[Federal Register Volume 70, Number 76 (Thursday, April 21, 2005)]
[Rules and Regulations]
[Pages 20717-20719]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-8013]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210 and 228

[Release Nos. 33-8568; 34-51558; 35-27959; IC-26833; FR-74]
RIN 3235-AJ39


Amendment to Rule 4-01(a) of Regulation S-X Regarding the 
Compliance Date for Statement of Financial Accounting Standards No. 123 
(Revised 2004), Share-Based Payment

AGENCY: Securities and Exchange Commission

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is amending Regulation S-X to amend the date for 
compliance with Statement of Financial Accounting Standards No. 123 
(revised 2004), Share-Based Payment (``Statement No. 123R'') so that 
each registrant that is not a small business issuer will be required to 
prepare financial statements in accordance with Statement 123R 
beginning with the first interim or annual reporting period of the 
registrant's first fiscal year beginning on or after June 15, 2005. We 
also are amending the effective date for

[[Page 20718]]

compliance with Statement No. 123R so that each small business issuer 
will be required to prepare financial statements in accordance with 
Statement 123R beginning with the first interim or annual reporting 
period of the registrant's first fiscal year beginning on or after 
December 15, 2005.

DATES: Effective Date: April 21, 2005.

FOR FURTHER INFORMATION CONTACT: Robert E. Burns, Chief Counsel, Office 
of the Chief Accountant, at (202) 942-4400, U.S. Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-1103.

SUPPLEMENTARY INFORMATION: The Commission historically has recognized 
pronouncements of the Financial Accounting Standards Board (``FASB'') 
as authoritative in the absence of any contrary determination by the 
Commission.\1\ More recently, in Financial Reporting Release No. 70 \2\ 
the Commission announced its determination that the FASB and its parent 
organization, the Financial Accounting Foundation, satisfied the 
criteria in section 108 of the Sarbanes-Oxley Act of 2002 \3\ and 
section 19(b) of the Securities Act of 1933 \4\ and, accordingly, 
FASB's financial accounting and reporting standards are recognized as 
``generally accepted'' for purposes of the federal securities laws. As 
a result, registrants are required to comply with those standards in 
preparing financial statements filed with the Commission, unless the 
Commission provides otherwise.\5\
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    \1\ Rule 4-01(a)(1) of Regulation S-X, 17 CFR 210.4-01(a)(1). 
See Accounting Series Release (``ASR'') No. 150 (December 20, 1973) 
and ASR No. 4 (April 25, 1938).
    \2\ Release Nos. 33-8221; 34-47743; IC-26028; FR-70 (April 25, 
2003) (``FR-70''); 68 FR 23333 (May 1, 2003).
    \3\ 15 U.S.C. 7218.
    \4\ 15 U.S.C. 77s(b).
    \5\ See FR-70; Rule 4-01(a)(1) of Regulation S-X, 17 CFR 210.4-
01(a)(1).
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    In December 2004, the FASB published a revision to its standard on 
the accounting for stock-based compensation. The new publication is 
Statement of Financial Accounting Standards No. 123 (revised 2004), 
Share-Based Payment (``Statement No. 123R''). The FASB determined that 
Statement No. 123R should be effective:
     For public entities that do not file as small business 
issuers,\6\ as of the beginning of the first interim or annual 
reporting period that begins after June 15, 2005.
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    \6\ Regulation S-B, item 10, 17 CFR 228.10, defines small 
business issuer as a company that meets all of the following 
criteria: (1) Has revenues of less than $25,000,000; (2) is a United 
States or Canadian issuer; (3) is not an investment company; and (4) 
if a majority owned subsidiary, the parent corporation is also a 
small business issuer; provided however, that an entity is not a 
small business issuer if it has a public float (the aggregate market 
value of the issuer's outstanding voting and non-voting common 
equity held by non-affiliates) of $25,000,000 or more.
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     For public entities that file as small business issuers, 
as of the beginning of the first interim or annual reporting period 
that begins after December 15, 2005.\7\
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    \7\ Statement 123R, ] 69. The FASB also provided that Statement 
No. 123R is effective for nonpublic entities as of the beginning of 
the first annual reporting period that begins after December 15, 
2005. The rule adopted by the Commission in this release does not 
alter the FASB's effective date for nonpublic entities, as provided 
in Statement 123R. See the definition of ``nonpublic entity'' in the 
Glossary to Statement No. 123R.
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    Under the FASB's effective dates, calendar year-end registrants 
that are not small business issuers, for example, would be permitted to 
file interim financial statements for the first and second quarters of 
2005 that comply with the pre-existing accounting standard and would be 
required to file interim financial statements for the third quarter 
that comply with the provisions in Statement No. 123R.
    Based on feedback from public companies, industry groups, and 
registered public accounting firms, we are concerned that initial 
implementation of Statement No. 123R in a period other than the first 
quarter of a fiscal year may make compliance more complicated for 
registrants and potentially could make comparisons more difficult for 
investors. In addition, phasing in Statement No. 123R at the beginning 
of a registrant's fiscal year would relieve registrants from having to 
change their accounting systems in the middle of the fiscal year and 
allow them to implement in a more orderly fashion the software programs 
that may facilitate compliance with the standard. Implementing the 
standard at the beginning of the fiscal year also would allow auditors 
to conduct more consistent audit, review and attest procedures in this 
area.
    For example, under the Commission's amendment, a domestic 
registrant \8\ is required to file financial statements that comply 
with Statement 123R in its Form 10-Q for the first quarter of the first 
fiscal year that begins after June 15, 2005 (or after December 15, 2005 
for small business issuers).\9\ Under the Commission's amendment, 
registrants would be permitted, but not required, to comply with 
Statement 123R for periods before the effective date of the 
Commission's new rule.
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    \8\ Similarly, a foreign private issuer is required to comply 
with Statement No. 123R in its annual report on Form 20-F for the 
first fiscal year that begins after June 15, 2005, or in a 
prospectus or registration statement that is required to include an 
interim period of the first fiscal year that begins after June 15, 
2005.
    \9\ Annual or interim financial statements for any reporting 
period beginning on or after the beginning of the registrant's first 
fiscal year after June 15, 2005 (or after December 15, 2005 for 
small business issuers) that are contained in a registration 
statement under the Securities Act of 1933 must be prepared in 
accordance with Statement No. 123R. A non-public entity that meets 
the definition of a ``public entity'' in Statement 123R after June 
15, 2005 should apply the provisions of Statement No. 123R 
applicable to its new status together with the Commission's 
amendment. See also Statement No. 123R, at ] Sec.  B257.
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    We believe that the rule being adopted will lower compliance costs 
for companies. Any burden that may be imposed on investors by the 
amendment will be reduced because, among other things: (1) The 
information required by Statement No. 123R will be provided within 
months of the effective date established by the FASB; (2) implementing 
these requirements at the beginning of a fiscal year should allow for 
easier comparison of quarterly data prepared under consistent 
standards; and (3) related information currently is disclosed in the 
footnotes to the financial statements.\10\
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    \10\ See Statement of Financial Accounting Standards No. 123, 
Accounting for Stock-Based Compensation (October 1995).
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    Sections 3(f) and 23(a)(2) of the Securities Exchange Act of 
1934,\11\ section 2(b) of the Securities Act of 1933,\12\ and section 
2(c) of the Investment Company Act of 1940 \13\ require the Commission, 
when engaging in rulemaking, to consider whether the action will 
promote efficiency, competition, and capital formation. The Commission 
has considered the effect of the amendment on efficiency, competition 
and capital formation. We believe that this amendment will not burden 
competition because registrants of similar size and fiscal year will be 
treated alike. The increased comparability of quarterly financial 
information and more orderly transition to the new accounting standard 
provided by this amendment will not adversely impact the efficiency of 
the securities markets nor adversely impact capital formation.\14\
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    \11\ 15 U.S.C. 78c(f) and 78w(a)(2).
    \12\ 15 U.S.C. 77b(b).
    \13\ 15 U.S.C. 80a-2(c).
    \14\ The Paperwork Reduction Act, 44 U.S.C. 3501 et seq., is not 
applicable to the promulgation of the amendment because it does not 
impose any collection of information requirements that would require 
approval of the Office and Management and Budget.
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    Public companies and their auditors may already be in the process 
of attempting to comply with Statement 123R. Changing companies' 
financial and tax systems in the middle of the

