changes in accrued liabilities for certain costs to exit an activity 
during periods subsequent to the initial charge;
     Grouping dissimilar items into an aggregated 
classification;
     Recurring ``nonrecurring'' charges;
     Inadequate disclosure of changes in estimates and in 
underlying assumptions during the period of change;
     Inconsistent application of SEC required disclosures of 
valuation and loss accruals, and
     Insufficient information about expected useful lives, 
changes in useful lives, and salvage values of long-lived assets.

II. Proposed Rule Changes

    The proposed amendments would create a new Item 302(c) of 
Regulation S-K to clarify and expand the supplemental disclosure 
requirements concerning activity involving valuation and loss accrual 
accounts so as to improve the transparency of financial reporting by 
registrants. The proposed requirements are patterned after Rule 12-09 
of Regulation S-X which currently requires schedule disclosure of 
activity in an entity's valuation and qualifying accounts and reserves. 
The schedule (Schedule II) is structured to show beginning and ending 
account balances as well as activity, including any adjustments, during 
the year for individually significant valuation and qualifying accounts 
and reserves. However, compliance with the schedule requirements 
appears to be mixed, possibly due to a lack of general agreement as to 
what constitutes a valuation or reserve account. Also, diversity in 
practice has resulted from varying approaches to combining individually 
insignificant account balances.
    The Financial Accounting Standards Board's Concepts Statements 
define a valuation account as a separate item that reduces or increases 
the carrying amount of an asset or liability. Examples cited include an 
estimate of uncollectible amounts that reduces receivables to the 
amount expected to be collected, or a premium on a bond receivable that 
increases the receivable to its amortized cost or present value. 
Valuation accounts are part of the asset or liability to which they 
relate and are neither assets nor liabilities in their own right.\8\
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    \8\ Paragraph 34 of Statement of Financial Accounting Concepts 
No. 6, Elements of Financial Statements.
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    In addition to detailed disclosures concerning valuation and 
qualifying accounts, Schedule II also currently requires disclosure of 
activity concerning balances in ``reserve'' accounts. Because the term 
``reserve'' is

[[Page 4587]]

not defined in the authoritative accounting literature, its references 
within the Commission's rules may have confused certain preparers and 
contributed to diverse reporting practices. As a result of this 
confusion, reporting by registrants about activity involving these 
accounts has been mixed, with certain registrants providing more 
complete disclosures than others in similar circumstances. To avoid 
future confusion, the Commission proposes to revise the supplemental 
disclosure requirements to refer to the term ``loss accrual'' thereby 
appropriately focusing on accruals for loss contingencies.
    To reduce the existing diversity in practice and provide a more 
``level playing field,'' proposed Item 302(c) sets forth a list of 
commonly reported loss accrual and/or valuation accounts that the 
Commission would expect registrants to present within that Item. The 
list, which was extracted from the SEC reporting guidelines of certain 
major accounting firms, is suggestive rather than all-inclusive and 
includes the following accounts:

 Allowance for doubtful accounts and notes receivable
 Allowance for sales returns, discounts, and contractual 
allowances
 Unamortized premium or discount
 Excess of estimated costs over revenues on contracts (loss 
contracts)
 Inventory valuation allowance \9\
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    \9\ Use of an inventory valuation allowance to reflect a 
writedown of inventory to the lower of cost or market at the close 
of a fiscal period establishes a new cost basis that cannot be 
marked up based on subsequent changes in market. See Accounting 
Research Bulletin No. 43, Chapter 4, Statement 5.
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 Valuation allowance for deferred tax assets
 Liabilities for exit and employee termination costs, 
including costs related to a restructuring (assuming that the 
criteria set forth in EITF Issue 94-3 have been met) \10\ or to an 
acquired business (assuming that the criteria under EITF Issue 95-3 
have been met) \11\
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    \10\ The FASB's Emerging Issues Task Force reached a consensus 
at its January 19, 1995 meeting on the criteria that must be met for 
an employer to recognize a liability for the costs of employee 
termination benefits provided to involuntarily terminated employees 
and other costs to exit an activity. EITF Issue 94-3, ``Liability 
Recognition For Certain Employee Termination Benefits and Other 
Costs to Exit an Activity (including Certain Costs Incurred in a 
Restructuring).''
    \11\ Similar to the resolution concerning restructuring-related 
costs, the EITF reached a consensus at its meetings of July 20-21, 
1995 on the conditions under which the costs of a plan to (1) exit 
an activity of an acquired company, (2) involuntarily terminate 
employees of an acquired company, or (3) relocate employees of an 
acquired company should be recognized as liabilities. EITF Issue 95-
3, ``Recognition of Liabilities in Connection with a Purchase 
Business Combination.''
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 Liabilities for costs of discontinued operations
 Liabilities for environmental remediation costs
 Contingent income and franchise tax liabilities recorded 
pursuant to FASB Statement 5
 Product warranty liabilities
 Probable losses from pending litigation

