[Federal Register Volume 68, Number 24 (Wednesday, February 5, 2003)]
[Rules and Regulations]
[Pages 5982-6004]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2365]



[[Page 5981]]

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Part II





Securities and Exchange Commission





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17 CFR Parts 228, 229 and 249



Disclosure in Management's Discussion and Analysis About Off-Balance 
Sheet Arrangements and Aggregate Contractual Obligations; Final Rule

  Federal Register / Vol. 68, No. 24 / Wednesday, February 5, 2003 / 
Rules and Regulations  

[[Page 5982]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 228, 229 and 249

[Release Nos. 33-8182; 34-47264; FR-67 International Series Release No. 
1266 File No. S7-42-02]
RIN 3235-AI70


Disclosure in Management's Discussion and Analysis About Off-
Balance Sheet Arrangements and Aggregate Contractual Obligations

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: As directed by new section 13(j) of the Securities Exchange 
Act of 1934, added by section 401(a) of the Sarbanes-Oxley Act of 2002, 
we are adopting amendments to our rules to require disclosure of off-
balance sheet arrangements. The amendments require a registrant to 
provide an explanation of its off-balance sheet arrangements in a 
separately captioned subsection of the ``Management's Discussion and 
Analysis'' (``MD&A'') section of a registrant's disclosure documents. 
The amendments also require registrants (other than small business 
issuers) to provide an overview of certain known contractual 
obligations in a tabular format.

DATES: Effective Date: April 7, 2003. Compliance Date: Registrants must 
comply with the off-balance sheet arrangement disclosure requirements 
in registration statements, annual reports and proxy or information 
statements that are required to include financial statements for their 
fiscal years ending on or after June 15, 2003. Registrants (other than 
small business issuers) must include the table of contractual 
obligations in registration statements, annual reports, and proxy or 
information statements that are required to include financial 
statements for the fiscal years ending on or after December 15, 2003. 
Registrants may voluntarily comply with the new disclosure requirements 
before the compliance dates.

FOR FURTHER INFORMATION CONTACT: Questions about this release should be 
referred to Andrew Thorpe, Special Counsel, Division of Corporation 
Finance ((202) 942-2910), Jenifer Minke-Girard, Associate Chief 
Accountant, or Eric Schuppenhauer, Professional Accounting Fellow, 
Office of the Chief Accountant ((202) 942-4400), Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Item 303 \1\ 
of Regulation S-K,\2\ Item 303 \3\ of Regulation S-B,\4\ Item 5 of Form 
20-F \5\ and General Instruction B of Form 40-F \6\ under the 
Securities Exchange Act of 1934.\7\
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    \1\ 17 CFR 229.303.
    \2\ 17 CFR 229.10 et seq.
    \3\ 17 CFR 228.303.
    \4\ 17 CFR 228.10 et seq.
    \5\ 17 CFR 249.220f.
    \6\ 17 CFR 249.240f.
    \7\ 15 U.S.C. Sec.  78a et seq.
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Table of Contents

I. Background
II. Overview of Proposals, Comments and amendments
    A. Proposing Release
    B. Overview of Comments and Amendments
    1. Proposed Definition of ``Off-Balance Sheet Arrangements''
    2. Proposed Disclosure Threshold
    3. Proposed Disclosure Requirements
    4. Proposed Tabular and Textual Disclosure
III. Discussion of Amendments
    A. Definition of ``Off-Balance Sheet Arrangements''
    1. Guarantees
    2. Retained or Contingent Interests
    3. Certain Derivative Instruments
    4. Variable Interests
    B. Disclosure Threshold
    C. Disclosure about Off-Balance Sheet Arrangements
    D. Tabular Disclosure of Contractual Obligations
    E. Presentation of Disclosure
    1. Separate Disclosure Sections
    2. Language and Format
    3. Cross-Referencing to the Financial Statements
    F. Effect of Amendments on Commission Statement
    G. Application to Foreign Private Issuers
    H. Safe Harbor for Forward-Looking Information
IV. Paperwork Reduction Act
V. Cost-Benefit Analysis
VI. Effects on Efficiency, Competition and Capital Formation
VII. Final Regulatory Flexibility Analysis
VIII. Statutory Authority and Text of Rule Amendments

I. Background

    On July 30, 2002, the Sarbanes-Oxley Act of 2002 was enacted.\8\ 
section 401(a) of the Sarbanes-Oxley Act added section 13(j) to the 
Securities Exchange Act of 1934,\9\ which requires the Commission to 
adopt final rules by January 26, 2003 (180 days after the date of 
enactment) to require each annual and quarterly financial report 
required to be filed with the Commission, to disclose ``all material 
off-balance sheet transactions, arrangements, obligations (including 
contingent obligations), and other relationships of the issuer with 
unconsolidated entities or other persons, that may have a material 
current or future effect on financial condition, changes in financial 
condition, results of operations, liquidity, capital expenditures, 
capital resources, or significant components of revenues or expenses.'' 
\10\ In November 2002, we published for comment a proposed rulemaking 
to implement Section 401(a) \11\ and to codify interpretive guidance 
set forth in our January 2002 Commission Statement.\12\
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    \8\ Pub. L. 107-204, 116 Stat. 745 (2002).
    \9\ 15 U.S.C. 78m(j).
    \10\ Pub. L. 107-204 Sec. 401(a).
    \11\ See Release No. 33-8144 (Nov. 4, 2002) [67 FR 68054] (the 
``Proposing Release'').
    \12\ See Release No. 33-8056, FR-61 (Jan. 22, 2002) [67 FR 3746] 
(the ``Commission Statement''). That statement was issued in 
response to a petition from Arthur Andersen LLP, Deloitte and Touche 
LLP, Ernst & Young LLP, KPMG LLP, and PricewaterhouseCoopers LLP, 
with the endorsement of the American Institute of Certified Public 
Accountants, for an interpretive release to facilitate enhanced MD&A 
disclosures. See Rulemaking Petition No. 4-450 (Dec. 31, 2001).
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    The Commission has long recognized the need for a narrative 
explanation of financial statements and accompanying footnotes and has 
developed MD&A over the years to fulfill this need.\13\ The disclosure 
in MD&A is of paramount importance in increasing the transparency of a 
company's financial performance and providing investors with the 
disclosure necessary to evaluate a company and to make informed 
investment decisions. MD&A also provides a unique opportunity for 
management to provide investors with an understanding of its view of 
the financial performance and condition of the company, an appreciation 
of what the financial statements show and do not show, as well as 
important trends and risks that have shaped the past or are reasonably 
likely to shape the future.
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    \13\ See, e.g., Release No. 33-5443 (Dec. 12, 1973) [39 FR 829].
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    The MD&A rules already require disclosure regarding off-balance 
sheet arrangements and other contingencies. They are designed to cover 
a wide range of corporate events, including events, variables and 
uncertainties not otherwise required to be disclosed under U.S. 
generally accepted accounting principles (``GAAP'').\14\ For

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example, the current MD&A rules require disclosure of:
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    \14\ In In the Matter of Caterpillar Inc., Release No. 34-30532 
(March 31, 1992), the Commission found that Caterpillar had violated 
section 13(a) of the Exchange Act [15 U.S.C. 78m(a)] by failing to 
have disclosed the magnitude of its Brazilian subsidiary's 
contribution to Caterpillar's overall earnings. Disclosure of the 
extent of that contribution was required under the MD&A disclosure 
requirements, even though disclosure was not required under GAAP, 
because the subsidiary's earnings materially affected Caterpillar's 
reported income from continuing operations. See Item 303(a)(3)(i) of 
Regulation S-K [17 CFR 229.303(a)(3)(i)]. Furthermore, Caterpillar's 
MD&A should have discussed various factors which contributed to the 
subsidiary's earnings, such as currency translation gains, export 
subsidies, interest income, and Brazilian tax loss carry-forwards, 
because such items were significant components of its revenues that 
should have been identified and addressed in order for a reader of 
the company's financial statements to understand Caterpillar's 
results of operations. Id.
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    [sbull] Information necessary to an understanding of the 
registrant's financial condition, changes in financial condition and 
results of operations;\15\
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    \15\ See Item 303(a) of Regulation S-K [17 CFR 229.303(a)].
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    [sbull] Any known trends, demands, commitments, events or 
uncertainties that will result in, or that are reasonably likely to 
result in, the registrant's liquidity increasing or decreasing in any 
material way;\16\
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    \16\ See Item 303(a)(1) of Regulation S-K [17 CFR 
229.303(a)(1)].
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    [sbull] The registrant's internal and external sources of 
liquidity, and any material unused sources of liquid assets;\17\
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    \17\ Id.
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    [sbull] The registrant's material commitments for capital 
expenditures as of the end of the latest fiscal period;\18\
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    \18\ See Item 303(a)(2)(i) of Regulation S-K [17 CFR 
229.303(a)(2)(i)].
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    [sbull] Any known material trends, favorable or unfavorable, in the 
registrant's capital resources, including any expected material changes 
in the mix and relative cost of capital resources, considering changes 
between debt, equity and any off-balance sheet financing 
arrangements.\19\
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    \19\ See Item 303(a)(2)(ii) of Regulation S-K [17 CFR 
229.303(a)(2)(ii)].
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    [sbull] Any unusual or infrequent events or transactions or any 
significant economic changes that materially affected the amount of 
reported income from continuing operations and, in each case, the 
extent to which income was so affected.\20\
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    \20\ See Item 303(a)(3)(i) of Regulation S-K [17 CFR 
229.303(a)(3)(i)].
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    [sbull] Significant components of revenues or expenses that should, 
in the company's judgment, be described in order to understand the 
registrant's results of operations;\21\
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    \21\ Id.
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    [sbull] Known trends or uncertainties that have had, or that the 
registrant reasonably expects will have, a material favorable or 
unfavorable impact on net sales or revenues or income from continuing 
operations.\22\
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    \22\ See Item 303(a)(3)(iii) of Regulation S-K [17 CFR 
229.303(a)(3)(iii)].
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    [sbull] Matters that will have an impact on future operations and 
have not had an impact in the past;\23\ and
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    \23\ See Instruction 3(A) to Item 303(a) of Regulation S-K [17 
CFR 229.303(a)].
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    [sbull] Matters that have had an impact on reported operations and 
are not expected to have an impact upon future operations.\24\
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    \24\ See Instruction 3(B) to Item 303(a) of Regulation S-K [17 
CFR 229.303(a)].

Accordingly, while only one item in our current MD&A rules specifically 
identifies off-balance sheet arrangements,\25\ the other items clearly 
require disclosure of off-balance sheet arrangements if necessary to an 
understanding of a registrant's financial condition, changes in 
financial condition or results of operations. As discussed below, the 
amendments clarify disclosures that registrants must make with regard 
to off-balance sheet arrangements, require registrants to set apart 
disclosure relating to off-balance sheet arrangements in a designated 
section of MD&A and (except in the case of small business issuers) 
require tabular disclosure of aggregate contractual obligations.\26\
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    \25\ See Item 303(a)(2)(ii) of Regulation S-K [17 CFR 
229.303(a)(2)(ii)].
    \26\ The Sarbanes-Oxley Act exempts from section 401 investment 
companies registered under section 8 of the Investment Company Act 
of 1940 (15 U.S.C. 80a-8). See Pub. L. 107-204 Sec. 405 [15 U.S.C. 
7263]. Therefore, registered investment companies are excluded from 
the scope of the amendments. The amendments apply, however, to 
business development companies. Business development companies are 
defined in section 2(a)(48) of the Investment Company Act of 1940. 
See 15 U.S.C. 80a-2(a)(48). Business development companies are a 
category of closed-end investment companies that are not required to 
register under the Investment Company Act, but file Forms 10-K and 
10-Q, and also include MD&A in their annual reports to shareholders.
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II. Overview of Proposals, Comments and Amendments

A. Proposing Release

    In November 2002, we published for comment proposals to require 
disclosure of a registrant's off-balance sheet arrangements in its 
MD&A.\27\ To address the scope of the disclosure contemplated by the 
Sarbanes-Oxley Act, the proposals included a definition of the term 
``off-balance sheet arrangement'' that covered a wide variety of 
arrangements. The proposed rules defined the term ``off-balance sheet 
arrangement'' as any transaction, agreement or other contractual 
arrangement to which an entity that is not consolidated with the 
registrant is a party, under which the registrant, whether or not a 
party to the arrangement, has, or in the future may have:
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    \27\ See Release No. 33-8144 (Nov. 4, 2002) [67 FR 68054].
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    [sbull] Any obligation under a direct or indirect guarantee or 
similar arrangement;
    [sbull] A retained or contingent interest in assets transferred to 
an unconsolidated entity or similar arrangement;
    [sbull] Derivatives, to the extent that the fair value thereof is 
not fully reflected as a liability or asset in the financial 
statements; or
    [sbull] Any obligation or liability, including a contingent 
obligation or liability, to the extent that it is not fully reflected 
in the financial statements (excluding the footnotes thereto).
    Because the Sarbanes-Oxley Act refers to off-balance sheet 
arrangements that ``may'' have a material future effect on the 
registrant, the proposed rules included a threshold for determining 
which off-balance sheet arrangements would have such an effect. In 
particular, the proposals would have required disclosure where the 
likelihood of either the occurrence of a future event implicating an 
off-balance sheet arrangement, or its material effect, was higher than 
remote. The proposed disclosure threshold departed from the existing 
MD&A threshold, under which a company must disclose information that is 
``reasonably likely'' to have a material effect on financial condition, 
changes in financial condition or results of operations.\28\
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    \28\ In a January 2002 Commission Statement, we indicated our 
view that ``reasonably likely'' is a lower disclosure threshold than 
``more likely than not.'' See Release No. 33-8056, FR-61 (Jan. 22, 
2002) [67 FR 3746] (the ``Commission Statement'').
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    The proposals contained specific items designed to elicit 
comprehensive information about a registrant's off-balance sheet 
arrangements that would provide investors with a clear understanding of 
the registrant's business activities, financial arrangements and 
financial statements. To filter out disclosure of insignificant 
details, the proposals would have required disclosure of enumerated 
items only ``to the extent necessary to an understanding of the 
registrant's off-balance sheet arrangements and their effect on 
financial condition, changes in financial condition and results of 
operations.'' The proposals would have required a registrant to 
disclose:
    [sbull] The nature and business purpose of the registrant's off-
balance sheet arrangements;
    [sbull] The significant terms and conditions of the arrangements;
    [sbull] The nature and amount of the total assets and of the total 
obligations and liabilities of an unconsolidated entity

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that conducts off-balance sheet activities;
    [sbull] The amounts of revenues, expenses and cash flows, the 
nature and amount of any retained interests, securities issued or other 
indebtedness incurred, or any other obligations or liabilities 
(including contingent obligations or liabilities) of the registrant 
arising from the arrangements that are, or may become, material and the 
circumstances under which they could arise;
    [sbull] Management's analysis of the material effects of the above 
items, including an analysis of the degree to which the registrant 
relies on off-balance sheet arrangements for its liquidity and capital 
resources or market risk or credit risk support or other benefits; and
    [sbull] A reasonably likely termination or material reduction in 
the benefits of an off-balance sheet arrangement and any material 
effects.
    We also proposed to require registrants to provide tabular 
disclosure of contractual obligations and either tabular or textual 
disclosure of contingent liabilities and commitments. With regard to 
the proposed table of contractual obligations, the proposed disclosure 
included amounts of a registrant's known contractual obligations, 
aggregated by type of obligation and by time period in which payments 
are due. The proposed disclosure of contingent liabilities and 
commitments required registrants to disclose, either in text or in 
tabular format, the expected amount, range of amounts or maximum amount 
of contingent liabilities and commitments, aggregated by type and by 
time period of the expiration of the commitment.