    Consistent with existing Rule 12-09 of Regulation S-X, the 
information called for under proposed Item 302(c) must be provided for 
each period for which an audited income statement is required. 
Consistent with the Item's income-statement focus, registrants must 
focus on income statement measures, such as effects on the individual 
line item, operating income (loss), net earnings (loss), and earnings 
trends, in making assessments of materiality of particular valuation 
and loss accrual accounts for purposes of presenting the relevant 
data.\12\ As pointed out by observers of ``earnings management'' 
abuses, changes in valuation and loss accrual accounts often have a 
significant impact on income statement results and earnings trends.
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    \12\ Staff Accounting Bulletin 99, ``Materiality'' (August 12, 
1999), provides guidelines for assessing materiality thresholds. It 
emphasizes that the exclusive use of numerical or percentage tests 
to make materiality determinations is not acceptable. 64 FR 45150 
(August 19, 1999).
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    Certain detailed disclosures about activity in a specific valuation 
and loss accrual account are required under existing generally accepted 
accounting principles (GAAP). For example, disclosure of the net change 
in the valuation allowance recognized for deferred tax assets is 
required by Statement of Financial Accounting Standards No. 109, 
Accounting for Income Taxes. To avoid redundancy, detailed information 
about activity in valuation and loss accrual accounts may be omitted if 
the same information is provided in the notes to financial statements.
    The proposed rules would reposition the required disclosures about 
activity in a registrant's valuation and loss accrual accounts 
currently furnished in a schedule to a separate item within the section 
of Regulation S-K captioned, Supplementary Financial Information. The 
proposed repositioning of disclosures about valuation and loss accrual 
account activity is intended to encourage registrants to focus on the 
need to provide a detailed narrative discussion about the assumptions 
underlying the recognition of a valuation or loss accrual account along 
with the nature of any changes in those assumptions requiring 
adjustment to the account balance. Experience has shown that the more 
free-writing style permitted to comply with Regulation S-K may be more 
conducive to detailed narrative explanation that better communicates 
the financial reporting effects of changes in facts and assumptions.
    Although the proposed repositioning of the valuation and loss 
accrual account activity disclosures would remove these disclosures 
from explicit coverage in the auditors' report, a registrant's auditors 
would continue to have certain professional responsibilities resulting 
from association with these disclosures. Statement on Auditing 
Standards No. (SAS) 8, ``Other Information in Documents Containing 
Audited Financial Statements,'' requires the auditor to read other 
information, such as the supplementary financial information about 
valuation and loan loss account activity, in a document containing 
audited financial statements and consider whether such information is 
materially inconsistent with information appearing in the financial 
statements. In the event that the auditor discovers a material 
inconsistency, compliance with SAS 8 would require that the auditor 
determine whether the financial statements, the auditor's report, or 
both should be revised.
    The Commission also is proposing to add a new Item 302(d) to 
provide information concerning property, plant, and equipment and 
related accumulated depreciation, depletion, and amortization. The 
proposed disclosure would be similar to the schedule information 
previously required under Rules 12-06 and 12-07 of Regulation S-X. 
Prior to 1995, registrants were required to provide detailed schedules 
of property, plant, and equipment and related accumulated depreciation, 
depletion, and amortization in cases where the property, plant, and 
equipment account exceeded 25 percent of total assets. Activity 
disclosed through the schedules included additions, retirements, and 
other changes in each major fixed asset account. These schedule 
requirements were rescinded through the Commission's issuance of 
Financial Reporting Release 44.\13\ In announcing rescission of the 
schedule requirements, the amending release cited the views of the 
majority of commentators that the schedules generally were redundant to 
information already required in the financial statements.
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    \13\ Release 33-7118, Financial Statements of Significant 
Foreign Equity Investees and Acquired Foreign Businesses of Domestic 
Issuers and Financial Schedules (December 13, 1994) [59 FR 65632].

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[[Page 4588]]

    Since the issuance of Financial Reporting Release 44, financial 
analysts have advised the Commission staff that the rescission of the 
schedule requirements has resulted in a loss of useful information 
about depreciation methods, useful lives, and salvage values of long-
lived assets. Analysts contend that this loss of information has 
hindered their ability to evaluate management's capital allocation 
decisions and to estimate future depreciation charges.\14\
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    \14\ 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.
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    In eliminating these schedule requirements, Financial Reporting 
Release 44 noted the existence of certain overlapping requirements 
under GAAP, principally Accounting Principles Board Opinion No. 12, 
calling for certain disclosures about major components of fixed assets 
and related accumulated depreciation and amortization account 
balances.\15\ However, since the requirements imposed under GAAP may be 
satisfied by general descriptions rather than the specific data 
required under the rescinded schedules, the net effect has been the 
loss of some key analytical data. For example, APB Opinion 12 requires 
a general description of the method or the methods used in computing 
depreciation of major classes of fixed assets. APB Opinion 12 also 
permits accumulated depreciation balances to be shown in the aggregate. 
No disclosure is required of estimated salvage values.
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    \15\ Accounting Principles Board Opinion No. 12, Omnibus 
Opinion--1967 addresses, among other topics, Disclosure of 
Depreciable Assets and Depreciation (see paragraphs 4 and 5).
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    Financial statement users have expressed frustration due to an 
inability to recreate the detailed information about activity in 
specific fixed asset accounts that formerly was provided under Rules 
12-06 and 12-07 of Regulation S-X. Experience has shown that compliance 
with the more general requirements imposed under APB Opinion 12 may not 
provide all detailed disclosures pertinent to an analysis of changes in 
fixed assets, and may have contributed to some lack of transparency in 
financial statements of public companies. Accordingly, the Commission 
is proposing to reinstate the informational requirements formerly 
called for under Rules 12-06 and 12-07 and to add disclosures about 
salvage values. The proposed disclosures would be required to support 
the account balances of any long-lived asset separately captioned on 
the balance sheet.
    The Commission staff has noted a similar lack of specificity in the 
requirements under GAAP for disclosures concerning intangible assets. 
APB Opinion No. 17, Intangible Assets, requires disclosure of the 
method and period of amortization of an entity's intangible assets.\16\ 
However, where the aggregate balance in an intangible asset account has 
many components (such as goodwill resulting from a number of individual 
purchase business combinations), the required disclosures may be 
provided in terms of ranges of amortization periods. Without additional 
data, users of financial information are unable to evaluate the impact 
on reported earnings of estimated useful lives assigned to intangible 
assets resulting from specific acquisitions.\17\
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    \16\ See paragraph 30 of APB Opinion No. 17.
    \17\ For example, disclosure may be provided that an entity's 
amortization of goodwill attributable to various business 
acquisitions ranges from five to forty years. Analysis of the impact 
of the selection of specific useful lives would be improved if 
details were provided as to which specific goodwill allocations fell 
on which end of the range.
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    Therefore, to provide additional analytical data necessary to 
evaluate the effects of varying amortization periods for intangible 
assets, the Commission also is proposing to include activity involving 
intangible assets in new Item 302(d). Furthermore, in order to provide 
more useful analytical data, the proposed Item would require disclosure 
about the registrant's goodwill account. In circumstances where the 
account balance results from different business acquisitions with 
varying useful lives, the disclosure would need to show the amount of 
goodwill in the aggregate as well as the account balance of each 
component assigned a different estimated useful life. However, 
consistent with the proposed treatment of valuation and loss accrual 
account activity, detailed information about activity in a particular 
property, plant, equipment, and intangible asset and related 
accumulated depreciation, depletion, and amortization account may be 
omitted if the same information is provided to investors within the 
notes to financial statements.
    In summary, the Commission is proposing amendments to Regulation S-
K to specify disclosures of valuation and loss accrual accounts and 
long-lived assets and related accumulated depreciation, depletion, and 
amortization in response to problems attributable to a lack of 
transparency in financial reporting. The proposed disclosures are 
intended to provide sufficient analytical information so that changes 
in the amounts and activity in these accounts are transparent to 
investors.
    The Commission is proposing to amend Form 20-F to include the 
substance of proposed Items 302(c) and (d). Foreign private issuers, 
therefore, would be required to provide these disclosures.