B. Overview of Comments and Amendments

    We received responses to our proposals from 48 commenters.\29\ 
Generally, the major issues raised by the responses fell into four 
categories: (1) The scope of the proposed definition of ``off-balance 
sheet arrangements;'' (2) the proposed disclosure threshold; (3) the 
proposed disclosure requirements for off-balance sheet arrangements; 
and (4) the scope of the proposed disclosure of contractual obligations 
and contingent liabilities and commitments. The commentary provided 
useful perspective on the practical issues that registrants would face 
in applying the proposed rules.
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    \29\ The commenters are as follows: Accounting Firms: BDO 
Seidman LLP (``BDO''); Deloitte & Touche LLP (``D&T''); Ernst & 
Young LLP (``E&Y''); KPMG LLP (``KPMG''); PricewaterhouseCoopers LLP 
(``PwC''). Law Firms: Cleary, Gottlieb, Steen & Hamilton 
(``Cleary''); Fried, Frank, Harris, Shriver & Jacobson (``Fried 
Frank''); Sullivan & Cromwell (``S&C''); Troutman Sanders LLP 
(``Troutman''). Associations: American Bar Association (``ABA''); 
American Institute of Certified Public Accountants (``AICPA''); 
American Society of Corporate Secretaries (``ASCS''); America's 
Community Bankers (``ACB''); Association for Financial Professionals 
(``AFP''); Association of the Bar of the City of New York (``NY City 
Bar''); Edison Electric Institute (``EEI''); Financial Executives 
International (``FEI''); Interfaith Council on Corporate 
Accountability (``CANICCOR''); Investment Company Institute 
(``ICI''); Investment Counsel Association of America (``ICAA''); 
National Association of Real Estate Investment Trusts (``NAREIT''); 
New York County Lawyer's Association (``NYCLA''); New York State Bar 
Association (``NYBA''); Organization for International Investment 
(``OFII''); Rose Foundation for Communities & Environment 
(``Rose''); Securities Industry Association (``SIA''). Corporations: 
Boeing Company (``Boeing''); Centex Corporation; (``Centex''); 
Compass Bancshares, Inc. (``Compass''); Computer Sciences 
Corporation (``CSC''); Constellation Energy Group (``CEG''); Eaton 
Corporation (``Eaton''); Eli Lilly and Company (``Lilly''); Emerson 
Electric Corporation (``Emerson''); First Tennessee National 
Corporation (``FTNC''); Ford Motor Company (``Ford''); IMC Global 
Inc. (``IMC''); Intel Corporation (``Intel''); Kellogg Company 
(``Kellogg''); Pfizer Inc. (``Pfizer''). Individuals: Barbara Barry 
(``Barry''); Robert Beard, C.P.A. (``Beard''); Kevin Bronner, Ph.D. 
(``Bronner''); Dave Henseler (``Henseler''); Timothy O'Keefe 
(``O'Keefe''); Ralph Saul (``Saul''). Governmental Bodies: European 
Commission (``EC'').
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1. Proposed Definition of ``Off-Balance Sheet Arrangements''
    While some commenters expressed general support for the proposed 
definition of ``off-balance sheet arrangements,'' \30\ the majority 
expressed the view that the definition was too broad and in need of 
further clarification.\31\ In particular, several commenters believed 
that the proposed definition included routine transactions that would 
not typically be considered to be ``off-balance sheet arrangements'' 
(e.g., executory contracts, employment agreements, consulting 
agreements, leases, licenses, royalty contracts, minimum purchase 
commitments, guarantees under customer contracts, and employee pension 
plan and postretirement benefit arrangements).\32\ Eight commenters 
suggested that the definition should focus on the types of 
unconsolidated entities that are typically used to conduct off-balance 
sheet activities, such as structured finance entities or special 
purpose entities (``SPEs'').\33\ One commenter suggested that the 
definition should focus on off-balance sheet arrangements used as a 
financing, liquidity or risk-sharing technique.\34\ Six commenters 
either were confused by, or opposed to, our proposal to include 
obligations or liabilities ``not fully reflected in the financial 
statements.''\35\ Finally, eight commenters recommended that we should 
reconcile apparent discrepancies between the elements of the proposed 
definition and the corollary accounting concepts embodied in GAAP.\36\
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    \30\ See, e.g., the letters of Compass, Emerson, Fried Frank, 
ICAA, IMC and PwC.
    \31\ See, e.g., the letters of ABA, ACB, AICPA, Boeing, CEG, 
CSC, D&T, Eaton, EEI, E&Y, FTNC, Kellogg, KPMG, Pfizer and S&C.
    \32\ See, e.g., the letters of ABA, ACB, AICPA, CEG, Centex, 
CSC, D&T, Eaton, EEI, E&Y, Kellogg, KPMG, NY City Bar and PwC.
    \33\ See, e.g., the letters of ABA, ACB, Centex, CSC, D&T, E&Y, 
KPMG and NY City Bar.
    \34\ See the letter of ABA.
    \35\ See, e.g., the letters of BDO, Compass, D&T, FTNC, Intel 
and S&C.
    \36\ See, e.g., the letters of ACB, AICPA, Boeing, CEG, D&T, 
EEI, E&Y and Pfizer.
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    At the commenters' suggestion, we are adopting a revised definition 
of ``off-balance sheet arrangement'' to clarify its scope. We agree 
that certain modifications of the proposed definition are necessary to 
eliminate disclosure of routine arrangements that could obscure more 
meaningful information. Accordingly, we have revised the definition to 
incorporate concepts from U.S. GAAP.\37\ We believe that the inclusion 
of references in the definition to U.S. GAAP help narrow the scope of 
arrangements that require more transparent disclosure under the 
amendments. The same types of off-balance sheet arrangements covered by 
the definition must be discussed in the MD&A regardless of the 
particular GAAP under which a registrant presents its primary financial 
statements. We are not imposing U.S. GAAP on foreign private issuers 
with respect to the preparation of their primary financial statements.
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    \37\ See Discussion in Section III.A.
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2. Proposed Disclosure Threshold
    The proposed rules would have required disclosure of off-balance 
sheet arrangements that ``may have a material current or future 
effect.'' The proposed rules stated that disclosure of an arrangement 
was not necessary ``if the likelihood of either the occurrence of an 
event implicating an off-balance sheet arrangement, or the materiality 
of its effect, is remote.'' We indicated that the proposed threshold of 
disclosure would have been lower than the current MD&A standard of 
``reasonably likely to have a material effect.'' We requested 
commentary on whether the proposed threshold was consistent under 
section 401(a) or whether a ``reasonably likely'' threshold was 
appropriate. Most commenters suggested that the final rule should 
incorporate the ``reasonably likely'' disclosure threshold that is 
currently found in MD&A rules,\38\ while

[[Page 5985]]

three commenters supported the disclosure threshold as proposed.\39\ In 
addition, many commenters stated that the ``reasonably likely'' 
threshold is an appropriate interpretation of the Sarbanes-Oxley 
Act.\40\ Many commenters opposed the proposed threshold because they 
thought that it would: be difficult for management to apply; yield 
voluminous disclosures; attribute undue prominence to information that 
is not important to investors; confuse or mislead investors; and elicit 
information that would not be comparable among firms.\41\ Some 
commenters indicated that the ``reasonably likely'' threshold is 
preferable because it would provide investors with the information that 
management considers important, as opposed to more speculative 
information that registrants would disclose under a lower 
threshold.\42\ Several commenters believed that it would be preferable 
to have consistency throughout MD&A by adopting the ``reasonably 
likely'' standard.\43\
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    \38\ See, e.g., the letters of ABA, ACB, AICPA, ASCS, Boeing, 
CEG, Cleary, Compass, CSC, D&T, Eaton, EEI, E&Y, Fried Frank, ICAA, 
IMC, Intel, KPMG, Lilly, NAREIT, NYBA, NY City Bar, Pfizer, PwC and 
S&C.
    \39\ See, e.g., the letters of Beard, CANICCOR and IMC.
    \40\ See, e.g., the letters of ABA, ACB, AICPA, CEG, Cleary, 
Compass, CSC, D&T, EEI, E&Y, Fried Frank, Lilly, NYBA, NY City Bar, 
Pfizer, PwC and S&C.
    \41\ See, e.g., the letters of ACB, AICPA, ASCS, Boeing, CEG, 
Cleary, Compass, CSC, D&T, EEI, FEI, Fried Frank, ICAA, KPMG, Lilly, 
NAREIT, NYBA, NY City Bar, Pfizer, PwC and S&C.
    \42\ See, e.g., the letters of Fried Frank, KPMG and Pfizer.
    \43\ See, e.g., the letters of ABA, ACB, AICPA, ASCS, CEG, CSC, 
D&T, Eaton, EEI, Fried Frank, FTNC, ICAA, Intel, KPMG, Lilly, 
NAREIT, NYBA, NY City Bar, Pfizer, PwC and S&C.
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    After considering the comments, we are adopting the ``reasonably 
likely'' disclosure threshold that we currently apply to other portions 
of MD&A disclosure.\44\ We believe that the ``reasonably likely'' 
threshold best promotes the utility of the disclosure requirements by 
reducing the possibility that investors will be overwhelmed by 
voluminous disclosure of insignificant and possibly unnecessarily 
speculative information.\45\ We have found no express reference in the 
legislative history conclusively demonstrating Congress' intent in 
using the word ``may.'' After considering the comments, we conclude 
that the ``reasonably likely'' standard focuses on the information most 
important to an understanding of a registrant's off-balance sheet 
arrangements and their material effects on the registrant's financial 
condition, changes in financial condition, revenues or expenses, 
results of operations, liquidity, capital expenditures or capital 
resources. In addition, we are mindful of the potential difficulty that 
registrants would have faced in attempting to comply with the 
``remote'' disclosure threshold set forth in the Proposing Release. We 
also believe that our use of a consistent disclosure threshold 
throughout MD&A will preclude the potential confusion that could result 
from disparate thresholds.
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    \44\ See Discussion in Section III.B.
    \45\ In June 2002, we proposed amendments to require registrants 
to file current reports on Form 8-K in the event of the creation of 
a direct or contingent material financial obligation or the 
occurrence of an event triggering a direct or contingent material 
financial obligation. See Release No. 33-8106 (June 17, 2002) [67 FR 
42914]. If adopted, those current reporting requirements will keep 
investors apprised of material contingent obligations arising from 
off-balance sheet arrangements even if these fall below the 
``reasonably likely'' threshold that we are adopting for MD&A 
disclosure.
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3. Proposed Disclosure Requirements
    While some commenters supported the proposed disclosure 
requirements,\46\ others believed the proposals to be overly 
prescriptive and detail-oriented.\47\ Eight commenters stated that the 
proposed disclosure would be voluminous, would not be useful or would 
be confusing to investors.\48\ Three commenters expressed concerns 
about the sensitivity and potential competitive harm of the required 
disclosures.\49\ In addition, seven commenters suggested that we should 
adopt a more flexible, principles-based approach to the MD&A 
disclosures.\50\
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    \46\ See, e.g., the letters of ICI, IMC, D&T, NYBA, Pfizer and 
PwC.
    \47\ See, e.g., the letters of Cleary, CSC, FTNC, NY City Bar 
and S&C.
    \48\ See, e.g., the letters of ACB, AFP, Boeing, CSC, FTNC, 
Cleary, NY City Bar and S&C.
    \49\ See, e.g., the letters of AFP, Boeing and Pfizer.
    \50\ See, e.g., the letters of BDO, Cleary, CSC, FTNC, NY City 
Bar, Pfizer and S&C.
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    Another area of concern was whether it is feasible to expect a 
registrant to be able to obtain information about the activities of 
unconsolidated entities over which it may not have control.\51\ For 
example, some commenters believed that companies might be unable to 
obtain, monitor or evaluate certain information about unconsolidated 
entities that conduct off-balance sheet activities (e.g., certain 
multi-party conduits or third parties that benefit from a pre-existing 
guarantee of the registrant).\52\
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    \51\ See, e.g., the letters of ABA, ACB, AICPA, Boeing, CSC, 
IMC, KPMG and Pfizer.
    \52\ Id.
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    After carefully evaluating the comments, we are adopting disclosure 
requirements that are more consistent with the principles-based 
approach found in current MD&A rules. The principle throughout the 
amendments is that the registrant should disclose information to the 
extent that it is necessary to an understanding of a registrant's 
material off-balance sheet arrangements and their material effects on 
financial condition, changes in financial condition, revenues or 
expenses, results of operations, liquidity, capital expenditures or 
capital resources. Consistent with traditional MD&A disclosure, 
management has the responsibility to identify and address the key 
variables and other qualitative and quantitative factors that are 
peculiar to, and necessary for, an understanding and evaluation of the 
company.\53\ The amendments contain the following four specific items 
to bolster the principles-based approach. These items require 
disclosure of the following information to the extent necessary for an 
understanding of a registrant's off-balance sheet arrangements and 
their effects:
---------------------------------------------------------------------------

    \53\ See Release No. 33-6349 (Sept. 28, 1981).
---------------------------------------------------------------------------

    [sbull] The nature and business purpose of the registrant's off-
balance sheet arrangements; \54\
---------------------------------------------------------------------------

    \54\ See, e.g., Item 303(a)(4)(i)(A) of Regulation S-K [17 CFR 
229.303(a)(4)(i)(A)].
---------------------------------------------------------------------------

    [sbull] The importance of the off-balance sheet arrangements to the 
registrant for liquidity, capital resources, market risk or credit risk 
support or other benefits; \55\
---------------------------------------------------------------------------

    \55\ See, e.g., Item 303(a)(4)(i)(B) of Regulation S-K [17 CFR 
229.303(a)(4)(i)(B)].
---------------------------------------------------------------------------

    [sbull] The financial impact of the arrangements on the registrant 
(e.g., revenues, expenses, cash flows or securities issued) and the 
registrant's exposure to risk as a result of the arrangements (e.g., 
retained interests or contingent liabilities); \56\ and
---------------------------------------------------------------------------

    \56\ See, e.g., Item 303(a)(4)(i)(C) of Regulation S-K [17 CFR 
229.303(a)(4)(i)(C)].
---------------------------------------------------------------------------

    [sbull] Known events, demands, commitments, trends or uncertainties 
that affect the availability or benefits to the registrant of material 
off-balance sheet arrangements.\57\
---------------------------------------------------------------------------

    \57\ See, e.g., Item 303(a)(4)(i)(D) of Regulation S-K [17 CFR 
229.303(a)(4)(i)(D)].

In addition, the amendments contain another principles-based 
requirement, similar to that used elsewhere in MD&A, that the 
registrant provide other information that it believes to be necessary 
for an understanding of its off-balance sheet arrangements and their 
material effects on the registrant's financial condition, changes in 
financial condition, revenues or expenses, results of operations, 
liquidity, capital expenditures or capital resources.\58\
---------------------------------------------------------------------------

    \58\ See, e.g., Item 303(a)(4)(i) of Regulation S-K [17 CFR 
229.303(a)(4)(i)].

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[[Page 5986]]

    We have eliminated one aspect of the proposed disclosure 
requirements after considering the public commentary. The amendments do 
not require a registrant to disclose the nature and amount of the total 
assets and total obligations of an unconsolidated entity that conducts 
off-balance sheet activities on behalf of the registrant. Commenters 
indicated that it might be impracticable to obtain, monitor or evaluate 
information about unconsolidated entities that are unaffiliated with 
the registrant.\59\ We believe that information regarding the nature 
and amount of assets transferred to an unconsolidated entity is more 
pertinent than a listing of the total assets and liabilities of that 
entity. We also believe that it may be necessary for a registrant to 
disclose the nature and amount of assets transferred to an 
unconsolidated entity in fulfilling its requirement to explain the 
nature and business purpose of an off-balance sheet arrangement.
---------------------------------------------------------------------------

    \59\ See, e.g., the letters of ABA, ACB, AICPA, Boeing, CSC, 
IMC, KPMG and Pfizer.
---------------------------------------------------------------------------

4. Proposed Tabular and Textual Disclosure
    Six commenters generally supported the proposed disclosure of 
contractual obligations and contingent liabilities and commitments,\60\ 
while four commenters opposed it.\61\ Two commenters expressed support 
for the proposed table of contractual obligations, but not for 
contingent liabilities and commitments.\62\ Four commenters believed 
that the disclosure would not improve transparency,\63\ and at least 13 
commenters requested guidance or clarification on how to implement the 
disclosure requirements.\64\
---------------------------------------------------------------------------

    \60\ See, e.g., the letters of ACB, Compass, CSC, ICAA, IMC and 
Pfizer.
    \61\ See, e.g., the letters of ABA, Eaton, Emerson and NY City 
Bar.
    \62\ See, e.g., the letters of AICPA and E & Y.
    \63\ See, e.g., the letters of Eaton, Emerson, NY City Bar and 
Troutman.
    \64\ See, e.g., the letters of ABA, ACB, BDO, Centex, D & T, 
Eaton, Emerson, ICAA, Kellogg, NYBA, NY City Bar, Rose and Troutman.
---------------------------------------------------------------------------

    Many of the commenters urged us to further limit and define the 
types of contractual obligations and contingent liabilities and 
commitments that would be subject to the new disclosure 
requirements.\65\ For example, some commenters believed that the 
disclosure should exclude purchase orders and contracts for goods and 
services in the ordinary course of business, as well as items for which 
GAAP would not require any disclosure in the financial statements and 
footnotes.\66\ In addition, some commenters suggested that we limit the 
disclosure of contractual obligations and commitments to contracts 
requiring cash payment.\67\ Some commenters suggested that the 
disclosure of contingent liabilities should cover only ``commercial 
commitments,'' to be defined by the rule \68\ and should exclude loss 
contingencies from litigation, arbitration or regulatory 
proceedings.\69\
---------------------------------------------------------------------------

    \65\ See, e.g., the letters of Centex, D & T, Eaton, Ford, FTNC, 
ICAA, IMC, Intel, Kellogg, NY City Bar and Pfizer.
    \66\ See, e.g., the letters of BDO, Centex, D & T, Emerson, 
Kellogg and NY City Bar.
    \67\ See, e.g., the letters of Centex and D & T.
    \68\ See, e.g., the letters of AICPA, E & Y, D & T, NYBA and 
PwC.
    \69\ See, e.g., the letters of AICPA, Eaton, E & Y, D & T, 
Intel, Troutman and PwC.
---------------------------------------------------------------------------

    In addition, many commenters believed that the disclosure would 
impose a large, new compliance burden on registrants by requiring them 
to aggregate and assess multiple contracts and commitments.\70\ Three 
commenters suggested that the disclosure should include a materiality 
threshold to help a registrant avoid the burden of identifying and 
evaluating insignificant contracts, contingencies or commitments.\71\ 
Finally, five commenters believed that the rule should exclude notes, 
drafts, acceptances, bills of exchange or other commercial instruments 
with a maturity of one year or less issued in the ordinary course of 
business.\72\
    After evaluating the comments received, we have modified the 
required table of contractual obligations. Contrary to the proposed 
rules, which only suggested the categories of contractual obligations 
to be included, the amendments specify that the following categories of 
contractual obligations must be included within the table:
---------------------------------------------------------------------------

    \70\ See, e.g., the letters of ABA, Centex, Eaton, Ford and NY 
City Bar.
    \71\ See, e.g., the letters of Centex, IMC and NY City Bar.
    \72\ See, e.g., the letters of Beard, CSC, IMC, NYBA and Pfizer.
---------------------------------------------------------------------------

    [sbull] Long-term debt obligations;
    [sbull] Capital lease obligations;
    [sbull] Operating lease obligations;
    [sbull] Purchase obligations; and
    [sbull] Other long-term liabilities reflected on the registrant's 
balance sheet under GAAP.