III. General Request for Comment

    The Commission is proposing these amendments to clarify and expand 
certain disclosures to be provided as supplementary financial 
information. If you would like to submit written comments on the 
proposals, to suggest additional changes, or to submit comments on 
other matters that might have an impact on the proposals, we encourage 
you to do so. Besides the specific questions being asked in this 
release, we also solicit comments on the usefulness of the proposals to 
security holders, issuers, and the marketplace at large. We would like 
comments from the point of view of both bidders and targets, as well as 
security holders and market professionals involved in the mergers and 
acquisitions area. We also solicit comments specifically addressing 
whether these proposed changes adequately provide information that is 
useful to the analysis of financial statements. We also seek comments 
about whether other amendments are appropriate for that purpose.
    The proposed amendments are based on the assumption that the 
information to be provided is readily available from each registrant's 
books and records. The Commission understands that some of the 
information called for under the proposed rules must be collected for 
the preparation and audit of a registrant's balance sheet and statement 
of cash flows. Consequently, we are interested in commentators' views 
as to whether they agree that the information to be provided under the 
proposed disclosure requirements already is collected as part of the 
financial statements preparation and related independent audit process.
    The staff also seeks specific comments on the following elements of 
this rule proposal:
    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)?
    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

[[Page 4589]]

threshold (for example, 5% of total assets or 3% of pretax income)? If 
so, what is an appropriate threshold?
    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?
    4. Should presentation of the proposed data be limited to the Form 
10-K?
    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?
    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.
    7. Should the disclosures concerning valuation and loss accrual 
account activity be required when interim financial statements are 
presented?
    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 send three copies of your comment letter to Jonathan G. 
Katz, Secretary, US Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549. Interested persons also may submit 
comments electronically at the following e-mail address: [email protected]. All comment letters should refer to File No. S7-03-
00; please include this file number in the subject line if you use e-
mail. Anyone can inspect and copy the comment letters in our public 
reference room at 450 Fifth Street, NW, Washington, DC 20549. We will 
post electronically submitted comment letters on our Internet Web Site 
(www.sec.gov).

IV. Paperwork Reduction Act

    The proposals contain ``collection of information'' requirements 
within the meaning of the Paperwork Reduction Act of 1995 (PRA). Our 
staff has submitted the proposals for review to the Office of 
Management and Budget (OMB) in accordance with the PRA. The title of 
the affected information collection is ``Supplementary Financial 
Information.'' An agency may not conduct or sponsor, and a person is 
not required to respond to, a collection of information unless it 
displays a currently valid control number. The proposals would revise a 
current collection of information, Regulation S-K, which currently is 
assigned OMB Control Number 3235-0071.
    The proposals are designed to elicit improved disclosures about (1) 
Registrants' property, plant, equipment and intangible assets, (2) 
Allowances for accumulated depreciation, depletion, and amortization of 
property, plant, equipment, and intangible assets, and (3) Valuation 
and loss accrual accounts. The purpose of these disclosures is to 
improve investors' understanding of how these items impact the numbers 
in the financial statements and to reduce the potential for abuse from 
establishing inappropriate amounts of valuation and loss accrual 
accounts and similar items. The information needed for preparation of 
these disclosures should be readily available from the registrant's 
books and records. Also, as discussed elsewhere in this release, small 
business issuers would not be impacted by the proposals.
    The likely respondents to the collection of information request 
include those currently filing Forms 10-K, 10, 20-F, and F-1. 
Registrants not eligible for incorporation by reference filing under 
Forms S-4 and F-4 are required to present schedule information. The 
information typically would be collected once a year in the Form 10-K 
and then incorporated by reference into other forms as appropriate. 
Based on a sample of Forms 10-K filed by registrants currently 
presenting valuation and qualifying account and reserve disclosures 
under Schedule II, it is estimated that approximately 2,900 respondents 
would be required to include the disclosures proposed under Item 302(c) 
in their Form 10-K filings.
    The staff has received input from a diversified, multi-divisional 
registrant estimating that the average burden hours to begin collecting 
the appropriate records and report the proposed disclosures about 
valuation and loss accrual account activity each year would be 247 
hours per registrant but that the annual, recurring burden would be 
only 17 hours per registrant. The cost estimates were based on the 
company's previous experience in complying with the requirements of 
Schedule II. Extending the cost burden estimates to the approximately 
2,900 registrants currently estimated to be filing valuation and 
qualifying account schedule data after initial start up burdens results 
in an estimated total recurring, annual burden of 49,300 hours.
    The same diversified, multi-divisional registrant also provided 
input concerning the estimated burden hours involved in beginning to 
comply with proposed Item 302(d) concerning changes in long-lived 
assets and related accumulated depreciation, depletion, and 
amortization. It is estimated that 133 burden hours per registrant 
would be required initially to comply with the proposed requirements 
under Item 302(d) but that the annual recurring burden would be 
approximately only 35 hours per registrant. Assuming that approximately 
the same number of SEC registrants required to furnish valuation and 
loss accrual account activity also would be impacted by the proposed 
long-lived asset disclosures (approximately 2,900), the total recurring 
annual burden would approximate 101,500 hours.
    Preparing and disclosing the Supplementary Financial Information 
will be mandatory to the extent a registrant must file with the 
Commission audited annual financial statements in accordance with 
Regulation S-X, 17 CFR 210, and the registrant has had significant 
activity involving the information required by the proposed new items 
in Regulation S-K. The supplementary data will be public information.
    Pursuant to 44 U.S.C. Sec. 3506(c)(2)(B), the Commission solicits 
comments on (i) Whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information shall have practical utility; (ii) 
The accuracy of the agency's estimate of the burden of the proposed 
collection of information; (iii) Whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(iv) Whether there are ways to minimize the burden of collection of 
information on those who are to respond, including through the use of 
automated collection techniques or other forms of information 
technology.
    Persons wishing to submit comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Jonathan G. Katz, 
Secretary, US Securities and Exchange Commission, 450 Fifth Street, NW, 
Washington, DC 20549-0609, with reference to File No. S7-03-00. The 
Office of Management and Budget is required to make a decision 
concerning the collection of information between 30 and 60 days after 
publication. Requests for materials submitted to OMB by the

[[Page 4590]]

Commission with regard to this collection of information should be in 
writing, refer to File No. S7-03-00 and be submitted to the Securities 
and Exchange Commission, Records Management, Office of Filings and 
Information Services.

V. Cost-Benefit Analysis

    The new proposals are intended to benefit investors by providing a 
clearer picture of how registrants may be using valuation and loss 
accrual accounts and estimates of the useful lives and salvage values 
assigned to assets to impact the amounts reported in their financial 
statements. Analysts have suggested, and we agree, that shedding more 
sunlight on these areas will assist investors in analyzing these items 
and discourage inappropriate ``earnings management,'' thus enhancing 
the protection of investors. We are unable to quantify this benefit.
    The new disclosures will require registrants to prepare two new 
disclosure items, one of which calls for information that essentially 
is being provided in an existing schedule. Registrants will face 
increased costs associated with the preparation and printing of these 
disclosures; however, because the information should be readily 
available from each registrant's books and records, we do not believe 
these costs would be significant. In addition, small business issuers 
under Regulation S-B and small issuers qualifying for the exemption 
under Regulation A are not required currently to provide this 
information and would not be impacted by the proposals. For the 
purposes of the PRA, we estimate that, after initial start up costs, 
the annual average hourly burden to comply with proposed Items 302(c) 
and (d) would be 52 hours. Assuming costs of $125 per hour and 2,900 
registrants, we estimate the average annual paperwork burden as 
$18,850,000. We request comment on the reasonableness of these 
assumptions. We solicit comment on these estimates.
    The Commission requests data to quantify the costs and the value of 
the benefits identified. The Commission also solicits estimates and 
views regarding the costs and benefits for particular types of market 
participants, as well as any other costs or benefits that may result 
from the adoption of the proposed rules. In particular, we request data 
and analysis on whether the new proposal would result in a major 
increase in costs or prices for consumers or individual industries, or 
significant adverse effects on competition, investment, productivity, 
innovation, or small business. Specifically:

    1. What are the expected increases in costs for:
    a. Internal financial reporting costs for the necessary data 
accumulation and preparation?
    b. Printing costs?
    c. Other costs? (please explain)
    2. What would be the expected impact on costs in response to 1. 
above if disclosure of valuation and loss accrual account activity 
was required on a quarterly basis?
    3. What are the expected cost savings from no longer requiring 
schedule disclosure of valuation and loss accrual account activity 
subject to audit?
    The Commission also is interested in the views of users of 
financial information as to any other costs or benefits that would 
result from adoption of the proposed disclosures.
    Commentators are requested to provide empirical data to support 
their views.