The preparation of financial statements in accordance with GAAP already 
requires registrants to assess payments under all of the above 
categories of contractual obligations, except for purchase obligations. 
To aid registrants in preparing the table, the amendments define the 
first four categories of contractual obligations.\73\ For issuers that 
present their primary financial statements in accordance with U.S. 
GAAP, we have defined the first three categories by referencing the 
relevant U.S. GAAP accounting pronouncements that require disclosure of 
these obligations in a registrant's financial statements or footnotes. 
The definition of ``purchase obligations'' is designed to capture the 
registrant's capital expenditures for purchases of goods or services 
over a five-year period. The fifth category captures all other long-
term liabilities that are reflected on the registrant's balance sheet 
under the registrant's applicable GAAP.
---------------------------------------------------------------------------

    \73\ See, e.g., Item 303(a)(5)(ii) of Regulation S-K [17 CFR 
229.303(a)(5)(ii)]. We are unable to follow a similar approach for 
registrants whose financial statements are prepared in accordance 
with a non-U.S. GAAP. An instruction, however, makes clear that such 
a registrant should base the categories of contractual obligations 
(except ``purchase obligations'') on the classifications used in the 
GAAP under which its primary financial statements are prepared. See, 
e.g., Instruction 2 to Item 5.F of Form 20-F [17 CFR 249.220f].
---------------------------------------------------------------------------

    The amendments require disclosure of the amounts of a registrant's 
purchase obligations without regard to whether notes, drafts, 
acceptances, bills of exchange or other commercial instruments will be 
used to satisfy such obligations because those instruments could have a 
significant effect on the registrant's liquidity. The purpose of this 
new disclosure requirement is to obtain enhanced disclosure concerning 
a registrant's contractual payment obligations, and the exclusion of 
commercial instruments would be inconsistent with that objective. 
Adoption of certain other suggestions of commenters, such as an 
exclusion of ordinary course items, a limitation to items reflected in 
financial statements or notes under GAAP or a materiality threshold 
would also be inconsistent with the objective.
    We are not adopting a disclosure requirement for contingent 
liabilities and commitments. We believe that meaningful disclosure of 
contingent liabilities and commitments is not necessarily best 
accomplished by an aggregated disclosure format (either tabular or 
textual) because such a format would inevitably omit important 
information about the operative facts and circumstances of contingent 
liabilities and commitments (e.g., triggering events, probability of 
occurrence or recourse provisions). In addition, we note that a number 
of new accounting \74\ and disclosure

[[Page 5987]]

requirements, including these amendments, address a registrant's 
contingent liabilities and commitments and may obviate the need for 
this additional disclosure requirement. We will, however, continue to 
assess the costs and benefits of an MD & A disclosure requirement for 
aggregate contingent liabilities and commitments in connection with our 
ongoing review of MD & A.\75\ Pending future Commission action on the 
subject, registrants should refer to the existing guidance in our 
Commission Statement to consider whether it would be beneficial to 
investors to include tabular disclosure of aggregate commercial 
commitments.\76\
---------------------------------------------------------------------------

    \74\ See, e.g., Financial Accounting Standards Board (``FASB'') 
Interpretation No. 45, Guarantor's Accounting and Disclosure 
Requirements for Guarantees, Including Indirect Guarantees of 
Indebtedness of Others (Nov. 2002), (``FIN 45''); and FASB 
Interpretation No. 46, Consolidation of Variable Interest Entities 
(Jan. 2003), (``FIN 46'').
    \75\ We are considering future rule proposals or interpretive 
releases to improve MD & A disclosure, such as requiring an overview 
about a company's situation and information about the trends that 
its management follows and evaluates in making decisions about how 
to guide the company's business.
    \76\ See Commission Statement, Release No. 33-8056, FR-61 (Jan. 
22, 2002) [67 FR 3746] at Section II.A.3.
---------------------------------------------------------------------------

III. Discussion of Amendments

A. Definition of ``Off-Balance Sheet Arrangement''

    The definition of ``off-balance sheet arrangement'' primarily 
targets the means through which companies typically structure off-
balance sheet transactions or otherwise incur risks of loss that are 
not fully transparent to investors. For example, in many cases, in 
order to facilitate a transfer of assets or otherwise finance the 
activities of an unconsolidated entity, a company must provide 
financial support designed to reduce risks to the entity or other third 
parties. That financial support may assume many different forms, such 
as financial guarantees, subordinated retained interests, keepwell 
agreements,\77\ derivative instruments or other contingent arrangements 
that expose the registrant to continuing risks or material contingent 
liabilities.\78\ To appropriately capture these transactions, the 
definition of ``off-balance sheet arrangement'' includes any 
contractual arrangement to which an unconsolidated entity is a party, 
under which the registrant has:
---------------------------------------------------------------------------

    \77\ A ``keepwell agreement'' includes any agreement or 
undertaking under which a company is, or would be, obligated to 
provide or arrange for the provision of funds or property to an 
affiliate or third party.
    \78\ For purposes of the amendments, contingent liabilities 
arising out of litigation, arbitration or regulatory actions are not 
considered to be off-balance sheet arrangements. See, e.g., 
Instruction 3 to Paragraph 303(a)(4) of Regulation S-K [17 CFR 
229.303].
---------------------------------------------------------------------------

    [sbull] Any obligation under certain guarantee contracts;\79\
---------------------------------------------------------------------------

    \79\ The guarantee contracts covered by the definition are 
consistent with the scope of the recently issued FIN 45.
---------------------------------------------------------------------------

    [sbull] A retained or contingent interest in assets transferred to 
an unconsolidated entity or similar arrangement that serves as credit, 
liquidity or market risk support to that entity for such assets;
    [sbull] Any obligation under certain derivative instruments;\80\
---------------------------------------------------------------------------

    \80\ For registrants whose financial statements are prepared in 
accordance with U.S. GAAP, the definition includes a contract that 
would be accounted for as a derivative instrument, except that it is 
both indexed to the registrant's own stock and classified in the 
registrant's statement of stockholders' equity. See FASB Statement 
of Financial Accounting Standards (``SFAS'') No. 133, Accounting for 
Derivative Instruments and Hedging Activities (June 1998), (``SFAS 
No. 133''), paragraph 11a. For other registrants, the definition 
includes derivative instruments that are both indexed to the 
registrant's own stock and classified in stockholders' equity, or 
not reflected, in the company's statement of financial position.
---------------------------------------------------------------------------

    [sbull] Any obligation under a material variable interest \81\ held 
by the registrant in an unconsolidated entity that provides financing, 
liquidity, market risk or credit risk support to the registrant, or 
engages in leasing, hedging or research and development services with 
the registrant.
---------------------------------------------------------------------------

    \81\ See FIN 46.
---------------------------------------------------------------------------

1. Guarantees
    The definition of ``off-balance sheet arrangements'' addresses 
certain guarantees that may be a source of potential risk to a 
registrant's future liquidity, capital resources and results of 
operations, regardless of whether or not they are recorded as 
liabilities. The definition borrows concepts from U.S. GAAP in order to 
identify the types of guarantee contracts for which disclosure is 
required. The references to U.S. GAAP apply regardless of the 
particular GAAP under which a registrant presents its primary financial 
statements.
    The first element of the definition refers to any obligation under 
a guarantee contract that has any of the characteristics identified in 
paragraph 3 of FIN 45, and that is not excluded from the initial 
recognition and measurement provisions of FIN 45.\82\ Paragraph 3 of 
FIN 45 includes within its scope any contract with one or more of the 
following four characteristics:
---------------------------------------------------------------------------

    \82\ See, e.g., Item 303(a)(4)(ii)(A) of Regulation S-K [17 CFR 
229.303(a)(4)(ii)(A)].
---------------------------------------------------------------------------

    [sbull] Contracts that contingently require the guarantor to make 
payments to the guaranteed party based on changes in an ``underlying'' 
\83\ that is related to an asset, a liability or an equity security of 
the guaranteed party (e.g., a financial standby letter of credit, a 
market value guarantee, a guarantee of the market price of the common 
stock of the guaranteed party or a guarantee of the collection of the 
scheduled contractual cash flows from individual financial assets held 
by an SPE);\84\
---------------------------------------------------------------------------

    \83\ An ``underlying'' is defined as ``a specified interest 
rate, security price, commodity price, foreign exchange rate, index 
of prices or rates, or other variable.'' See FIN 45 at fn. 2.
    \84\ See FIN 45, paragraph 3a.
---------------------------------------------------------------------------

    [sbull] Contracts that contingently require the guarantor to make 
payments to the guaranteed party based on another entity's failure to 
perform under an obligating agreement (e.g., a performance guarantee); 
\85\
---------------------------------------------------------------------------

    \85\ Id., paragraph 3b.
---------------------------------------------------------------------------

    [sbull] Indemnification agreements (contracts) that contingently 
require the indemnifying party (guarantor) to make payments to the 
indemnified party (guaranteed party) based on changes in an underlying 
that is related to an asset, a liability or an equity security of the 
indemnified party (e.g., an adverse judgment in a lawsuit or the 
imposition of additional taxes due to either a change in the tax law or 
an adverse interpretation of the tax law); \86\ or
---------------------------------------------------------------------------

    \86\ Id., paragraph 3c.
---------------------------------------------------------------------------

    [sbull] Indirect guarantees of the indebtedness of others, which 
arise under an agreement that obligates one entity to transfer funds to 
a second entity upon the occurrence of specified events, under 
conditions whereby (a) the funds become legally available to creditors 
of the second entity and (b) those creditors may enforce the second 
entity's claims against the first entity under the agreement (e.g., 
keepwell agreements).\87\
---------------------------------------------------------------------------

    \87\ Id., paragraphs 3d and 17.

The definition of ``off-balance sheet arrangement'' is designed so that 
a registrant's application of FIN 45 will provide the basis for 
determining the guarantee contracts that are subject to disclosure 
under the amendments.\88\ Paragraphs 6 and 7 of FIN 45 exclude certain 
guarantee contracts from the recognition and measurements provisions of 
FIN 45.\89\ These exclusions

[[Page 5988]]

also will apply to the definition of ``off-balance sheet arrangements'' 
in the amendments.
---------------------------------------------------------------------------

    \88\ A registrant that prepares its financial statements in 
accordance with a non-U.S. GAAP must apply FIN 45 to reconcile its 
financial statements with U.S. GAAP.
    \89\ Paragraph 6 of FIN 45 excludes: guarantees issued by 
insurance and reinsurance companies and accounted for under 
specialized accounting principles for those companies; a lessee's 
guarantee of the residual value of leased property in a capital 
lease; contingent rents; vendor rebates; and guarantees whose 
existence prevents the guarantor from recognizing a sale or the 
earnings from a sale. Paragraph 7 of FIN 45 excludes: product 
warranties; guarantees that are accounted for as derivatives; 
contingent consideration in a business combination; guarantees for 
which the guarantor's obligations would be reported as an equity 
item (rather than a liability); certain guarantees in connection 
with a lease restructuring; guarantees issued between either parents 
and their subsidiaries or corporations under common control; a 
parent's guarantee of a subsidiary's debt to a third party; and a 
subsidiary's guarantee of the debt owed to a third party by either 
its parent or another subsidiary of that parent.
---------------------------------------------------------------------------

2. Retained or Contingent Interests
    As an alternative to guarantee contracts, companies may structure 
and facilitate off-balance sheet arrangements by retaining an interest 
in assets transferred to an unconsolidated entity. For example, a 
subordinated retained interest in a pool of receivables transferred to 
an unconsolidated entity can provide credit support to the entity by 
cushioning the senior interests in the event that a portion of the 
receivables becomes uncollectible. In this event, the value of the 
retained interest can decline and can therefore have a material effect 
on a registrant's financial condition. Accordingly, the second element 
of the definition of ``off-balance sheet arrangements'' includes 
retained or contingent interests in assets transferred to an 
unconsolidated entity or similar arrangements that serve as credit, 
liquidity or market risk support to such entity for such assets.\90\
---------------------------------------------------------------------------

    \90\ See, e.g., Item 303(a)(4)(ii)(B) of Regulation S-K [17 CFR 
229.303(a)(4)(ii)(B)].
---------------------------------------------------------------------------

3. Certain Derivative Instruments
    Similar to guarantees or retained interests, certain derivative 
instruments have been used in structuring off-balance sheet 
arrangements. For example, a registrant may issue or hold derivative 
instruments that are indexed to its stock and classified as 
stockholders' equity under GAAP.\91\ The impact of those derivative 
instruments often is not transparent to investors because those 
derivative instruments are classified as equity and subsequent changes 
in fair value may not be periodically recognized in the financial 
statements. Therefore, the third element of the definition includes 
those derivative instruments to better apprise investors of their 
impact. The definition for registrants whose financial statements are 
prepared in accordance with U.S. GAAP includes derivative instruments 
that are excluded from SFAS No. 133 pursuant to paragraph 11a of that 
Statement.\92\ Similarly, the definition for registrants whose 
financial statements are prepared in accordance with a non-U.S. GAAP 
includes any obligation under a derivative instrument that is both 
indexed to the registrant's own stock and classified in stockholders' 
equity, or not reflected, in the registrant's statement of financial 
position.\93\
---------------------------------------------------------------------------

    \91\ See FASB Emerging Issues Task Force Issue (``EITF'') No. 
00-19 Accounting for Derivative Financial Instruments Indexed to, 
and Potentially Settled in, a Company's Own Stock (Jan. 2001). The 
FASB has been reevaluating the accounting treatment for such 
financial instruments and is expected to issue SFAS No. 149 
Accounting for Financial Instruments with Characteristics of 
Liabilities or Equity in February 2003.
    \92\ See SFAS No. 133, paragraph 11a. In particular, paragraph 
11a excludes contracts issued or held by a registrant that are both: 
(1) indexed to its own stock and (2) classified in stockholder's 
equity in its statement of financial position.
    \93\ See, e.g., Item 5.E.2(c) of Form 20-F [17 CFR 249.220f].
---------------------------------------------------------------------------

4. Variable Interests
    The fourth element of the definition includes any obligation, 
including a contingent obligation, arising out of a material variable 
interest held by the registrant in an unconsolidated entity, where such 
entity provides financing, liquidity, market risk or credit risk 
support to, or engages in leasing, hedging or research and development 
services with, the registrant.\94\ We intend for this element of the 
definition to be consistent with the concept of a ``variable interest'' 
that is included in the recently issued FASB Interpretation No. 46 
(``FIN 46''). The term ``variable interest'' is defined in FIN 46 as 
``contractual, ownership, or other pecuniary interests in an entity 
that change with changes in the entity's net asset value.''\95\ In 
other words, variable interests are investments or other interests that 
will absorb a portion of an entity's expected losses if they occur or 
receive portions of the entity's expected residual returns if they 
occur.\96\ To apply this element of the definition, a registrant must 
assess the variable interests it holds in the specified unconsolidated 
entities regardless of whether the entity is deemed to be a ``variable 
interest entity'' pursuant to paragraph 5 of FIN 46. To focus the 
disclosure on the most crucial off-balance sheet arrangements, however, 
the definition only applies to variable interests, that are material to 
the registrant, in entities that provide financing, liquidity, market 
risk or credit risk support to the registrant, or engage in leasing, 
hedging or research and development services with the registrant.\97\
---------------------------------------------------------------------------

    \94\ See, e.g., Item 303(a)(4)(ii)(D) of Regulation S-K [17 CFR 
229.303(a)(4)(ii)(D)].
    \95\ See FIN 46 at paragraph 2c.
    \96\ See FIN 46 at paragraph 6. The definition of ``off-balance 
sheet arrangement'' only addresses obligations arising out of a 
variable interest held by a registrant, and not residual returns.
    \97\ We identified the need for improved disclosures about 
entities that conduct these activities in the January 2002 
Commission Statement. See Commission Statement, Release No. 33-8056, 
FR-61 (Jan. 22, 2002) [67 FR 3746] at Section II.A.2.
---------------------------------------------------------------------------

B. Disclosure Threshold

    The amendments require disclosure of off-balance sheet arrangements 
that either have, or are reasonably likely to have, a current or future 
effect on the registrant's financial condition, changes in financial 
condition, revenues or expenses, results of operations, liquidity, 
capital expenditures or capital resources that is material to 
investors.\98\ That disclosure threshold is consistent with the 
existing disclosure threshold under which information that could have a 
material effect on financial condition, changes in financial condition 
or results of operations must be included in MD&A.\99\
---------------------------------------------------------------------------

    \98\ See, e.g., Item 303(a)(4)(i) of Regulation S-K [17 CFR 
229.303(a)(4)(i)].
    \99\ See Release No. 33-6835 (May 18, 1989) [54 FR 22427] (the 
``1989 Interpretive Release''). The January 2002 Commission 
Statement indicated that ``reasonably likely'' is a lower disclosure 
threshold than ``more likely than not.'' See Release No. 33-8056, 
FR-61 (Jan. 22, 2002) [67 FR 3746].
---------------------------------------------------------------------------

    To apply the disclosure threshold, management first must identify 
and critically analyze the registrant's off-balance sheet arrangements, 
including its guarantee contracts, retained or contingent interests, 
derivative instruments and variable interests. Second, management must 
assess the likelihood of the occurrence of any known trend, demand, 
commitment, event or uncertainty that could affect an off-balance sheet 
arrangement (e.g., performance under a guarantee; an obligation under a 
variable interest or equity-linked or indexed derivative instrument; or 
recognition of an impairment). If management concludes that the known 
trend, demand, commitment, event or uncertainty is not reasonably 
likely to occur, then no disclosure is required in MD&A.\100\ If 
management cannot make that determination, it must evaluate objectively 
the consequences of the known trend, demand, commitment, event or 
uncertainty on the assumption that it will come to fruition. Disclosure 
is then required unless management determines that a material effect on 
the registrant's financial condition, changes in financial condition, 
revenues or expenses, results of operations,

[[Page 5989]]

liquidity, capital expenditures or capital resources is not reasonably 
likely to occur. Consistent with other disclosure threshold 
determinations that management must make in drafting MD&A, the 
assessment must be objectively reasonable, viewed as of the time the 
determination is made.\101\
---------------------------------------------------------------------------

    \100\ Even if management determines that the likelihood of a 
material effect is not reasonably likely, disclosure may still be 
required in the footnotes to the financial statements. See, e.g., 
FIN 45, paragraph 13.
    \101\ See Release No. 33-6835 (May 18, 1989) [54 FR 22427].
---------------------------------------------------------------------------

C. Disclosure About Off-Balance Sheet Arrangements

    The amendments require a registrant to disclose the material facts 
and circumstances that provide investors with a clear understanding of 
a registrant's off-balance sheet arrangements and their material 
effects. To provide flexibility to registrants and to filter out 
disclosure of insignificant details, the amendments require disclosure 
of enumerated information only to the extent necessary to an 
understanding of a registrant's off-balance sheet arrangements and 
their material effects on financial condition, changes in financial 
condition, revenues and expenses, results of operations, liquidity, 
capital expenditures and capital resources. In addition to the 
enumerated information, the discussion must include such other 
information that the registrant believes is necessary for an 
understanding of its off-balance sheet arrangements and the specified 
material effects.\102\ The disclosure shall generally cover the most 
recent fiscal year, but it also should address changes from the 
previous year where such discussion is necessary to an understanding of 
the disclosure.\103\
---------------------------------------------------------------------------

    \102\ See, e.g., Item 303(a)(4)(i) of Regulation S-K [17 CFR 
229.303(a)(4)(i)].
    \103\ See, e.g., Instruction 4 to paragraph 303(a)(4) of 
Regulation S-K [17 CFR 229.303]. Compare Instruction 1 to Item 
303(a) of Regulation S-K [17 CFR 229.303].
---------------------------------------------------------------------------

    Under the amendments, a registrant must disclose the nature and 
business purpose of the off-balance sheet arrangements.\104\ This 
disclosure should explain to investors why a registrant engages in off-
balance sheet arrangements and should provide the information that 
investors need to understand the business activities advanced through a 
registrant's off-balance sheet arrangements. For example, a registrant 
may indicate that the arrangements enable the company to lease certain 
facilities rather than acquire them, where the latter would require the 
registrant to recognize a liability for the financing. Other possible 
disclosure under this requirement may indicate that the off-balance 
sheet arrangement enables the registrant to readily obtain cash through 
sales of groups of loans to a trust; to finance inventory, 
transportation or research and development costs without recognizing a 
liability; or to lower borrowing costs of unconsolidated affiliates by 
extending guarantees to their creditors.
---------------------------------------------------------------------------

    \104\ See, e.g., Item 303(a)(4)(i)(A) of Regulation S-K [17 CFR 
229.303(a)(4)(i)(A)].
---------------------------------------------------------------------------

    Under the amendments, a registrant must discuss the importance of 
its off-balance sheet arrangements to its liquidity, capital resources, 
market risk support, credit risk support or other benefits.\105\ This 
disclosure should provide investors with an understanding of the 
importance of off-balance sheet arrangements to the registrant as a 
financial matter. For example, if a registrant materially relies on 
off-balance sheet arrangements for its liquidity and capital resources, 
a registrant may be required to disclose how often it securitizes 
financial assets, to what degree its securitizations are a material 
source of liquidity, whether it has materially increased or decreased 
securitizations from past periods and to explain such increase or 
decrease. Together with the other disclosure requirements, registrants 
should provide information sufficient for investors to assess the 
extent of the risks that have been transferred and retained as a result 
of the arrangements.
---------------------------------------------------------------------------