VI. Consideration of impact on the Economy, Burden on Efficiency, 
Competition and Capital Formation

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (SBREFA),\18\ the Commission also is requesting information 
regarding the potential impact of the proposed rule on an annual basis. 
Commentators should provide empirical data to support their views.
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    \18\ Pub. L. No. 104-121, 110 Stat. 857 (1996) (codification in 
various sections of 5 U.S.C. and 15 U.S.C. and a note to 5 U.S.C. 
601).
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    Section 23(a)(2) of the Securities Exchange Act of 1934 requires 
the Commission, in adopting rules under the Act, to consider the anti-
competitive effects of any rule it adopts.\19\ We request comment on 
whether the proposed revision, 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 of 1933 and the Securities Exchange Act of 1934.
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    \19\ 15 U.S.C. 78 w(a)(2).
---------------------------------------------------------------------------

    Section 2(b) of the Securities Act of 1933 \20\ and Section 3(f) of 
the Securities Exchange Act of 1934 \21\ require the Commission, when 
engaged in rulemaking that requires a public interest finding, to 
consider, in addition to the protection of investors, whether the 
action will promote efficiency, competition and capital formation. 
Therefore, we solicit comment on what effect the proposed changes, if 
adopted, may have on efficiency, competition and capital formation.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 77(b).
    \21\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

VII. Summary of Regulatory Flexibility Act Certification

    Pursuant to section 605(b) of the Regulatory Flexibility Act,\22\ 
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 supplementary information is 
not filed by small business issuers. In addition, the proposed 
amendments would require registrants to present supplementary data that 
should be easily retrievable from their books and records. We include 
the Certification in this release as Attachment A and encourage written 
comments relating to it. Commentators should describe the nature of any 
impact on small entities and provide empirical data to support the 
extent of the impact.
---------------------------------------------------------------------------

    \22\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

VIII. Codification Update

    The Commission proposes to amend the ``Codification of Financial 
Reporting Policies'' announced in the Financial Reporting Release No. 1 
(April 15, 1982) [47 FR 21028] to:
    1. Delete Section 209, Property, Plant, and Equipment Disclosure 
Requirements.
    2. Add new Section 217, Valuation and Loss Accrual Accounts to 
include the fourth and fifth paragraphs under Section II of this 
release captioned, Proposed Rule Changes.
    The Codification is a separate publication of the Commission. It 
will not be published in the Code of Federal Regulations.

IX. 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 3,10A,12,13,14,15(d) and 23(a) of the Exchange Act.

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

    Accounting, Reporting and recordkeeping requirements, Securities.

Text of Proposals

    Accordingly, the Commission proposes to amend Title 17, Chapter II 
of the Code of Federal Regulations as follows:

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:


[[Page 4591]]


    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. 210.5-04 as follows:
    a. By revising paragraph (a)(1);
    b. Removing paragraph (a)(2);
    c. Redesignating paragraph (a)(3) as (a)(2); and
    d. Removing and reserving Schedule II to read as follows:


Sec. 210.5-04  What schedules are to be filed.

    (a) * * *
    (l) The schedule specified in this section as Schedule III shall be 
filed as of the date of the most recent audited balance sheet for each 
person or group.
* * * * *
    3. By amending Sec. 210.7-05 as follows:
    a. By revising paragraphs (a)(2) and (a)(3); and
    b. Removing and reserving Schedule V to read as follows:


Sec. 210.7-05  What schedules are to be filed.

    (a) * * *
    (1) * * *
    (2) Schedule IV specified in this section shall be filed for each 
period for which an audited income statement is required to be filed.
    (3) Schedules II and III in this section shall be filed as of the 
date and for the periods specified in the schedule.
* * * * *

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

    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. 229.302 by adding paragraphs(c) and (d) to read 
as follows:


Sec. 229.302  (Item 302) Supplementary financial information.

* * * * *
    (c) Information about changes in valuation and loss accrual 
accounts. Registrants shall provide the following information 
concerning changes in each major class of valuation or loss accrual 
account (estimated liabilities) for each period for which an audited 
income statement is required. Major classes of valuation or loss 
accrual accounts shall include, but not necessarily be limited to, 
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.

----------------------------------------------------------------------------------------------------------------
                                                                  Additions
                 Balance--beginning of period                     charged to      Deductions/    Balance--end of
                                                                   expense      other additions       period
----------------------------------------------------------------------------------------------------------------
(1)(3)(5)....................................................             (4)           (2)(4)              (6)
----------------------------------------------------------------------------------------------------------------

    Instructions to paragraph (c). 1. List separately each major 
class of valuation and loss accrual account by descriptive title. 
All loss contingencies recorded pursuant to the requirements of FASB 
Statement 5 should be reported.
    2. Describe the nature of any deductions or additions other than 
those charged to expense.
    3. To the extent that a major class of valuation or loss accrual 
account is composed of varying elements (e.g., the various elements 
comprising a registrant's liability for exit and employee 
termination costs), each significant element should be disclosed.
    4. Describe the nature of any changes in the assumptions used in 
estimating the amount of a valuation or loss accrual account that 
has a material effect on the change in the valuation or loss accrual 
account.
    5. Registrants are reminded that if no accrual is made for a 
loss contingency because all of the conditions specified in FASB 
Statement 5 have not been met, or if an exposure to loss exists in 
excess of the recorded amounts, paragraph 10 of that standard 
requires that disclosure be provided in the financial statements 
when there is at least a reasonable possibility that a loss or 
additional loss has been incurred.
    6. Use of an inventory valuation allowance to reflect a 
writedown of inventory to the lower of cost or market at the close 
of a fiscal period creates a new cost basis that cannot be marked up 
based on subsequent changes in market.

    (d) Information about changes in long-lived asset and 
corresponding accumulated depreciation, depletion, and amortization 
accounts. Registrants shall provide the following information 
concerning changes in each major long-lived asset and corresponding 
accumulated depreciation, depletion, and amortization (allowance) 
account. Major long-lived asset classifications are those assets for 
which separate presentation is made on the balance sheet and include 
land, buildings, equipment, leaseholds, brand names, non-compete 
agreements, customer lists, goodwill, and other major tangible or 
intangible long-lived assets. Information also should be provided as 
to each allowance account that corresponds with the major asset 
classification.

----------------------------------------------------------------------------------------------------------------
                                                                                                 Balance--end of
                 Balance--beginning of period                     Additions        Deductions         period
----------------------------------------------------------------------------------------------------------------
(1)(2).......................................................       (3)(4)(6)           (5)(6)   ...............
----------------------------------------------------------------------------------------------------------------

    Instructions to paragraph (d). 1. List separately balances in 
major long-lived asset accounts and corresponding accumulated 
depreciation, depletion, and amortization accounts. Information 
concerning changes in each asset and allowance account shall be 
presented for each period in which an audited income statement is 
required.
    2. Disclose the method of depreciation, depletion, or 
amortization,

[[Page 4592]]

estimated useful lives, and salvage values for each long-lived asset 
account. Separately present goodwill and corresponding accumulated 
amortization account balances for each significantly different 
useful life group. Disclosure of estimated useful lives may be 
provided in a range or weighted average if there is significant 
variance within the asset group.
    3. Provide an explanation as to the nature of any additions to 
long-lived asset accounts that are other than at cost.
    4. Provide an explanation if additions to accumulated 
depreciation, depletion, and amortization accounts are charged 
against accounts other than expenses in the income statement.
    5. Provide an explanation if the deduction from the asset and 
related allowance accounts related to assets sold or retired during 
the period is at an amount other than cost.
    6. Provide an explanation for any significant and unusual asset 
additions, abandonments, retirements, or other adjustments (e.g., 
foreign currency translation) or any significant and unusual changes 
in the general character and location of principal plants and units 
that occurred during the period

PART 249--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1934

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

    Authority:  15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
    7. By amending Form 20-F (referenced in Sec. 249.220f) as effective 
September 30, 2000, by adding Item 8C in Part I and removing the 
reference ``Sec. 210.12-09,'' in paragraph (a) of Item 17, Part IV to 
read as follows:

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

Form 20-F

Registration Statement Pursuant to Section 12 (b) or (g) of the 
Securities Exchange Act of 1934

        or

Annual Report Pursuant to Section 13 or 15(d) of the Securities 
Exchange Act of 1934

        or

Transition Report Pursuant to Section 13 or 15(d) of the Securities 
Exchange Act of 1934

* * * * *

Part I

Item 8C. Supplementary Financial Information

    (a) Information about changes in valuation and loss accrual 
accounts. Registrants shall provide the following information 
concerning changes in each major class of valuation or loss accrual 
account (estimated liabilities) for each period for which an audited 
income statement is required. Major classes of valuation or loss 
accrual accounts shall include, but not necessarily be limited to, 
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.