    \105\ See, e.g., Item 303(a)(4)(i)(B) of Regulation S-K [17 CFR 
229.303(a)(4)(i)(B)].
---------------------------------------------------------------------------

    In addition, the disclosure should provide investors with insight 
into the overall magnitude of a registrant's off-balance sheet 
activities, the specific material impact of the arrangements on a 
registrant and the circumstances that could cause material contingent 
obligations or liabilities to come to fruition. Disclosure is required 
to the extent material and necessary to investors' understanding of:
    [sbull] The amounts of revenues, expenses, and cash flows of the 
registrant arising from the arrangements;
    [sbull] The nature and total amount of any interests retained, 
securities issued and other indebtedness incurred by the registrant in 
connection with such arrangements; and
    [sbull] The nature and amount of any other obligations or 
liabilities (including contingent obligations or liabilities) of the 
registrant arising from the arrangements that are, or are reasonably 
likely to become, material and the triggering events or circumstances 
that could cause them to arise.\106\
---------------------------------------------------------------------------

    \106\ See, e.g., Item 303(a)(4)(i)(C) of Regulation S-K [17 CFR 
229.303(a)(4)(i)(C)].
---------------------------------------------------------------------------

    The discussion also must identify any known event, demand, 
commitment, trend or uncertainty that will, or is reasonably likely to, 
result in the termination, or material reduction in availability to the 
registrant, of its off-balance sheet arrangements that provide the 
registrant with material benefits.\107\ Under this requirement, a 
registrant must disclose, for example, any material contractual 
provisions calling for the termination or material reduction of an off-
balance sheet arrangement. The disclosure also should address factors 
that are reasonably likely to affect the registrant's ability to 
continue using off-balance sheet arrangements that provide it with 
material benefits. For example, if a registrant's credit rating were to 
fall below a certain level, some off-balance sheet arrangements may 
require the registrant to purchase the assets or assume the liabilities 
of an unconsolidated entity. In addition, a change in a registrant's 
credit rating could either preclude or materially reduce the benefits 
to the registrant of engaging in off-balance sheet arrangements. In 
such cases, the registrant will have to disclose known circumstances 
that are reasonably likely to cause its credit rating to fall to the 
specified level and discuss the material consequences of the drop in 
ratings. In addition, the registrant must discuss the course of action 
that it has taken or proposes to take in response to a termination or 
material reduction in the availability of an off-balance sheet 
arrangement that provides material benefits.
---------------------------------------------------------------------------

    \107\ See, e.g., Item 303(a)(4)(i)(D) of Regulation S-K [17 CFR 
229.303(a)(4)(i)(D)].
---------------------------------------------------------------------------

    The amendments contain a principles-based requirement stating that 
a registrant must provide other information that it believes to be 
necessary for an understanding of its off-balance sheet arrangements 
and the material effects of these arrangements on its financial 
condition, changes in financial condition, revenues or expenses, 
results of operations, liquidity, capital expenditures or capital 
resources.\108\ The disclosure should provide investors with 
management's insight into the impact and proximity of the potential 
material risks that are reasonably likely to arise from material off-
balance sheet arrangements.
---------------------------------------------------------------------------

    \108\ See, e.g., Item 303(a)(4)(i) of Regulation S-K [17 CFR 
229.303(a)(4)(i)].
---------------------------------------------------------------------------

    The amendments instruct registrants to aggregate off-balance sheet 
arrangements in groups or categories that provide information in an 
efficient and understandable manner and avoid repetition and disclosure 
of immaterial

[[Page 5990]]

information.\109\ Common or similar effects that may result from a 
number of different off-balance sheet arrangements must be analyzed in 
the aggregate to the extent that the aggregation increases 
understanding. For example, if particular triggering events or 
circumstances would either require a registrant to become directly 
obligated, or accelerate its obligations, under a number of off-balance 
sheet arrangements, and the overall obligations would be material, then 
the amendments will require an analysis of the circumstances and their 
aggregate effect to the extent it increases understanding. Registrants 
should discuss distinctions among aggregated off-balance sheet 
arrangements if such distinctions are material, but the discussion 
should avoid repetition and disclosure of immaterial information.
---------------------------------------------------------------------------

    \109\ See, e.g., Instruction 2 to paragraph 303(a)(4) of 
Regulation S-K [17 CFR 229.303].
---------------------------------------------------------------------------

    In light of the fact that the off-balance sheet arrangements 
covered under the amendments are contractual, it is appropriate to 
apply the Commission's policy regarding MD&A disclosure of preliminary 
negotiations. Therefore, the amendments include an instruction that no 
obligation to make disclosure of an off-balance sheet arrangement will 
arise until an unconditionally binding definitive agreement, subject 
only to customary closing conditions exists or, if there is no such 
agreement, when settlement of the transaction occurs.\110\ That 
instruction is consistent with the Commission policy set forth in its 
1989 Interpretive Release on disclosure of preliminary negotiations for 
the acquisition or disposition of assets not in the ordinary course of 
business.\111\ In the 1989 Interpretive Release, the Commission stated 
that, ``where disclosure is not otherwise required, and has not 
otherwise been made, the MD&A need not contain a discussion of the 
impact of [preliminary negotiations for the acquisition or disposition 
of assets not in the ordinary course of business] where, in the 
registrant's view, inclusion of such information would jeopardize 
completion of the transaction.'' \112\
---------------------------------------------------------------------------

    \110\ See, e.g., Instruction 1 to paragraph 303(a)(4) of 
Regulation S-K [17 CFR 229.303].
    \111\ See Release No. 33-6835 (May 18, 1989) [54 FR 22427].
    \112\ Id. at 22436.
---------------------------------------------------------------------------

D. Tabular Disclosure of Contractual Obligations

    Some accounting standards require disclosure concerning a 
registrant's obligations and commitments to make future payments under 
contracts, such as debt and lease agreements.\113\ Information about 
other obligations, such as purchase contracts, may or may not be 
disclosed, but if disclosed, it is usually dispersed throughout a 
filing and may not be presented in a consistent manner among 
registrants. Aggregated information about a registrant's contractual 
obligations in a single location will provide useful context for 
investors to assess a registrant's short- and long-term liquidity and 
capital resource needs and demands. In addition, it will improve an 
investor's ability to compare registrants. Therefore, we are requiring 
registrants to disclose in a tabular format the amounts of payments due 
under specified contractual obligations, aggregated by category of 
contractual obligation, for specified time periods.\114\ We are not 
adopting this requirement for small business issuers that file small 
business reporting forms.\115\ The registrant must provide the 
information as of the latest fiscal year end balance sheet date,\116\ 
and the table should be in substantially the same form as follows:
---------------------------------------------------------------------------

    \113\ See, e.g., FASB SFAS No. 13, Accounting for Leases (Nov. 
1976); SFAS No. 47, Disclosure of Long-Term Obligations (March 
1981); and SFAS No. 129, Disclosure of Information about Capital 
Structure (Feb. 1997).
    \114\ See, e.g., Item 303(a)(5)(i) of Regulation S-K [17 CFR 
229.303(a)(5)(i)].
    \115\ ``Small business issuer'' is defined to mean any entity 
that (1) Has revenues of less than $25,000,000; (2) is a U.S. or 
Canadian issuer; (3) is not an investment company; and (4) if a 
majority-owned subsidiary, has a parent corporation that also is a 
small business issuer. An entity is not a small business issuer, 
however, if it has a public float (the aggregate market value of the 
outstanding equity securities held by non-affiliates) of $25,000,000 
or more. See 17 CFR 228.10.
    \116\ Registrants are not required to include the table for 
interim periods. Instead, a registrant should update the table from 
its annual report by disclosing only material changes outside of the 
ordinary course of business. See, e.g., Instruction 7 to paragraph 
303(b) of Regulation S-K [17 CFR 229.303].

----------------------------------------------------------------------------------------------------------------
                                                                      Payments due by period
                                                ----------------------------------------------------------------
            Contractual  obligations                          Less than 1                            More than 5
                                                    Total         year      1-3 years    3-5 years      years
----------------------------------------------------------------------------------------------------------------
[Long-Term Debt]...............................  ...........  ...........  ...........  ...........  ...........
[Capital Lease Obligations]....................  ...........  ...........  ...........  ...........  ...........
[Operating Leases].............................  ...........  ...........  ...........  ...........  ...........
[Purchase Obligations].........................  ...........  ...........  ...........  ...........  ...........
[Other Long-Term Liabilities Reflected on the    ...........  ...........  ...........  ...........  ...........
 Registrant's..................................
Balance Sheet under GAAP]......................  ...........  ...........  ...........  ...........  ...........
                                                --------------
      Total....................................  ...........  ...........  ...........  ...........  ...........
----------------------------------------------------------------------------------------------------------------

To provide flexibility for company-specific disclosure, the amendments 
allow a registrant to disaggregate the specified categories by using 
other categories suitable to its business, but the table must include 
all of the obligations that fall within specified categories.\117\ In 
addition, the table should be accompanied by footnotes necessary to 
describe material contractual provisions or other material information 
to the extent necessary for an understanding of the timing and amount 
of the contractual obligations in the table.
---------------------------------------------------------------------------

    \117\ See, e.g., Item 303(a)(5)(i) of Regulation S-K [17 CFR 
229.303(a)(5)(i)].
---------------------------------------------------------------------------

    U.S. GAAP already requires registrants to aggregate and assess all 
of the specified categories, except for purchase obligations. 
Accordingly, the first three categories of contractual obligations are 
defined by reference to the relevant U.S. GAAP accounting 
pronouncements.\118\ A registrant that prepares financial statements in 
accordance with a non-U.S. GAAP should include contractual obligations 
in the table that are consistent with the classifications used in the 
GAAP under which its primary financial statements are prepared.\119\
---------------------------------------------------------------------------

    \118\ See, e.g., Item 303(a)(5)(ii) of Regulation S-K [17 CFR 
229.303(a)(5)(ii)].
    \119\ See, e.g., Instruction 2 to Item 5.F of Form 20-F [17 CFR 
249.220f].
---------------------------------------------------------------------------

    Some purchase obligations are executory contracts, and therefore 
are not recognized as liabilities in

[[Page 5991]]

accordance with GAAP.\120\ Because purchase obligations may have a 
significant effect on the registrant's liquidity, they are included in 
the table. The amendments provide a definition of ``purchase 
obligations.'' A ``purchase obligation'' is defined as an agreement to 
purchase goods or services that is enforceable and legally binding on 
the registrant and that specifies all significant terms, including: 
fixed or minimum quantities to be purchased; fixed, minimum or variable 
price provisions; and the approximate timing of the transaction.\121\ 
If the purchase obligations are subject to variable price provisions, 
then the registrant must provide estimates of the payments due. In that 
case, the table should include footnotes to inform investors of the 
payments that are subject to market risk, if that information is 
material to investors. In addition, the footnotes should discuss any 
material termination or renewal provisions to the extent necessary for 
an understanding of the timing and amount of the registrant's payments 
under its purchase obligations.
---------------------------------------------------------------------------

    \120\ See FASB, Statement of Financial Accounting Concepts No. 
6, Elements of Financial Statements (Dec. 1985), paragraphs 35-40.
    \121\ See, e.g., Item 303(a)(5)(ii)(D) of Regulation S-K [17 CFR 
229.303(a)(5)(ii)(D)].
---------------------------------------------------------------------------

E. Presentation of Disclosure

1. Separate Disclosure Sections
    The amendments require a registrant to present the disclosure about 
off-balance sheet arrangements in a separately-captioned section of 
MD&A. In contrast, a registrant may place the tabular disclosure of 
known contractual obligations in an MD&A location that it deems to be 
appropriate. In response to the request for comments in the Proposing 
Release, five commenters suggested that the issuer should be able to 
determine the placement of the off-balance sheet disclosures within the 
MD&A,\122\ and two commenters supported a separate disclosure section 
for off-balance sheet disclosures.\123\ After evaluating the comments, 
we are adopting a requirement for a separate section for two reasons. 
First, a distinct presentation of the information will highlight it for 
readers and enable investors to more easily compare disclosure of 
different companies. Second, a distinct presentation will layer the 
MD&A, and thereby enable investors with varying levels of interest and 
financial acumen to easily obtain desired information.
---------------------------------------------------------------------------

    \122\ See, e.g., the letters of ACB, CSC, D&T, IMC and Pfizer.
    \123\ See, e.g., the letters of Beard and PwC.
---------------------------------------------------------------------------

2. Language and Format
    The MD&A discussion should be presented in language and a format 
that is clear, concise and understandable. For example, a registrant 
may choose to include the financial impact of its off-balance sheet 
arrangements (e.g., revenues, expenses, gains or losses) aggregated by 
type of arrangement in a tabular format. The information should not be 
presented in such a manner that only an accountant or financial analyst 
or an expert on a particular industry would be able to fully understand 
it. Boilerplate disclosures that do not specifically address the 
registrant's particular circumstances and operations will not satisfy 
the MD&A requirements. Disclosure that can easily be transferred from 
year to year, or from company to company, with no change will neither 
inform investors adequately nor reflect the independent thinking that 
must precede the assessment by management that is intended for MD&A 
disclosure.
3. Cross-Referencing to the Financial Statements
    In response to the Proposing Release, eight commenters noted that 
some of the disclosures appear to be redundant with GAAP disclosure 
requirements.\124\ To eliminate unnecessary repetition, the amendments 
allow a registrant to include within its MD&A section a cross-reference 
to information in the footnotes to the financial statements.\125\ The 
cross-reference must clearly identify specific information in the 
footnotes and must integrate the substance of the footnotes into the 
MD&A discussion in a manner designed to inform readers of the 
significance of the information that is not included within the body of 
the MD&A. Registrants should ensure that the quality of the discussion 
of off-balance sheet arrangements has not diminished as a result of 
including a cross-reference. In addition, the disclosure in the 
referenced footnotes should comply with the language and format 
requirements discussed above.
---------------------------------------------------------------------------

    \124\ See, e.g., the letters of ACB, Boeing, Eaton, E&Y, Ford, 
KPMG, NAREIT and NY City Bar.
    \125\ See, e.g., Instruction 5 to paragraph 303(a)(4) of 
Regulation S-K [17 CFR 229.303(a)(4)].
---------------------------------------------------------------------------

F. Effect of Amendments on Commission Statement

    In an effort to provide guidance to public companies, our January 
2002 Commission Statement presented a number of factors that management 
should consider regarding the MD&A disclosure requirements for 
liquidity and capital resources, off-balance sheet arrangements, 
certain trading activities that include non-exchange traded contracts 
accounted for at fair value, and transactions with persons or entities 
that derive benefits from their non-independent relationships with the 
registrant or the registrant's related parties.\126\ The amendments 
relating to disclosures that are the subject of this release will 
supersede the guidance in the Commission Statement on disclosure of 
off-balance sheet arrangements \127\ as of the Compliance Date for the 
amendments. On the Compliance Date for the amendments relating to 
disclosure of the table of contractual obligations, the guidance in the 
Commission Statement on disclosure of the table of contractual 
obligations \128\ also will be superseded by the amendments. All other 
guidance issued in the Commission Statement will remain in effect. 
While the Compliance Dates for the amendments applies to annual 
reports, registration statements and proxy or information statements 
that are required to include financial statements for the fiscal years 
ending on or after June 15, 2003 for disclosure about off-balance sheet 
arrangements and December 15, 2003 for the table of contractual 
obligations, we assume that registrants with fiscal years ending before 
the Compliance Dates will continue to follow the guidance in the 
Commission Statement. Registrants may voluntarily comply with the new 
disclosure requirements before the Compliance Dates.
---------------------------------------------------------------------------

    \126\ See Commission Statement, Release No. 33-8056, FR-61 (Jan. 
22, 2002)[67 FR 3746].
    \127\ See Commission Statement, Section II.A.2.
    \128\ See Commission Statement, Section II.A.3.
---------------------------------------------------------------------------

G. Application to Foreign Private Issuers

    The amendments apply to foreign private issuers that file annual 
reports on Form 20-F \129\ or on Form 40-F.\130\ Because section 401(a) 
of the Sarbanes-Oxley Act does not distinguish between foreign private 
issuers \131\ and U.S. companies, we interpret Congress' directive to 
the Commission to adopt rules requiring expanded disclosure about off-
balance sheet transactions in annual reports filed with the

[[Page 5992]]

Commission to apply equally to Form 20-F or 40-F annual reports filed 
by foreign private issuers and to Form 10-K or 10-KSB annual reports 
filed by domestic issuers. In response to the Proposing Release, three 
commenters believed that the rules should apply to foreign private 
issuers, \132\ five commenters believed that the rules should not apply 
to MJDS filers,\133\ and four commenters believed that the Sarbanes-
Oxley Act does not, and should not, require the proposals to be applied 
to foreign private issuers and MJDS filers.\134\ We do not believe that 
it is appropriate to exempt foreign private issuers or MJDS filers 
because, as discussed below, the disclosure requirements do not 
represent a fundamental change in our approach with respect to the 
financial disclosure provided by foreign private issuers and MJDS 
filers.
---------------------------------------------------------------------------

    \129\ 17 CFR 249.220f.
    \130\ 17 CFR 249.240f. Form 40-F is the form used by qualified 
Canadian issuers to file their Exchange Act registration statements 
and annual reports with the Commission in accordance with Canadian 
disclosure requirements under the U.S.-Canadian Multijurisdictional 
Disclosure System (``MJDS'').
    \131\ A foreign private issuer is a non-U.S. company except for 
a company that has more than 50% of its outstanding voting 
securities owned by U.S. investors and has a majority of its 
officers and directors residing in or being citizens of the U.S., 
has a majority of its assets located in the U.S., or has its 
business principally administered in the U.S. See Exchange Act Rule 
3b-4 [17 CFR 240.3b-4].
    \132\ See, e.g., the letters of AICPA, D&T and Pfizer.
    \133\ See, e.g., the letters of AICPA, D&T, Fried Frank, Pfizer 
and PwC.
    \134\ See, e.g., the letters of ABA, OFII, NY City Bar and S&C.
---------------------------------------------------------------------------

    There are two additional reasons for applying the amendments to 
foreign private issuers' annual reports filed with the Commission. 
First, investors and others would enjoy the same benefits from expanded 
off-balance sheet disclosure in foreign private issuers' annual reports 
as they would from this disclosure in domestic issuers' annual reports. 
Second, for Form 20-F annual reports, the existing MD&A-equivalent 
requirements for foreign private issuers currently mirror the 
substantive MD&A requirements for U.S. companies. We believe this 
desirable policy should continue.\135\
---------------------------------------------------------------------------