----------------------------------------------------------------------------------------------------------------
                                                                  Additions       Deductions/
                 Balance--beginning of period                     charged to         other         Balance--end
                                                                   expense         additions        of period
----------------------------------------------------------------------------------------------------------------
(1)(3).......................................................             (4)           (2)(4)   ...............
----------------------------------------------------------------------------------------------------------------

    Instructions to Paragraph (a). 1. List separately each major 
class of valuation and loss accrual account by descriptive title. 
All recorded loss contingencies should be reported.
    2. Describe the nature of any deductions or additions other than 
those charged to expense.
    3. To the extent that a major class of valuation or loss accrual 
account is composed of varying elements (e.g., the various elements 
comprising a registrant's liability for exit and employee 
termination costs), each significant element should be disclosed.
    4. Describe the nature of any changes in the assumptions used in 
estimating the amount of a valuation or loss accrual account that 
has a material effect on the change in the valuation or loss accrual 
account.
    (b) Information about changes in long-lived asset and 
corresponding accumulated depreciation, depletion, and amortization 
accounts. Registrants shall provide the following information 
concerning changes in each major long-lived asset and corresponding 
accumulated depreciation, depletion, and amortization (allowance) 
account. Major long-lived asset classifications are those assets for 
which separate presentation is made on the balance sheet and include 
land, buildings, equipment, leaseholds, brand names, non-compete 
agreements, customer lists, goodwill, and other major tangible or 
intangible long-lived assets. Information also should be provided as 
to each allowance account that corresponds with the major asset 
classification.

----------------------------------------------------------------------------------------------------------------
                                                                                                   Balance--end
                 Balance--beginning of period                      Additions        Deductions       of period
----------------------------------------------------------------------------------------------------------------
(1)(2)........................................................       (3)(4)(6)           (5)(6)   ..............
----------------------------------------------------------------------------------------------------------------

    Instructions to paragraph (b). 1. List separately balances in 
major long-lived asset accounts and corresponding accumulated 
depreciation, depletion, and amortization accounts. Information 
concerning changes in each asset or allowance account shall be 
presented for each period in which an audited income statement is 
required.
    2. Disclose the method of depreciation, depletion, or 
amortization, estimated useful lives, and salvage values for each 
long-lived asset account. Disclosure of estimated useful lives may 
be provided in a range or weighted average if there is significant 
variance within the asset group. Separately present goodwill and 
corresponding accumulated amortization account balances for each 
significantly different useful life group.
    3. Provide an explanation as to the nature of any additions to 
long-lived

[[Page 4593]]

asset accounts that are other than at cost.
    4. Provide an explanation if additions to accumulated 
depreciation, depletion, and amortization accounts are charged 
against accounts other than expenses in the income statement.
    5. Provided an explanation if the deduction from the asset and 
related allowance accounts related to assets sold or retired during 
the period is at an amount other than cost.
    6. Provide an explanation for any significant and unusual asset 
additions, abandonments, retirements, or other adjustments (e.g., 
foreign currency translation) or any significant and unusual changes 
in the general character and location of principal plants and units 
that occurred during the period.
* * * * *

    Dated: January 21, 2000.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.

Attachment A:

[Note: Attachment A to the preamble will not appear in the Code of 
Federal Regulations.]

Regulatory Flexibility Act Certification

    I, Arthur Levitt, Chairman of the Securities and Exchange 
Commission, hereby certify, pursuant to 5 U.S.C. Sec. 605(b), that 
the proposed amendments to rules contained in Securities Act Release 
No. 7793, if adopted, will not have significant economic impact on a 
substantial number of small entities. The proposals will not be 
applicable to small business issues under Regulation S-B or to small 
issuers using Regulation A. In addition, information to be included 
in the proposed disclosures should be readily available from 
registrants' books and records. Accordingly, the proposed schedules 
and amendments to rules would not have a significant impact on a 
substantial number of small entities.

    Dated: January 21, 2000.
Arthur Levitt,
Chairman.
[FR Doc. 00-1969 Filed 1-28-00; 8:45 am]
BILLING CODE 8010-01-U