    \135\ Although we revised the wording of the MD&A Item in Form 
20-F in 1999, the adopting release noted that we interpret that Item 
as requiring the same disclosure as Item 303 of Regulation S-K. See 
Release No. 33-7745 (September 28, 1999) [64 FR 53900 at 59304]. In 
addition, Instruction 1 to Item 5 in Form 20-F provides that issuers 
should refer to the Commission's 1989 interpretive release on MD&A 
disclosure under Item 303 of Regulation S-K for guidance in 
preparing the discussion and analysis by management of the company's 
financial condition and results of operations required in Form 20-F. 
See Release No. 33-6835 (May 18, 1989) [54 FR 22427].
---------------------------------------------------------------------------

    The disclosure provided by Canadian issuers that file Form 40-F is 
generally that required under Canadian law. We have, however, 
supplemented these disclosure requirements with specific required items 
of information.\136\ We have adopted additional disclosure requirements 
under Form 40-F as a result of the Sarbanes-Oxley Act.\137\
---------------------------------------------------------------------------

    \136\ For example, under General Instruction C.2 of Form 40-F, 
the issuer must usually include financial information that is 
reconciled to U.S. generally accepted accounting principles.
    \137\ We have recently adopted amendments in Form 40-F to 
require disclosure concerning whether the issuer has adopted a code 
of ethics applicable to certain officers and whether it has a 
financial expert on its audit committee. See Release No. 33-8177 
(January 23, 2003) [Not yet published in Federal Register].
---------------------------------------------------------------------------

    Although an issuer prepares its MD&A discussion contained in a Form 
40-F registration statement or annual report in accordance with 
Canadian disclosure standards, we believe that requiring disclosure of 
off-balance sheet arrangements and a table of contractual obligations 
in accordance with SEC rules is not inconsistent with the principles of 
the MJDS, is consistent with the Sarbanes-Oxley Act and, most 
importantly, will provide investors with useful information that is 
comparable to that provided by U.S. and other foreign companies that 
file reports under the Exchange Act.
    Section 401(a) of the Sarbanes-Oxley Act also requires the 
Commission to adopt off-balance sheet disclosure rules that apply to 
``each quarterly financial report required to be filed with the 
Commission.'' \138\ Foreign private issuers are not required to file 
``quarterly'' reports with the Commission, and therefore the amendments 
do not apply to Form 6-K reports submitted by foreign private issuers 
to provide copies of materials required to be made public in their home 
jurisdictions.\139\ Thus, unless a foreign private issuer files a 
Securities Act registration statement that must include interim period 
financial statements and related MD&A disclosure, it will not be 
required to update its MD&A disclosure more frequently than 
annually.\140\
    The MD&A disclosure that foreign private issuers currently provide 
in documents filed with the Commission must focus on the primary 
financial statements, whether those are prepared in accordance with 
U.S. GAAP or a non-U.S. GAAP.\141\ Foreign private issuers whose 
primary financial statements are prepared in accordance with a non-U.S. 
GAAP should include in their MD&A a discussion of the reconciliation to 
U.S. GAAP, and any differences between foreign and U.S. GAAP, if it 
would be necessary for an understanding of the financial statements as 
a whole.\142\ Consistent with that existing MD&A requirement for 
foreign private issuers, the disclosure about off-balance sheet 
arrangements and the table of contractual obligations must focus on the 
primary financial statements presented in the document, while taking 
the reconciliation into account.
    The definition of ``off-balance sheet arrangements'' covers the 
same types of arrangements regardless of whether a registrant is a 
foreign private issuer or a domestic issuer. We believe that the 
references to U.S. GAAP in the definition best achieve the appropriate 
scope of arrangements that require more transparent disclosure, 
regardless of any particular accounting treatment. To identify the 
types of arrangements that are subject to disclosure under the 
amendments, a foreign private issuer must assess its guarantee 
contracts and variable interests pursuant to U.S. GAAP. Foreign private 
issuers must already make this assessment when they reconcile or 
prepare their financial statements in accordance with U.S. GAAP. A 
foreign private issuer's MD&A disclosure should continue to focus on 
its primary financial statements despite the fact that its various 
``off-balance sheet arrangements'' have been defined by reference to 
U.S. GAAP.
---------------------------------------------------------------------------

    \138\ Exchange Act section 13(j) [15 U.S.C. 78m(j)].
    \139\ A foreign private issuer must furnish under cover of Form 
6-K material information that it makes public or is required to make 
public under its home country laws or the rules of its home country 
stock exchange or that it distributes to security holders. While 
foreign private issuers may submit interim financial information 
under cover of Form 6-K, they do so pursuant to their home country 
requirements and not because of a Commission requirement to submit 
updated financial information for specified periods and according to 
specified standards. Therefore, we do not believe that a Form 6-K 
constitutes a ``periodic'' or ``quarterly'' report analogous to a 
Form 10-Q or 10-QSB for which expanded disclosure is required. We 
similarly clarified that Form 6-K reports are not subject to the 
recently adopted section 302 certification requirements. See Release 
No. 33-8124 at n. 50.
    \140\ Similar to our treatment of Securities Act registration 
statements filed by domestic issuers, we are including within the 
scope of the amendments Securities Act registration statements filed 
by foreign private issuers on Forms F-1, F-2, F-3 and F-4 [17 CFR 
239.31-239.34]. Each of these registration statements references 
Form 20-F's disclosure requirements. The amendments would not, 
however, apply to Securities Act registration statements filed by 
Canadian issuers under the MJDS because we believe them to be 
outside the scope of the directive in section 401(a) of the 
Sarbanes-Oxley Act. These MJDS registration statements are based on 
Canadian disclosure requirements.
    \141\ See Instruction 2 to Item 5 of Form 20-F [17 CFR 
249.220f].
    \142\ Id.
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H. Safe Harbor for Forward-Looking Information

    Some of the disclosure required by the amendments would require 
disclosure of forward-looking information.\143\ To encourage the type 
of

[[Page 5993]]

information and analysis necessary for investors to understand the 
impact of off-balance sheet arrangements and to reduce the burden of 
estimating the payments due under contractual obligations, the 
amendments include a safe harbor for forward-looking information.\144\ 
The safe harbor explicitly applies the statutory safe harbor 
protections (sections 27A of the Securities Act and 21E of the Exchange 
Act) \145\ to forward-looking information that is required to be 
disclosed.
---------------------------------------------------------------------------

    \143\ We are therefore eliminating a portion of the instructions 
in the MD&A rules that state that registrants are not required to 
provide forward-looking information. See, e.g., Instruction 7 to 
Item 303(a) and 6 to Item 303(b) of Regulation S-K [17 CFR 229.303]. 
Deleting that portion of the instructions does not in any way reduce 
the availability of any existing safe harbor for forward-looking 
information.
    \144\ See, e.g., Item 303(c) of Regulation S-K [17 CFR 
229.303(c)].
    \145\ See 15 U.S.C. 77z-2 and 78u-5.
---------------------------------------------------------------------------

    The statutory safe harbors contain provisions to protect forward-
looking statements against private legal actions that are based on 
allegations of a material misstatement or omission.\146\ The statutory 
safe harbors provide three separate bases for a registrant to claim the 
protection against liability for forward-looking statements made in the 
registrant's MD&A. First, a forward-looking statement will fall within 
the safe harbors if identified as forward-looking and accompanied by 
meaningful cautionary statements that identify important factors that 
could cause actual results to differ materially from those in the 
forward-looking statement. Second, the safe harbors protect from 
private liability any forward-looking statement that is not material. 
Finally, the safe harbors preclude private liability if a plaintiff 
fails to prove that the forward-looking statement was made by or with 
the approval of an executive officer of the registrant who had actual 
knowledge that it was false or misleading. The statutory safe harbors 
cover statements by reporting companies, persons acting on their 
behalf, outside reviewers retained by them, and their underwriters 
(when using information from, or derived from, the companies).
---------------------------------------------------------------------------

    \146\ While the statutory safe harbors by their terms do not 
apply to forward-looking statements included in financial statements 
prepared in accordance with U.S. GAAP, they do cover MD&A 
disclosures. The statutory safe harbors would not apply, however, if 
the MD&A forward-looking statement were made in connection with: an 
initial public offering, a tender offer, an offering by a 
partnership or a limited liability company, a roll-up transaction, a 
going private transaction, an offering by a blank check company or a 
penny stock issuer, or an offering by an issuer convicted of 
specified securities violations or subject to certain injunctive or 
cease and desist actions. See 15 U.S.C. 77z-2(b) and 78u-5(b).
---------------------------------------------------------------------------

    Because we believe that it would promote more meaningful 
disclosure, we are invoking rulemaking authority under sections 27A and 
21E to create a new safe harbor to ensure the application of the 
statutory safe harbors to the forward-looking statements required under 
the amendments. The safe harbor is designed to remove possible 
ambiguity about whether the statutory safe harbors would apply to the 
forward-looking statements made in response to the amendments. The safe 
harbor specifies that, except for historical facts, the disclosure 
would be deemed to be a ``forward looking statement'' as that term is 
defined in the statutory safe harbors.\147\ In addition, with respect 
to the MD&A discussion of off-balance sheet arrangements, we are 
adopting a provision that the ``meaningful cautionary statements'' 
element of the statutory safe harbors will be satisfied if a registrant 
satisfies all of its off-balance sheet arrangements disclosure 
requirements.\148\ Because the new MD&A safe harbor is closely linked 
to the statutory safe harbors, we urge companies preparing their 
disclosure to consider the terms, conditions and scope of the statutory 
safe harbors in drafting their disclosure.
---------------------------------------------------------------------------

    \147\ See, e.g., Item 303(c)(2)(i) of Regulation S-K [17 CFR 
229.303(c)(2)(i)].
    \148\ See, e.g., Item 303(c)(2)(ii) of Regulation S-K [17 CFR 
229.303(c)(2)(ii)]. Because this provision does not apply to the 
required table of contractual obligations, registrants should tailor 
the required cautionary language to the specific forward-looking 
statements being made.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

A. Background

    The amendments to Regulations S-B, S-K,\149\ Form 20-F and Form 40-
F contain ``collection of information'' requirements within the meaning 
of the Paperwork Reduction Act of 1995 (``PRA'').\150\ We published a 
notice requesting comment on the collection of information requirements 
in the Proposing Release, and we submitted these requirements to the 
Office of Management and Budget (``OMB'') for review in accordance with 
the PRA.\151\ The titles for the collections of information are:
---------------------------------------------------------------------------

    \149\ Although we are proposing amendments to Regulations S-B 
and S-K, the burden is imposed through the forms that refer to the 
disclosure regulations. To avoid a Paperwork Reduction Act inventory 
reflecting duplicative burdens, we estimate the burdens imposed by 
Regulations S-B and S-K to be one hour.
    \150\ 44 U.S.C. 3501 et seq.
    \151\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    (1) ``Form S-1'' (OMB Control No. 3235-0065);
    (2) ``Form F-1'' (OMB Control No. 3235-0258);
    (3) ``Form SB-2'' (OMB Control No. 3235-0418);
    (4) ``Form S-4'' (OMB Control No. 3235-0324);
    (5) ``Form F-4'' (OMB Control No. 3235-0325);
    (6) ``Form 10'' (OMB Control No. 3235-0064);
    (7) ``Form 10-SB'' (OMB Control No. 3235-0419);
    (8) ``Form 20-F'' (OMB Control No. 3235-0288);
    (9) ``Form 40-F'' (OMB Control No. 3235-0381);
    (10) ``Form 10-K'' (OMB Control No. 3235-0063);
    (11) ``Form 10-KSB'' (OMB Control No. 3235-0420);
    (12) ``Proxy Statements--Regulation 14A (Commission Rules 14a-1 
through 14a-15) and Schedule 14A'' (OMB Control No. 3235-0059);
    (13) ``Information Statements--Regulation 14C (Commission Rules 
14c-1 through 14c-7 and Schedule 14C)'' (OMB Control No. 3235-0057);
    (14) ``Form 10-Q'' (OMB Control No. 3235-0070);
    (15) ``Form 10-QSB'' (OMB Control No. 3235-0416);
    (16) ``Regulation S-K'' (OMB Control No. 3235-0071); and

    (17) ``Regulation S-B'' (OMB Control No. 3235-0417).

These regulations and forms were adopted pursuant to the Securities Act 
and the Exchange Act and set forth the disclosure requirements for 
annual and quarterly reports, registration statements and proxy and 
information statements filed by companies to ensure that investors are 
informed. The hours and costs associated with preparing, filing, and 
sending these forms constitute reporting and cost burdens imposed by 
each collection of 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 amendments require public companies to include a discussion of 
material off-balance sheet arrangements and a table of certain 
contractual obligations in the MD&A section of their filings with the 
Commission. We are adopting these rules pursuant to the legislative 
mandate in section 401(a) of the Sarbanes-Oxley Act of 2002.\152\ 
Compliance with the revised disclosure requirements is mandatory. There 
is no mandatory retention period for the information disclosed, and 
responses to the disclosure requirements will not be kept confidential.
---------------------------------------------------------------------------

    \152\ Pub. L. 107-204 Sec. 401(a) [15 U.S.C. 78m(j)].
---------------------------------------------------------------------------

B. Paperwork Burden Estimates

    For purposes of the Paperwork Reduction Act, we estimated the 
annual

[[Page 5994]]

incremental paperwork burden for all companies to prepare the 
disclosure required under the amendments to be approximately 366,337 
hours of company personnel time and the incremental cost to be 
approximately $44,795,000 for the services of outside 
professionals.\153\ That estimate includes the time and the cost of in-
house preparation of the disclosure, reviews by executive officers, in-
house counsel, outside counsel, independent auditors and members of the 
audit committee.\154\ It does not include the full cost of establishing 
systems to collect and monitor the information because a registrant 
must already do so to prepare its financial statements, comply with 
current disclosure requirements and maintain adequate internal 
controls.
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    \153\ For convenience, the estimated PRA hour burdens have been 
rounded to the nearest whole number, and the estimated PRA cost 
burdens have been rounded to the nearest $1,000.
    \154\ In connection with other recent rulemakings, we have had 
discussions with several private law firms to estimate an hourly 
rate of $300 as the cost of outside professionals that assist 
companies in preparing these disclosures. For Securities Act 
registration statements, we also consider additional reviews of the 
disclosure by underwriters' counsel and underwriters.
---------------------------------------------------------------------------

    We derived the paperwork burden estimates by estimating the total 
amount of time it will take a company to prepare each item of the 
disclosure. We estimate that in the first year, the off-balance sheet 
disclosure will take 14.5 hours for annual reports and proxy statements 
(11 hours in-house personnel time and a cost of approximately $1100 for 
professional services), 16 hours for registration statements (4 hours 
in-house personnel time and a cost of approximately $3600 for 
professional services) and 10 hours for quarterly reports (7.5 hours 
in-house personnel time and a cost of approximately $750 for 
professional services). We estimate that in the first year, the 
disclosure of contractual obligations will take 7.5 hours for annual 
reports and proxy statements (5.5 hours in-house personnel time and a 
cost of approximately $600 for professional services), 8.5 hours for 
registration statements (2 hours in-house personnel time and a cost of 
approximately $1900 for professional services) and 3 hours for each 
quarterly report (2.25 hours in-house personnel time and a cost of 
approximately $225 for professional services). Our estimates for the 
preparation time for all of the disclosure items in the first year are 
22 hours for annual reports and proxy statements (16.5 hours in-house 
personnel time and a cost of approximately $1650 for professional 
services), 24.5 hours for registration statements (6 hours in-house 
personnel time and a cost of approximately $5500 for professional 
services) and 13 hours for quarterly reports (9.75 hours in-house 
personnel time and a cost of approximately $975 for professional 
services). The paperwork burden estimate for preparing one annual 
report and three quarterly reports is 61 hours (46 hours in-house 
personnel time and a cost of approximately $4600 for professional 
services).
    Because the paperwork burden estimates reflect a three-year period, 
we averaged the first year estimates with later year estimates to 
account for the fact that registrants would become accustomed to the 
disclosure requirements after the first year and therefore spend less 
time preparing the disclosure over the two subsequent years. The 
submission to OMB also reduced the burden to account for issuers that 
do not engage in off-balance sheet arrangements and for issuers that 
include identical MD&A sections in more than one filing covering the 
same period (e.g., Form 10-K and Form S-1).

C. Responses to Request for Comments

    We requested comment on the PRA analysis contained in the Proposing 
Release and received the following responses. Two commenters believed 
that the average estimate of 37 hours per registrant underestimated the 
compliance burden.\155\ One commenter provided an estimated burden of 
approximately 150 to 190 hours to implement the rule.\156\ Another 
commenter believed that compliance with the proposed requirement to 
include a tabular or textual disclosure of contractual obligations and 
contingent liabilities and commitments would require most companies to 
implement tracking and monitoring systems for contractual obligations 
and commitments (which would cost approximately $75,000 to $125,000 for 
software, with annual personnel costs of $90,000 to $125,000, plus an 
additional $25,000 for other costs).\157\
---------------------------------------------------------------------------

    \155\ See, e.g., the letters of CSC and Eaton.
    \156\ See, e.g., the letter of FTNC.
    \157\ See, e.g., the letter of Troutman.
---------------------------------------------------------------------------

    We believe that registrants already must collect the information 
required by the amendments in order to prepare their financial 
statements, meet their existing disclosure requirements and to maintain 
adequate internal controls. For example, U.S. GAAP currently requires 
registrants to disclose information about guarantees, contractual 
obligations under leases and long-term debt.\158\ Current MD&A rules 
require disclosure of the registrant's material commitments for capital 
expenditures as of the end of the latest fiscal period.\159\ We also 
believe that the treasury functions of most registrants track and 
monitor payments due under purchase obligations for internal control 
and budgeting purposes. Therefore, the paperwork burden in our estimate 
reflects the time it will take to draft and review the required 
disclosures, but not to initially collect the information.
---------------------------------------------------------------------------

    \158\ See, FASB SFAS No. 5, Accounting for Contingencies (Mar. 
1975), paragraph 12 and FASB Interpretation No. 45, paragraph 13. 
See also, FASB SFAS No. 13, Accounting for Leases (Nov. 1976); SFAS 
No. 47, Disclosure of Long-Term Obligations (March 1981); and SFAS 
No. 129, Disclosure of Information about Capital Structure (Feb. 
1997).
    \159\ See Item 303(a)(2)(i) of Regulation S-K [17 CFR 
229.303(a)(2)(i)].
---------------------------------------------------------------------------

    Accordingly, we are not changing our initial estimates that have 
been submitted to OMB. In response to the commenters' concerns that the 
Proposing Release underestimated the paperwork burden, we are not 
reducing our estimates even though we have refined the definition of 
``off-balance sheet arrangements,'' specified the particular 
contractual obligations to be included in the table and eliminated the 
table or text of contingent liabilities or commitments.

V. Cost-Benefit Analysis

A. Background

    In accordance with the directive in section 401(a) of the Sarbanes-
Oxley Act,\160\ the Commission is adopting amendments to disclosure 
rules regarding a company's off-balance sheet arrangements. The 
amendments require disclosure to improve investors' understanding of a 
company's overall financial condition, changes in financial condition 
and results of operations. The amendments require companies that are 
reporting, raising capital in the registered public markets or asking 
shareholders for their votes to provide information about their off-
balance sheet arrangements and an aggregate overview of their known 
contractual obligations in tabular format.
---------------------------------------------------------------------------

    \160\ Pub. L. 107-204 Sec. 401(a) [15 U.S.C. 78m(j)].
---------------------------------------------------------------------------

B. Objectives of Amendments

    The amendments seek to improve transparency of disclosure regarding 
a company's off-balance sheet arrangements and to provide an overview 
of aggregate contractual obligations. We believe that improvement in 
the quality of information in these areas is necessary for investors to 
better understand a company's current and future financial position and 
current and future sources of liquidity. Moreover, because

[[Page 5995]]

management is in the best position to monitor and assess those aspects 
of its business, it also is in the best position to provide clear 
explanations and analysis to investors. Our objectives are:
    [sbull] To implement the legislative mandate in section 401(a) of 
the Sarbanes-Oxley Act;
    [sbull] To provide investors with the information and analysis 
necessary to gain a more comprehensive understanding of the 
implications of a company's obligations and contingencies from off-
balance sheet arrangements that are neither readily apparent, nor 
easily understood, from a reading of the financial statements alone; 
and
    [sbull] To better inform investors of the short- and long-term 
impact of payments due under contractual obligations, from both on- and 
off-balance sheet activities, by presenting a complete picture in a 
single location.

With a greater understanding of off-balance sheet arrangements and 
contractual obligations, investors should be better able to understand 
how a company conducts significant aspects of its business (including 
financing), to assess the quality of earnings and to understand the 
risks that are not apparent on the face of the financial statements.

C. Regulatory Approach

    We are adopting principles-based disclosure requirements that are 
bolstered by four specific disclosure items to provide basic 
information about off-balance sheet arrangements. The principle 
governing our regulatory approach is that registrants should disclose 
information to the extent that it is necessary to an understanding of 
its off-balance sheet arrangements and their effect on financial 
condition, changes in financial condition, revenues or expenses, 
results of operations, liquidity, capital expenditures or capital 
resources. To militate against obscure disclosure, the amendments 
include four disclosure items that are designed to result in a focused 
and descriptive discussion of the registrant's material off-balance 
sheet arrangements. This approach attempts to balance the need for 
registrants to have flexibility when drafting financial disclosure with 
investors' needs for more transparency. While the amendments could be 
considered less prescriptive than the proposed rules, we believe that 
we have preserved the benefits to investors of the disclosure 
requirements for off-balance sheet arrangements.
    Certain disclosures required by this amendment are already required 
by generally accepted accounting principles.\161\ The amendments are 
designed to work in concert with the disclosures required by generally 
accepted accounting principles to provide investors with a deeper, more 
comprehensive understanding of off-balance sheet arrangements employed 
by the registrant. Management is afforded the flexibility under the 
amendments to enhance the factual content contained in the financial 
statements with its perspective of how off-balance sheet arrangements 
are used in the context of the registrant's business.
---------------------------------------------------------------------------

    \161\ See FASB Interpretation No. 45, Guarantor's Accounting and 
Disclosure Requirements for Guarantees, Including Indirect 
Guarantees of Indebtedness of Others (Nov. 2002); FASB 
Interpretation No. 46, Consolidation of Variable Interest Entities 
(Jan. 2003); and FASB SFAS No. 129, Disclosure of Information about 
Capital Structure (Feb. 1997).
---------------------------------------------------------------------------

D. Benefits of the Amendments

    The primary anticipated benefit of the amendments is to increase 
transparency of a registrant's financial disclosure. Current market 
events have evidenced a need to provide investors with a clearer 
understanding of how a company's off-balance sheet arrangements 
materially affect the financial statements and company 
performance.\162\ The amendments are intended to enhance the utility of 
the disclosure in the MD&A section by providing more information, 
including management's analysis, of off-balance sheet arrangements. In 
addition, the tabular disclosure of contractual obligations is designed 
to provide investors with an understanding of the liquidity and capital 
resource need and demands in short- and long-term time horizons.
---------------------------------------------------------------------------

    \162\ See, e.g., Paquita Y. Davis-Friday et. al., The Value 
Relevance of Financial Statement Recognition vs. Disclosure: 
Evidence from SFAS No. 106, 74 The Accounting Review 403 (Oct. 
1999).
---------------------------------------------------------------------------

    By making information about off-balance sheet arrangements and 
contractual obligations available and more understandable, the 
amendments will benefit investors both directly and indirectly through 
the financial analysts and the credit rating agencies whose analyses 
investors consider.\163\ In addition, the amendments should benefit 
investors because the enumerated disclosure will likely be more 
comparable across all firms and consistent over time. Greater 
transparency will thus enable investors to make more informed 
investment decisions and to allocate capital on a more efficient basis.
---------------------------------------------------------------------------

    \163\ See, e.g., Kent L. Womack, Do Brokerage Analysts' 
Recommendations have Investment Value? 51 Journal of Finance 137 
(1996). See also, R. Mear and M. Firth, Risk Perceptions of 
Financial Analysts and the Use of Market and Accounting Data, 18 
Accounting and Business Research 335 (1988).
---------------------------------------------------------------------------

E. Costs of Amendments

    We estimate that the amendments will impose a disclosure 
requirement on approximately 9,850 public companies.\164\ We estimate 
that the disclosure will involve multiple parties, including in-house 
preparers, senior management, in-house counsel, outside counsel, 
outside auditors, and audit committee members. One commenter, 
commenting on the types of expenses, believed that companies would 
incur significant legal, accounting and internal costs (including 
collection and monitoring systems) in order to comply with the proposed 
disclosure.\165\ For purposes of the Paperwork Reduction Act,\166\ we 
estimated that company personnel would spend approximately 366,337 
hours per year (37 hours per company) to prepare, review and file the 
proposed disclosure. Based on our estimated cost of in-house staff 
time, we estimated that the PRA hour-burden would translate into an 
approximate cost of $45,792,000 ($5,000 per company).\167\ We also 
estimated that companies would spend approximately $44,795,000 ($5,000 
per company) on outside professionals to comply with the 
disclosure.\168\ In response to our request for comment, one commenter 
estimated the annual cost for a large multinational company to be about 
$2 million.\169\ One commenter noted that, in view of the limited 
number of public companies that may have failed to provide disclosures, 
it had significant reservations about whether the additional cost of 
regulation is justified.\170\
---------------------------------------------------------------------------

    \164\ We estimate that about 80% of the number of registrants 
who filed annual reports last year will provide the disclosure.
    \165\ See, e.g., the letter of Pfizer.
    \166\ 44 U.S.C. 3501 et seq.
    \167\ We estimate the average hourly cost of in-house personnel 
to be $125. This cost estimate is based on data obtained from The 
SIA Report on Management and Professional Earnings in the Securities 
Industry (Oct. 2001).
    \168\ To derive our estimates for the Paperwork Reduction Act, 
we multiplied the number of filers for each form by the incremental 
hours per form. The portion of the product carried by the company is 
reflected in hours and the portion carried by outside professionals 
is reflected as a cost.
    \169\ See, e.g., the letter of Pfizer.
    \170\ See, e.g., the letter of KPMG.
---------------------------------------------------------------------------

    We believe the amendments will not substantially increase the costs 
to collect the information necessary to prepare the disclosure. This 
information should largely be readily available from each company's 
books and records. Since management should be fully apprised of off-
balance sheet arrangements and contractual

[[Page 5996]]

obligations in the ordinary course of managing the company, maintaining 
adequate internal controls and preparing the financial statements, the 
amendments may not impose significant incremental costs for the 
collection and calculation of data.
    In assessing the cost of the amendments, we have considered 
possible unintended consequences. One possible unintended consequence 
of the amendments is that a registrant's competitors may be able to 
infer proprietary information from the disclosure. For example, a 
registrant's competitors may infer that the registrant has adopted a 
particular strategy based on disclosure about its off-balance sheet 
arrangements. In addition, a registrant may be discouraged from 
developing innovative financing techniques if a competitor may be able 
to copy the technique at little cost. The amendments could impose 
additional costs to the extent that the disclosure would deter 
legitimate uses of off-balance sheet arrangements.

F. Foreign Private Issuers

    The amendments apply to foreign private issuers the same MD&A 
disclosure requirements that apply to U.S. companies. Foreign private 
issuers, however, are not required to file quarterly reports with the 
Commission. Thus, unless a foreign private issuer files a registration 
statement that must include interim period financial statements and 
related MD&A disclosure, it generally will not be required to update 
the MD&A disclosure more frequently than annually. Therefore, the cost 
of compliance could be lower for foreign private issuers than for U.S. 
companies. It is possible, however, that foreign private issuers will 
incur greater expenses in connection with the required reconciliation 
to U.S. GAAP, but only if a discussion of the differences in accounting 
is necessary for an understanding of the financial statements as a 
whole.

G. Small Business Issuers

    The amendments do not require that small businesses provide tabular 
disclosure about contractual obligations. This information is currently 
required to be disclosed in various locations in filings. While it 
would be useful to investors if this information were disclosed in a 
single location, we believe that excluding small business issuers from 
this requirement is consistent with the policies underlying the small 
business issuer disclosure system. Although a small business issuer is 
not required to provide the table of contractual obligations in its 
MD&A, we encourage small business issuers to identify for investors the 
relevant financial footnotes that contain information about certain 
contractual obligations.

VI. Effects on Efficiency, Competition and Capital Formation

    Section 23(a)(2) of the Exchange Act \171\ requires us, when 
adopting rules under the Exchange Act, to consider the anti-competitive 
effects. In addition, section 23(a)(2) prohibits us from adopting any 
rule that would impose a burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act. We have 
considered the amendments in accordance with the standards in section 
23(a)(2).
---------------------------------------------------------------------------

    \171\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The amendments require disclosure of information that is essential 
to an understanding of the ways that a company conducts its business 
and the potential material risks that the company may face as a result. 
The amendments also enhance the transparency of financial information 
that is neither readily apparent, nor easily understood, from a reading 
of the financial statements alone. The amendments are intended to make 
information about off-balance sheet arrangements and their impact on a 
public company's financial condition, changes in financial condition 
and operating results more understandable to investors. The amendments 
also will provide an overview of a company's known contractual 
obligations, which will improve an investors' ability to assess the 
liquidity and capital resource needs of a company over short- and long-
term time periods.
    In the Proposing Release, we identified two possible areas where 
the rules could potentially place a burden on competition. First, the 
amendments could burden competition to the extent that the disclosure 
may deter legitimate uses of off-balance sheet arrangements. Second, 
there is a possibility that a company's competitors could be able to 
infer proprietary or sensitive information from the company's 
disclosure about its off-balance sheet arrangements. We requested 
comment regarding the degree to which the proposed disclosure 
requirements would create competitively harmful effects upon public 
companies and how to minimize those effects. Three commenters on the 
Proposing Release expressed concerns about the sensitivity and 
potential competitive harm that could result from the disclosure.\172\ 
The likelihood that competitors could infer proprietary information 
must be weighed against investors' needs for transparency of financial 
arrangements and resultant risk exposures. The amendments attempt to 
mitigate competitive harm by requiring disclosure to the extent 
necessary for an understanding of a registrant's off-balance sheet 
arrangements and their financial effects. Seven commenters believed 
that the proposal to require tabular or textual disclosure of 
contingent liabilities would cause competitive harm to the extent that 
such disclosure could negatively influence the outcome of the 
contingency.\173\ We are not adopting that proposal at this time.
---------------------------------------------------------------------------

    \172\ See, e.g., the letters of AFP, Boeing and Pfizer.
    \173\ See, e.g., the letters of AICPA, Eaton, E&Y, D&T, Intel, 
Troutman and PwC.
---------------------------------------------------------------------------

    Section 2(b) of the Securities Act \174\ and section 3(f) of the 
Exchange Act \175\ require us, when engaging in rulemaking that 
requires us to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition and capital formation. We believe the amendments will 
promote market efficiency by making information about off-balance sheet 
arrangements, and their impact on the presentation of the company's 
financial position, more understandable. In addition, information about 
payments under known contractual obligations will be aggregated and 
presented in a single location. As a result, we believe that investors 
may be able to make more informed investment decisions and capital may 
be allocated on a more efficient basis.
---------------------------------------------------------------------------

    \174\ 15 U.S.C. 77b(b).
    \175\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

VII. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with the Regulatory Flexibility Act.\176\ This 
FRFA relates to amendments to Item 303 of Regulation S-K,\177\ Item 303 
of Regulation S-B,\178\ Item 5 of Form 20-F \179\ and General 
Instruction B of Form 40-F.\180\ The amendments require public 
companies to discuss off-balance sheet arrangements and to provide a 
table of aggregate contractual obligations as of

[[Page 5997]]

the latest fiscal year end balance sheet date. The disclosure will be 
included in the MD&A section of a public company's annual reports, 
quarterly reports, registration statements and proxy and information 
statements.
---------------------------------------------------------------------------

    \176\ 5 U.S.C. 603.
    \177\ 17 CFR 229.303.
    \178\ 17 CFR 228.303.
    \179\ 17 CFR 249.220f.
    \180\ 17 CFR 249.240f.
---------------------------------------------------------------------------

A. Need for the Amendments

    On July 30, 2002, the Sarbanes-Oxley Act of 2002 was enacted.\181\ 
Section 401 of the Sarbanes-Oxley Act, entitled ``Disclosures in 
Periodic Reports,'' requires the Commission to adopt final rules by 
January 26, 2003 (180 days after the date of enactment) that require a 
company, in each annual and quarterly financial report that it files 
with the Commission, to disclose ``all material off-balance sheet 
transactions, arrangements, obligations (including contingent 
obligations), and other relationships of the issuer with unconsolidated 
entities or other persons, that may have a material current or future 
effect on financial condition, changes in financial condition, results 
of operations, liquidity, capital expenditures, capital resources, or 
significant components of revenues or expenses.''\182\ The Commission 
is adopting the amendments to fulfill that legislative mandate. The 
amendments address the lack of transparency of off-balance sheet 
arrangements in a public company's financial disclosure. The amendments 
address this problem by requiring a discussion of off-balance sheet 
arrangements in a public company's MD&A. The potential consequences of 
not taking this action to require disclosure regarding the off-balance 
sheet arrangements are: (a) Less transparency in the presentation of 
companies' financial statements and, correspondingly, a lesser 
understanding of companies' financial condition, changes in financial 
condition and results of operations when making investment decisions; 
and (b) a potential decrease in investor confidence in the full and 
fair disclosure system that is the hallmark of the U.S. capital 
markets.
---------------------------------------------------------------------------

    \181\ Pub. L. 107-204, 116 Stat. 745 (2002).
    \182\ Pub. L. 107-204 Sec. 401 [15 U.S.C. 78m(j)].
---------------------------------------------------------------------------

    The amendments seek to improve transparency of a company's off-
balance sheet arrangements and aggregate contractual obligations. We 
believe that improvements in the quality of information in these areas 
will promote investor understanding of a company's current and future 
financial position. Our objectives are:
    [sbull] To implement the legislative mandate in section 401(a) of 
the Sarbanes-Oxley Act;
    [sbull] To provide investors with the information and analysis 
necessary to gain a more comprehensive understanding of the 
implications of a company's obligations and contingencies from off-
balance sheet arrangements that are neither readily apparent, nor 
easily understood, from a reading of the financial statements alone; 
and
    [sbull] To better inform investors of the aggregate impact of 
short- and long-term contractual obligations, from both on- and off-
balance sheet activities, by presenting a complete picture in a single 
location.

With a greater understanding of a company's off-balance sheet 
arrangements and contractual obligations, investors will be better able 
to understand how a company conducts significant aspects of its 
business and to assess the quality of a company's earnings and the 
risks that are not apparent on the face of the financial statements.

B. Significant Issues Raised by Public Comment

    The Initial Regulatory Flexibility Analysis (``IRFA'') appeared in 
the Proposing Release. We requested comment on any aspect of the IRFA, 
including the number of small entities that would be affected by the 
proposals, the nature of the impact, how to quantify the number of 
small entities that would be affected and how to quantify the impact of 
the proposals. We received no comment letters responding to that 
request.

C. Small Entities Subject to the Amendments

    The amendments would affect companies that are small entities. 
Securities Act Rule 157 \183\ and Exchange Act Rule 0-10(a) \184\ 
define a company, other than an investment company, to be a ``small 
business'' or ``small organization'' if it had total assets of $5 
million or less on the last day of its most recent fiscal year. We 
estimate that there are approximately 2,500 companies, other than 
investment companies, that may be considered small entities. The 
amendments would apply to any small entity that fulfills its disclosure 
obligations by complying with our standard disclosure requirements 
\185\ or with our optional disclosure system available only to small 
businesses.\186\
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    \183\ 17 CFR 230.157.
    \184\ 17 CFR 270.0-10(a).
    \185\ Regulation S-K, 17 CFR 229.10-229.1016.
    \186\ Regulation S-B, 17 CFR 228.10-228.701.
---------------------------------------------------------------------------

    We believe that off-balance sheet arrangements involving small 
entities are most likely to be operating leases, but we did not receive 
any comments substantiating that belief. In our Paperwork Reduction Act 
analysis, we estimated that the cost of in-house staff time would 
translate into an approximate cost of $4,000 per company.\187\ This 
figure may be lower for a small entity if its average hourly cost for 
its personnel were lower than $125, but we did not receive any specific 
data regarding these estimates. We also estimated that companies would 
spend approximately $5,000 per company on outside professionals to 
comply with the disclosure.\188\ This figure may be lower for a small 
entity if its average hourly cost of outside professionals were lower 
than $300, but we did not receive any substantiating data.
---------------------------------------------------------------------------

    \187\ We estimate the average hourly cost of in-house personnel 
to be $125. This cost estimate is based on data obtained from The 
SIA Report on Management and Professional Earnings in the Securities 
Industry (Oct. 2001).
    \188\ To derive our estimates for the Paperwork Reduction Act, 
we multiplied the number of filers for each form by the incremental 
hours per form. The portion of the product carried by the company is 
reflected in hours and the portion carried by outside professionals 
is reflected as a cost.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    The amendments will impose reporting and recordkeeping requirements 
on the class of small entities subject to our reporting requirements, 
either due to Securities Act registration or by the Exchange Act 
reporting requirements. The amendments will subject this class of small 
entities to reporting and recordkeeping requirements in connection with 
drafting, reviewing, filing, printing and disseminating disclosure in 
annual reports, registration statements, proxy or information 
statements and quarterly reports. The data underlying the disclosure 
about off-balance sheet transactions should be readily available from a 
company's books and records. Since management should be fully apprised 
of material off-balance sheet arrangements to fulfill its existing 
disclosure requirements and to maintain proper internal controls, the 
amendments may not impose significant incremental costs related to the 
collection and calculation of data. Small entities will either utilize 
existing personnel or hire an outside professional to provide the 
required disclosure.

[[Page 5998]]

E. Agency Action To Minimize Effect on Small Entities

    Because section 401(a) of the Sarbanes-Oxley Act does not 
distinguish between small entities and other companies, we interpret 
Congress' directive to the Commission to adopt rules requiring expanded 
disclosure about off-balance sheet transactions to apply equally to 
small entities and to other public companies. However, we were able to 
further ease the regulatory burden on small entities by excluding small 
business issuers from the tabular disclosure requirement about 
contractual obligations. Tabular disclosure of contractual obligations 
was not mandated by the Sarbanes-Oxley Act. That information is 
currently required to be disclosed in various locations in filings. 
While it would be useful to investors if this information were 
disclosed in a single location, we believe that excluding small 
business issuers from this requirement would reduce their regulatory 
burden.
    As required by the Regulatory Flexibility Act, we have considered 
alternatives that would accomplish our stated objectives, while 
minimizing any significant adverse impact on small entities. In 
connection with the amendments, we considered the following 
alternatives:
    (a) The establishment of differing compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
    (b) The clarification, consolidation, or simplification of 
disclosure for small entities;
    (c) The use of performance rather than design standards; and
    (d) An exemption for small entities from all or part of the 
amendments.
    We have drafted the amendments to require clear and straightforward 
disclosure of off-balance sheet arrangements in MD&A. Separate 
disclosure requirements regarding off-balance sheet arrangements for 
small entities will not yield the disclosure that we believe is 
necessary to achieve our objectives. In addition, the informational 
needs of investors in small entities are typically as great as the 
needs of investors in larger companies. Therefore, it does not seem 
appropriate to develop separate requirements with regard to off-balance 
sheet arrangements for small entities that clarify, consolidate or 
simplify the amendments. We have, however, excluded small business 
issuers from the requirement to provide tabular disclosure of 
contractual obligations.
    We have used design rather than performance standards in connection 
with the amendments for three reasons. First, we believe the disclosure 
will be easier to implement and more useful to investors with 
enumerated informational requirements. The required disclosures may be 
likely to result in a more focused and comprehensive discussion of the 
company's off-balance sheet arrangements. Second, mandated disclosures 
regarding off-balance sheet arrangements may benefit investors in small 
entities because the enumerated disclosure under the amendments likely 
will be more comparable across all firms and consistent over time. 
Third, a mandated discussion of a company's off-balance sheet 
arrangements is uniquely suited to the MD&A disclosure in light of 
MD&A's emphasis on the identification of significant uncertainties and 
events and favorable or unfavorable trends. Therefore, adding a 
disclosure requirement to the existing MD&A appears to be the most 
effective method of eliciting the disclosure.
    Because section 401(a) of the Sarbanes-Oxley Act does not 
distinguish between small entities and other companies, we do not 
believe it is appropriate to exempt small entities from the requirement 
to discuss off-balance sheet arrangements. We have, however, excluded 
small business issuers from the requirement to provide tabular 
disclosure of contractual obligations.

VIII. Statutory Authority and Text of Rule Amendments

    The amendments contained in this release are being adopted under 
the authority set forth in sections 7, 10, 19, 27A and 28 of the 
Securities Act, sections 12, 13, 14, 21E, 23 and 36 of the Exchange Act 
and sections 3(a) and 401(a) of the Sarbanes-Oxley Act of 2002.

List of Subjects in 17 CFR Parts 228, 229 and 249

    Reporting and recordkeeping requirements, Securities.

Text of Amendments

    In accordance with the foregoing, Title 17, Chapter II, of the Code 
of Federal Regulations is amended as follows:

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

    1. The authority citation for Part 228 is amended by adding the 
following citation in numerical order to read as follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 
77sss, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-29, 
80a-30, 80a-37 and 80b-11.

    Section 228.303 is also issued under secs. 3(a) and 401(a), Pub. 
L. No. 107-204, 116 Stat. 745.

* * * * *

    2. Section 228.303 is amended by:
    a. Removing the phrase ``paragraph (a)'' and adding, in its place, 
the phrase ``paragraphs (a) and (c)'' in the first sentence of the 
introductory text;
    b. Removing the phrase ``paragraph (b)'' and adding, in its place, 
the phrase ``paragraphs (b) and (c)'' in the second sentence of the 
introductory text;
    c. Adding paragraph (c);
    d. Adding Instructions 1 through 5 to paragraph (c) of Item 303; 
and
    e. Adding paragraph (d).
    The additions read as follows:


Sec.  228.303 (Item 303)  Management's discussion and analysis or plan 
of operation.

* * * * *
    (c) Off-balance sheet arrangements. (1) In a separately-captioned 
section, discuss the small business issuer's off-balance sheet 
arrangements that have or are reasonably likely to have a current or 
future effect on the small business issuer's financial condition, 
changes in financial condition, revenues or expenses, results of 
operations, liquidity, capital expenditures or capital resources that 
is material to investors. The disclosure shall include the items 
specified in paragraphs (c)(1)(i), (ii), (iii) and (iv) of this Item to 
the extent necessary to an understanding of such arrangements and 
effect and shall also include such other information that the small 
business issuer believes is necessary for such an understanding.
    (i) The nature and business purpose to the small business issuer of 
such off-balance sheet arrangements;
    (ii) The importance to the small business issuer of such off-
balance sheet arrangements in respect of its liquidity, capital 
resources, market risk support, credit risk support or other benefits; 
(iii) The amounts of revenues, expenses and cash flows of the small 
business issuer arising from such arrangements; the nature and amounts 
of any interests retained, securities issued and other indebtedness 
incurred by the small business issuer in connection with such 
arrangements; and the nature and amounts of any other obligations or 
liabilities (including contingent obligations or liabilities) of the 
small business issuer arising from such arrangements that are or are 
reasonably

[[Page 5999]]

likely to become material and the triggering events or circumstances 
that could cause them to arise; and
    (iv) Any known event, demand, commitment, trend or uncertainty that 
will result in or is reasonably likely to result in the termination, or 
material reduction in availability to the small business issuer, of its 
off-balance sheet arrangements that provide material benefits to it, 
and the course of action that the small business issuer has taken or 
proposes to take in response to any such circumstances.
    (2) As used in paragraph (c) of this Item, the term off-balance 
sheet arrangement means any transaction, agreement or other contractual 
arrangement to which an entity unconsolidated with the small business 
issuer is a party, under which the small business issuer has:
    (i) Any obligation under a guarantee contract that has any of the 
characteristics identified in paragraph 3 of FASB Interpretation No. 
45, Guarantor's Accounting and Disclosure Requirements for Guarantees, 
Including Indirect Guarantees of Indebtedness of Others (November 2002) 
(``FIN 45''), as may be modified or supplemented, and that is not 
excluded from the initial recognition and measurement provisions of FIN 
45 pursuant to paragraphs 6 or 7 of that Interpretation;
    (ii) A retained or contingent interest in assets transferred to an 
unconsolidated entity or similar arrangement that serves as credit, 
liquidity or market risk support to such entity for such assets;
    (iii) Any obligation, including a contingent obligation, under a 
contract that would be accounted for as a derivative instrument, except 
that it is both indexed to the small business issuer's own stock and 
classified in stockholders' equity in the small business issuer's 
statement of financial position, and therefore excluded from the scope 
of FASB Statement of Financial Accounting Standards No. 133, Accounting 
for Derivative Instruments and Hedging Activities (June 1998), pursuant 
to paragraph 11(a) of that Statement, as may be modified or 
supplemented; or
    (iv) Any obligation, including a contingent obligation, arising out 
of a variable interest (as referenced in FASB Interpretation No. 46, 
Consolidation of Variable Interest Entities (January 2003), as may be 
modified or supplemented) in an unconsolidated entity that is held by, 
and material to, the small business issuer, where such entity provides 
financing, liquidity, market risk or credit risk support to, or engages 
in leasing, hedging or research and development services with, the 
small business issuer.
    Instructions to paragraph (c) of Item 303. 1. No obligation to make 
disclosure under paragraph (c) of this Item shall arise in respect of 
an off-balance sheet arrangement until a definitive agreement that is 
unconditionally binding or subject only to customary closing conditions 
exists or, if there is no such agreement, when settlement of the 
transaction occurs.
    2. Small business issuers should aggregate off-balance sheet 
arrangements in groups or categories that provide material information 
in an efficient and understandable manner and should avoid repetition 
and disclosure of immaterial information. Effects that are common or 
similar with respect to a number of off-balance sheet arrangements must 
be analyzed in the aggregate to the extent the aggregation increases 
understanding. Distinctions in arrangements and their effects must be 
discussed to the extent the information is material, but the discussion 
should avoid repetition and disclosure of immaterial information.
    3. For purposes of paragraph (c) of this Item only, contingent 
liabilities arising out of litigation, arbitration or regulatory 
actions are not considered to be off-balance sheet arrangements.
    4. Generally, the disclosure required by paragraph (c) of this Item 
shall cover the most recent fiscal year. However, the discussion should 
address changes from the previous year where such discussion is 
necessary to an understanding of the disclosure.
    5. In satisfying the requirements of paragraph (c) of this Item, 
the discussion of off-balance sheet arrangements need not repeat 
information provided in the footnotes to the financial statements, 
provided that such discussion clearly cross-references to specific 
information in the relevant footnotes and integrates the substance of 
the footnotes into such discussion in a manner designed to inform 
readers of the significance of the information that is not included 
within the body of such discussion.
    (d) Safe harbor. (1) The safe harbor provided in section 27A of the 
Securities Act of 1933 (15 U.S.C. 77z-2) and section 21E of the 
Securities Exchange Act of 1934 (15 U.S.C. 78u-5) (``statutory safe 
harbors'') shall apply to forward-looking information provided pursuant 
to paragraph (c) of this Item, provided that the disclosure is made by: 
an issuer; a person acting on behalf of the issuer; an outside reviewer 
retained by the issuer making a statement on behalf of the issuer; or 
an underwriter, with respect to information provided by the issuer or 
information derived from information provided by the issuer.
    (2) For purposes of paragraph (d) of this Item only:
    (i) All information required by paragraph (c) of this Item is 
deemed to be a ``forward looking statement'' as that term is defined in 
the statutory safe harbors, except for historical facts.
    (ii) With respect to paragraph (c) of this Item, the meaningful 
cautionary statements element of the statutory safe harbors will be 
satisfied if a small business issuer satisfies all requirements of that 
same paragraph (c) of this Item.

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

    3. The authority citation for Part 229 is amended by adding the 
following citation in numerical order to read as follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll 
78mm, 79e, 79j, 79n, 79t, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-
31(c), 80a-37, 80a-38(a), 80a-39 and 80b-11, unless otherwise noted.

    Section 229.303 is also issued under secs. 3(a) and 401(a), Pub. 
L. No. 107-204, 116 Stat. 745.
* * * * *

    4. Section 229.303 is amended by:
    a. Removing the authority citation following Sec.  229.303;
    b. Removing the phrase ``paragraphs (a)(1), (2) and (3) with 
respect to liquidity, capital resources and results of operations'' and 
adding, in its place, the phrase ``paragraphs (a)(1) through (5) of 
this Item'' in the second sentence of the introductory text of 
paragraph (a);
    c. Removing the phrase ``or for those fiscal years beginning after 
December 25, 1979,'' in paragraph (a)(3)(iv);
    d. Adding paragraphs (a)(4) and (a)(5) before the ``Instructions to 
Paragraph 303(a)'';
    e. Removing the second sentence of Instruction 2 of ``Instructions 
to Paragraph 303(a)'';
    f. Removing the first three sentences of Instruction 7 of 
``Instructions to Paragraph 303(a)'';
    g. Removing the first sentence of Instruction 6 of ``Instructions 
to Paragraph (b) of Item 303'';
    h. Adding Instructions 1 through 5 to paragraph 303(a)(4) at the 
end of ``Instructions to Paragraph 303(a)'';

[[Page 6000]]

    i. Adding Instruction 7 to ``Instructions to Paragraph (b) of Item 
303''; and
    j. Adding paragraph (c).
    The additions read as follows:


Sec.  229.303 (Item 303)  Management's discussion and analysis of 
financial condition and results of operations.

    (a) * * *
    (4) Off-balance sheet arrangements. (i) In a separately-captioned 
section, discuss the registrant's off-balance sheet arrangements that 
have or are reasonably likely to have a current or future effect on the 
registrant's financial condition, changes in financial condition, 
revenues or expenses, results of operations, liquidity, capital 
expenditures or capital resources that is material to investors. The 
disclosure shall include the items specified in paragraphs 
(a)(4)(i)(A), (B), (C) and (D) of this Item to the extent necessary to 
an understanding of such arrangements and effect and shall also include 
such other information that the registrant believes is necessary for 
such an understanding.
    (A) The nature and business purpose to the registrant of such off-
balance sheet arrangements;
    (B) The importance to the registrant of such off-balance sheet 
arrangements in respect of its liquidity, capital resources, market 
risk support, credit risk support or other benefits;
    (C) The amounts of revenues, expenses and cash flows of the 
registrant arising from such arrangements; the nature and amounts of 
any interests retained, securities issued and other indebtedness 
incurred by the registrant in connection with such arrangements; and 
the nature and amounts of any other obligations or liabilities 
(including contingent obligations or liabilities) of the registrant 
arising from such arrangements that are or are reasonably likely to 
become material and the triggering events or circumstances that could 
cause them to arise; and
    (D) Any known event, demand, commitment, trend or uncertainty that 
will result in or is reasonably likely to result in the termination, or 
material reduction in availability to the registrant, of its off-
balance sheet arrangements that provide material benefits to it, and 
the course of action that the registrant has taken or proposes to take 
in response to any such circumstances.
    (ii) As used in this paragraph (a)(4), the term off-balance sheet 
arrangement means any transaction, agreement or other contractual 
arrangement to which an entity unconsolidated with the registrant is a 
party, under which the registrant has:
    (A) Any obligation under a guarantee contract that has any of the 
characteristics identified in paragraph 3 of FASB Interpretation No. 
45, Guarantor's Accounting and Disclosure Requirements for Guarantees, 
Including Indirect Guarantees of Indebtedness of Others (November 2002) 
(``FIN 45''), as may be modified or supplemented, and that is not 
excluded from the initial recognition and measurement provisions of FIN 
45 pursuant to paragraphs 6 or 7 of that Interpretation;
    (B) A retained or contingent interest in assets transferred to an 
unconsolidated entity or similar arrangement that serves as credit, 
liquidity or market risk support to such entity for such assets;
    (C) Any obligation, including a contingent obligation, under a 
contract that would be accounted for as a derivative instrument, except 
that it is both indexed to the registrant's own stock and classified in 
stockholders' equity in the registrant's statement of financial 
position, and therefore excluded from the scope of FASB Statement of 
Financial Accounting Standards No. 133, Accounting for Derivative 
Instruments and Hedging Activities (June 1998), pursuant to paragraph 
11(a) of that Statement, as may be modified or supplemented; or
    (D) Any obligation, including a contingent obligation, arising out 
of a variable interest (as referenced in FASB Interpretation No. 46, 
Consolidation of Variable Interest Entities (January 2003), as may be 
modified or supplemented) in an unconsolidated entity that is held by, 
and material to, the registrant, where such entity provides financing, 
liquidity, market risk or credit risk support to, or engages in 
leasing, hedging or research and development services with, the 
registrant.
    (5) Tabular disclosure of contractual obligations. (i) In a tabular 
format, provide the information specified in this paragraph (a)(5) as 
of the latest fiscal year end balance sheet date with respect to the 
registrant's known contractual obligations specified in the table that 
follows this paragraph (a)(5)(i). The registrant shall provide amounts, 
aggregated by type of contractual obligation. The registrant may 
disaggregate the specified categories of contractual obligations using 
other categories suitable to its business, but the presentation must 
include all of the obligations of the registrant that fall within the 
specified categories. A presentation covering at least the periods 
specified shall be included. The tabular presentation may be 
accompanied by footnotes to describe provisions that create, increase 
or accelerate obligations, or other pertinent data to the extent 
necessary for an understanding of the timing and amount of the 
registrant's specified contractual obligations.

----------------------------------------------------------------------------------------------------------------
                                                         Payments due by period
                                                ---------------------------------------              More than 5
            Contractual obligations                           Less than 1                3-5 years      years
                                                    Total         year      1-3 years
----------------------------------------------------------------------------------------------------------------
[Long-Term Debt Obligations]...................  ...........  ...........  ...........  ...........  ...........
[Capital Lease Obligations]....................  ...........  ...........  ...........  ...........  ...........
[Operating Lease Obligations]..................  ...........  ...........  ...........  ...........  ...........
[Purchase Obligations].........................  ...........  ...........  ...........  ...........  ...........
[Other Long-Term Liabilities Reflected on the    ...........  ...........  ...........  ...........  ...........
 Registrant's Balance Sheet under GAAP]........
                                                --------------
      Total....................................  ...........  ...........  ...........  ...........  ...........
----------------------------------------------------------------------------------------------------------------

    (ii) Definitions: The following definitions apply to this paragraph 
(a)(5):
    (A) Long-Term Debt Obligation means a payment obligation under 
long-term borrowings referenced in FASB Statement of Financial 
Accounting Standards No. 47 Disclosure of Long-Term Obligations (March 
1981), as may be modified or supplemented.
    (B) Capital Lease Obligation means a payment obligation under a 
lease classified as a capital lease pursuant to FASB Statement of 
Financial Accounting Standards No. 13

[[Page 6001]]

Accounting for Leases (November 1976), as may be modified or 
supplemented.
    (C) Operating Lease Obligation means a payment obligation under a 
lease classified as an operating lease and disclosed pursuant to FASB 
Statement of Financial Accounting Standards No. 13 Accounting for 
Leases (November 1976), as may be modified or supplemented.
    (D) Purchase Obligation means an agreement to purchase goods or 
services that is enforceable and legally binding on the registrant that 
specifies all significant terms, including: fixed or minimum quantities 
to be purchased; fixed, minimum or variable price provisions; and the 
approximate timing of the transaction.
    Instructions to Paragraph 303(a):
* * * * *
    Instructions to Paragraph 303(a)(4):
    1. No obligation to make disclosure under paragraph (a)(4) of this 
Item shall arise in respect of an off-balance sheet arrangement until a 
definitive agreement that is unconditionally binding or subject only to 
customary closing conditions exists or, if there is no such agreement, 
when settlement of the transaction occurs.
    2. Registrants should aggregate off-balance sheet arrangements in 
groups or categories that provide material information in an efficient 
and understandable manner and should avoid repetition and disclosure of 
immaterial information. Effects that are common or similar with respect 
to a number of off-balance sheet arrangements must be analyzed in the 
aggregate to the extent the aggregation increases understanding. 
Distinctions in arrangements and their effects must be discussed to the 
extent the information is material, but the discussion should avoid 
repetition and disclosure of immaterial information.
    3. For purposes of paragraph (a)(4) of this Item only, contingent 
liabilities arising out of litigation, arbitration or regulatory 
actions are not considered to be off-balance sheet arrangements.
    4. Generally, the disclosure required by paragraph (a)(4) shall 
cover the most recent fiscal year. However, the discussion should 
address changes from the previous year where such discussion is 
necessary to an understanding of the disclosure.
    5. In satisfying the requirements of paragraph (a)(4) of this Item, 
the discussion of off-balance sheet arrangements need not repeat 
information provided in the footnotes to the financial statements, 
provided that such discussion clearly cross-references to specific 
information in the relevant footnotes and integrates the substance of 
the footnotes into such discussion in a manner designed to inform 
readers of the significance of the information that is not included 
within the body of such discussion.
    (b) * * *
    Instructions to Paragraph (b) of Item 303:
* * * * *
    7. The registrant is not required to include the table required by 
paragraph (a)(5) of this Item for interim periods. Instead, the 
registrant should disclose material changes outside the ordinary course 
of the registrant's business in the specified contractual obligations 
during the interim period.
    (c) Safe harbor. (1) The safe harbor provided in section 27A of the 
Securities Act of 1933 (15 U.S.C. 77z-2) and section 21E of the 
Securities Exchange Act of 1934 (15 U.S.C. 78u-5) (``statutory safe 
harbors'') shall apply to forward-looking information provided pursuant 
to paragraphs (a)(4) and (5) of this Item, provided that the disclosure 
is made by: an issuer; a person acting on behalf of the issuer; an 
outside reviewer retained by the issuer making a statement on behalf of 
the issuer; or an underwriter, with respect to information provided by 
the issuer or information derived from information provided by the 
issuer.
    (2) For purposes of paragraph (c) of this Item only:
    (i) All information required by paragraphs (a)(4) and (5) of this 
Item is deemed to be a forward looking statement as that term is 
defined in the statutory safe harbors, except for historical facts.
    (ii) With respect to paragraph (a)(4) of this Item, the meaningful 
cautionary statements element of the statutory safe harbors will be 
satisfied if a registrant satisfies all requirements of that same 
paragraph (a)(4) of this Item.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    5. The authority citation for Part 249 is amended by revising the 
sectional authority for 249.220f and 249.240f to read as follows:

    Authority: 15 U.S.C. 78a et seq., unless otherwise noted.
    Section 249.220f is also issued under secs. 3(a), 302, 306(a), 
401(a), 401(b), 406 and 407, Pub. L. No. 107-204, 116 Stat. 745.
    Section 249.240f is also issued under secs. 3(a), 302, 306(a), 
401(a), 406 and 407, Pub. L. No. 107-204, 116 Stat. 745.
* * * * *


    6. Form 20-F (referenced in Sec.  249.220f), Item 5 is amended by:
    a. Adding Items 5.E through 5.G;
    b. Adding Instructions to 5.E; and
    c. Adding Instructions to Item 5.F to read as follows:

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

Form 20-F

* * * * *

Item 5. Operating and Financial Review and Prospects

* * * * *

E. Off-Balance Sheet Arrangements

    1. In a separately-captioned section, discuss the company's off-
balance sheet arrangements that have or are reasonably likely to have a 
current or future effect on the company's financial condition, changes 
in financial condition, revenues or expenses, results of operations, 
liquidity, capital expenditures or capital resources that is material 
to investors. The disclosure shall include the items specified in Items 
5.E.1(a), (b), (c) and (d) of this Item to the extent necessary to an 
understanding of such arrangements and effect, and shall also include 
such other information that the company believes is necessary for such 
an understanding.
    (a) The nature and business purpose to the company of such off-
balance sheet arrangements;
    (b) The importance to the company of such off-balance sheet 
arrangements in respect of its liquidity, capital resources, market 
risk support, credit risk support or other benefits;
    (c) The amounts of revenues, expenses and cash flows of the company 
arising from such arrangements; the nature and amounts of any interests 
retained, securities issued and other indebtedness incurred by the 
company in connection with such arrangements; and the nature and 
amounts of any other obligations or liabilities (including contingent 
obligations or liabilities) of the company arising from such 
arrangements that are or are reasonably likely to become material and 
the triggering events or circumstances that could cause them to arise; 
and
    (d) Any known event, demand, commitment, trend or uncertainty that 
will result in or is reasonably likely to result in the termination, or 
material reduction in availability to the company, of its off-balance 
sheet arrangements that provide material benefits to it, and the course 
of action that the company has taken or proposes to take in response to 
any such circumstances.

[[Page 6002]]

    2. As used in this Item 5.E., the term off-balance sheet 
arrangement means any transaction, agreement or other contractual 
arrangement to which an entity unconsolidated with the company is a 
party, under which the company has:
    (a) Any obligation under a guarantee contract that has any of the 
characteristics identified in paragraph 3 of FASB Interpretation No. 
45, Guarantor's Accounting and Disclosure Requirements for Guarantees, 
Including Indirect Guarantees of Indebtedness of Others (November 2002) 
(``FIN 45''), as may be modified or supplemented, excluding the types 
of guarantee contracts described in paragraphs 6 and 7 of FIN 45;
    (b) A retained or contingent interest in assets transferred to an 
unconsolidated entity or similar arrangement that serves as credit, 
liquidity or market risk support to such entity for such assets;
    (c) Any obligation under a derivative instrument that is both 
indexed to the company's own stock and classified in stockholders' 
equity, or not reflected, in the company's statement of financial 
position; or
    (d) Any obligation, including a contingent obligation, arising out 
of a variable interest (as referenced in FASB Interpretation No. 46, 
Consolidation of Variable Interest Entities (January 2003), as may be 
modified or supplemented) in an unconsolidated entity that is held by, 
and material to, the company, where such entity provides financing, 
liquidity, market risk or credit risk support to, or engages in 
leasing, hedging or research and development services with, the 
company.

F. Tabular Disclosure of Contractual Obligations

    1. In a tabular format, provide the information specified in this 
Item 5.F.1 as of the latest fiscal year end balance sheet date with 
respect to the company's known contractual obligations specified in the 
table that follows this Item 5.F.1. The company shall provide amounts, 
aggregated by type of contractual obligation. The company may 
disaggregate the specified categories of contractual obligations using 
other categories suitable to its business, but the presentation must 
include all of the obligations of the company that fall within the 
specified categories. A presentation covering at least the periods 
specified shall be included. The tabular presentation may be 
accompanied by footnotes to describe provisions that create, increase 
or accelerate obligations, or other pertinent data to the extent 
necessary for an understanding of the timing and amount of the 
company's specified contractual obligations.

----------------------------------------------------------------------------------------------------------------
                                                                      Payments due by period
                                                ----------------------------------------------------------------
            Contractual obligations                           Less than 1                            More than 5
                                                    Total         year      1-3 years    3-5 years      years
----------------------------------------------------------------------------------------------------------------
[Long-Term Debt Obligations]...................  ...........  ...........  ...........  ...........  ...........
[Capital (Finance) Lease Obligations]..........  ...........  ...........  ...........  ...........  ...........
[Operating Lease Obligations]..................  ...........  ...........  ...........  ...........  ...........
[Purchase Obligations].........................  ...........  ...........  ...........  ...........  ...........
[Other Long-Term Liabilities Reflected on the    ...........  ...........  ...........  ...........  ...........
 Company's Balance Sheet under the GAAP of the
 primary financial statements].................
                                                --------------
      Total....................................  ...........  ...........  ...........  ...........  ...........
----------------------------------------------------------------------------------------------------------------

    2. As used in this Item 5.F.1, the term purchase obligation means 
an agreement to purchase goods or services that is enforceable and 
legally binding on the company that specifies all significant terms, 
including: fixed or minimum quantities to be purchased; fixed, minimum 
or variable price provisions; and the approximate timing of the 
transaction.

G. Safe Harbor

    1. The safe harbor provided in section 27A of the Securities Act 
and section 21E of the Exchange Act (``statutory safe harbors'') shall 
apply to forward-looking information provided pursuant to Item 5.E and 
F, provided that the disclosure is made by: an issuer; a person acting 
on behalf of the issuer; an outside reviewer retained by the issuer 
making a statement on behalf of the issuer; or an underwriter, with 
respect to information provided by the issuer or information derived 
from information provided by the issuer.
    2. For purposes of Item 5.G.1 of this Item only, all information 
required by Item 5.E.1 and 5.E.2 of this Item is deemed to be a 
``forward looking statement'' as that term is defined in the statutory 
safe harbors, except for historical facts.
    3. With respect to Item 5.E, the meaningful cautionary statements 
element of the statutory safe harbors will be satisfied if a company 
satisfies all requirements of that same Item 5.E.
* * * * *
    Instructions to Item 5.E:
    1. No obligation to make disclosure under Item 5.E shall arise in 
respect of an off-balance sheet arrangement until a definitive 
agreement that is unconditionally binding or subject only to customary 
closing conditions exists or, if there is no such agreement, when 
settlement of the transaction occurs.
    2. Companies should aggregate off-balance sheet arrangements in 
groups or categories that provide material information in an efficient 
and understandable manner and should avoid repetition and disclosure of 
immaterial information. Effects that are common or similar with respect 
to a number of off-balance sheet arrangements must be analyzed in the 
aggregate to the extent the aggregation increases understanding. 
Distinctions in arrangements and their effects must be discussed to the 
extent the information is material, but the discussion should avoid 
repetition and disclosure of immaterial information.
    3. For purposes of paragraph Item 5.E only, contingent liabilities 
arising out of litigation, arbitration or regulatory actions are not 
considered to be off-balance sheet arrangements.
    4. Generally, the disclosure required by Item 5.E shall cover the 
most recent fiscal year. However, the discussion should address changes 
from the previous year where such discussion is necessary to an 
understanding of the disclosure.
    5. In satisfying the requirements of Item 5.E, the discussion of 
off-balance sheet arrangements need not repeat information provided in 
the footnotes to the financial statements, provided that such 
discussion clearly cross-references to specific information in the 
relevant footnotes and integrates the substance of the footnotes into 
such discussion in a manner designed to inform readers of the 
significance of the information that is not included within the body of 
such discussion.

[[Page 6003]]

    Instructions to Item 5.F:
    1. The company is not required to include the table required by 
Item 5.F.1 for interim periods. Instead, the company should disclose 
material changes outside the ordinary course of the company's business 
in the specified contractual obligations during the interim period.
    2. Except for ``purchase obligations,'' the contractual obligations 
in the table required by Item 5.F.1 should be based on the 
classifications used in the generally accepted accounting principles 
under which the company prepares its primary financial statements. If 
the generally accepted accounting principles under which the company 
prepares its primary financial statements do not distinguish between 
capital (finance) leases and operating leases, then present all leases 
under one category.
* * * * *

    7. Form 40-F (referenced in Sec.  249.240f) is amended by adding 
paragraphs (11) through (13) and Instructions to General Instruction B. 
to read as follows:

    Note: The text of Form 40-F does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 40-F

* * * * *

General Instructions

* * * * *

B. Information To Be Filed on this Form

* * * * *
    (11) Off-balance sheet arrangements. (i) In a separately-captioned 
section, discuss the registrant's off-balance sheet arrangements that 
have or are reasonably likely to have a current or future effect on the 
registrant's financial condition, changes in financial condition, 
revenues or expenses, results of operations, liquidity, capital 
expenditures or capital resources that is material to investors. The 
disclosure shall include the items specified in this General 
Instruction B.(11)(i)(A), (B), (C) and (D) to the extent necessary to 
an understanding of such arrangements and effect and shall also include 
such other information that the registrant believes is necessary for 
such an understanding.
    (A) The nature and business purpose to the registrant of such off-
balance sheet arrangements;
    (B) The importance to the registrant of such off-balance sheet 
arrangements in respect of its liquidity, capital resources, market 
risk support, credit risk support or other benefits; and
    (C) The amounts of revenues, expenses and cash flows of the 
registrant arising from such arrangements; the nature and amounts of 
any interests retained, securities issued and other indebtedness 
incurred by the registrant in connection with such arrangements; and 
the nature and amounts of any other obligations or liabilities 
(including contingent obligations or liabilities) of the registrant 
arising from such arrangements that are or are reasonably likely to 
become material and the triggering events or circumstances that could 
cause them to arise.
    (D) Any known event, demand, commitment, trend or uncertainty that 
will result in or is reasonably likely to result in the termination, or 
material reduction in availability to the registrant, of its off-
balance sheet arrangements that provide material benefits to it, and 
the course of action that the registrant has taken or proposes to take 
in response to any such circumstances.
    (ii) As used in this General Instruction B.(11), the term off-
balance sheet arrangement means any transaction, agreement or other 
contractual arrangement to which an entity unconsolidated with the 
registrant is a party, under which the registrant has:
    (A) Any obligation under a guarantee contract that has any of the 
characteristics identified in paragraph 3 of FASB Interpretation No. 
45, Guarantor's Accounting and Disclosure Requirements for Guarantees, 
Including Indirect Guarantees of Indebtedness of Others (November 2002) 
(``FIN 45''), as may be modified or supplemented, excluding the types 
of guarantee contracts described in paragraphs 6 and 7 of FIN 45;
    (B) A retained or contingent interest in assets transferred to an 
unconsolidated entity or similar arrangement that serves as credit, 
liquidity or market risk support to such entity for such assets;
    (C) Any obligation under a derivative instrument that is both 
indexed to the registrant's own stock and classified in stockholders' 
equity, or not reflected, in the company's statement of financial 
position; or
    (D) Any obligation, including a contingent obligation, arising out 
of a variable interest (as referenced in FASB Interpretation No. 46, 
Consolidation of Variable Interest Entities (January 2003), as may be 
modified or supplemented) in an unconsolidated entity that is held by, 
and material to, the registrant, where such entity provides financing, 
liquidity, market risk or credit risk support to, or engages in 
leasing, hedging or research and development services with, the 
registrant.
    (12) Tabular disclosure of contractual obligations. (i) In a 
tabular format, provide the information specified in this General 
Instruction B.(12) as of the latest fiscal year end balance sheet date 
with respect to the registrant's known contractual obligations 
specified in the table that follows this General Instruction B.(12). 
The registrant shall provide amounts, aggregated by type of contractual 
obligation. The registrant may disaggregate the specified categories of 
contractual obligations using other categories suitable to its 
business, but the presentation must include all of the obligations of 
the registrant that fall within the specified categories. A 
presentation covering at least the periods specified shall be included. 
The tabular presentation may be accompanied by footnotes to describe 
provisions that create, increase or accelerate obligations, or other 
pertinent data to the extent necessary for an understanding of the 
timing and amount of the registrant's specified contractual 
obligations.

----------------------------------------------------------------------------------------------------------------
                                                                      Payments due by period
                                                ----------------------------------------------------------------
            Contractual obligations                           Less than 1                            More than 5
                                                    Total         year      1-3 years    3-5 years      years
----------------------------------------------------------------------------------------------------------------
[Long-Term Debt Obligations]...................  ...........  ...........  ...........  ...........  ...........
[Capital (Finance) Lease Obligations]..........  ...........  ...........  ...........  ...........  ...........
[Operating Lease Obligations]..................  ...........  ...........  ...........  ...........  ...........
[Purchase Obligations].........................  ...........  ...........  ...........  ...........  ...........
[Other Long-Term Liabilities Reflected on the    ...........  ...........  ...........  ...........  ...........
 Registrant's Balance Sheet under the GAAP of
 the primary financial statements].............
                                                --------------

[[Page 6004]]

 
      Total....................................  ...........  ...........  ...........  ...........  ...........
----------------------------------------------------------------------------------------------------------------

    (ii) As used in this General Instruction B.(12), the term purchase 
obligation means an agreement to purchase goods or services that is 
enforceable and legally binding on the registrant that specifies all 
significant terms, including: fixed or minimum quantities to be 
purchased; fixed, minimum or variable price provisions; and the 
approximate timing of the transaction.
    (13) Safe harbor. (i) The safe harbor provided in section 27A of 
the Securities Act and section 21E of the Exchange Act (``statutory 
safe harbors'') shall apply to forward-looking information provided 
pursuant to General Instruction B.(11) and (12) of this Form 40-F, 
provided that the disclosure is made by: an issuer; a person acting on 
behalf of the issuer; an outside reviewer retained by the issuer making 
a statement on behalf of the issuer; or an underwriter, with respect to 
information provided by the issuer or information derived from 
information provided by the issuer.
    (ii) For purposes of paragraph (i) of this General Instruction 
B.(13) only, all information required by General Instruction B.(11) and 
(12) of this Form 40-F is deemed to be a ``forward looking statement'' 
as that term is defined in the statutory safe harbors, except for 
historical facts.
    (iii) With respect to General Instruction B.(11), the meaningful 
cautionary statements element of the statutory safe harbors will be 
satisfied if a registrant satisfies all requirements of that same 
General Instruction B.(11).
    Instructions:
    1. No obligation to make disclosure under General Instruction 
B.(11) shall arise in respect of an off-balance sheet arrangement until 
a definitive agreement that is unconditionally binding or subject only 
to customary closing conditions exists or, if there is no such 
agreement, when settlement of the transaction occurs.
    2. Registrants should aggregate off-balance sheet arrangements in 
groups or categories that provide material information in an efficient 
and understandable manner and should avoid repetition and disclosure of 
immaterial information. Effects that are common or similar with respect 
to a number of off-balance sheet arrangements must be analyzed in the 
aggregate to the extent the aggregation increases understanding. 
Distinctions in arrangements and their effects must be discussed to the 
extent the information is material, but the discussion should avoid 
repetition and disclosure of immaterial information.
    3. For purposes of paragraph General Instruction B.(11) only, 
contingent liabilities arising out of litigation, arbitration or 
regulatory actions are not considered to be off-balance sheet 
arrangements.
    4. Generally, the disclosure required by General Instruction B.(11) 
shall cover the most recent fiscal year. However, the discussion should 
address changes from the previous year where such discussion is 
necessary to an understanding of the disclosure.
    5. In satisfying the requirements of General Instruction B.(11), 
the discussion of off-balance sheet arrangements need not repeat 
information provided in the footnotes to the financial statements, 
provided that such discussion clearly cross-references to specific 
information in the relevant footnotes and integrates the substance of 
the footnotes into such discussion in a manner designed to inform 
readers of the significance of the information that is not included 
within the body of such discussion.
    6. The registrant is not required to include the table required by 
General Instruction B.(12) for interim periods. Instead, the registrant 
should disclose material changes outside the ordinary course of the 
registrant's business in the specified contractual obligations during 
the interim period.
    7. Except for ``purchase obligations,'' the contractual obligations 
in the table required by General Instruction B.(12) should be based on 
the classifications used in the generally accepted accounting 
principles under which the registrant prepares its primary financial 
statements. If the generally accepted accounting principles under which 
the registrant prepares its primary financial statements do not 
distinguish between capital (finance) leases and operating leases, then 
present all leases under one category.
* * * * *

    By the Commission.

    Dated: January 28, 2003.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-2365 Filed 2-4-03; 8:45 am]
BILLING CODE 8010-01-P