[[Page 20719]]

year while the Commission publishes notice and seeks comment may add 
unnecessary costs to the implementation of the standard. In addition, 
some companies will, if the Commission does not act immediately, file a 
quarterly filing using the new standard, potentially making comparisons 
of quarterly information more difficult for analysts and investors. 
Accordingly, in light of these concerns, the impending deadline and the 
other reasons discussed above, the Commission for good cause finds that 
providing notice and an opportunity for comment would be impracticable 
and contrary to the public interest.\15\ In addition, for good cause 
and because implementing Statement No. 123R at the beginning of a 
fiscal year will relieve a restriction or obligation on registrants, 
the Commission's rule will be effective on April 21, 2005.\16\
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    \15\ See Section 553(b)(3)(B) of the Administrative Procedure 
Act, 5 U.S.C. 553(b)(3)(B), which states that an agency may dispense 
with prior notice and comment when it finds, for good cause, that 
notice and comment are ``impracticable, unnecessary, or contrary to 
the public interest.'' The Regulatory Flexibility Act (``RFA'') is 
not applicable to the promulgation of the amendment because the RFA 
applies only when an agency must publish a general notice of 
proposed rulemaking for notice and comment and the Commission has 
determined that notice and comment are not required for this 
amendment. See 5 U.S.C. 603.
    \16\ 5 U.S.C. 553(d).
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    The statutory basis for this amendment to Regulation S-X includes 
sections 3(a) and 108 of the Sarbanes-Oxley Act of 2002 and Schedule A 
and sections 7, 8, 10 and 19 of the Securities Act of 1933, sections 3, 
10A, 12, 13, 14, 17 and 23 of the Securities Exchange Act of 1934, 
sections 5, 10, 14 and 20 of the Public Utility Holding Company Act of 
1935 and sections 8, 30, 31, 32 and 38 of the Investment Company Act of 
1940.

List of Subjects

17 CFR Part 210

    Accountants, Accounting, Reporting and recordkeeping requirements, 
Securities.

17 CFR Part 228

    Reporting and recordkeeping requirements, Securities.

Text of Rule Amendments

0
In accordance with the foregoing, Title 17, Chapter II of the Code of 
Federal Regulations is amended as follows:

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

0
1. The authority for part 210 continues to read as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77aa(25), 77aa(26), 78c, 78j-1, 78l, 78m, 78n, 78o(d), 78q, 78u-5, 
78w(a), 78ll, 78mm, 79e(b), 79j(a), 79n, 79t(a), 80a-8, 80a-20, 80a-
29, 80a-30, 80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, unless 
otherwise noted.
* * * * *

0
2. Section 210.4-01 is amended by removing the authority citation 
following the section and adding paragraph (a)(3) to read as follows:


Sec.  210.4-01  Form, order, and terminology.

    (a) * * *
    (3)(i) Notwithstanding the effective dates set forth in Statement 
of Financial Accounting Standards No. 123 (revised 2004), Share-Based 
Payment (``Statement No. 123R''), financial statements shall be 
prepared in accordance with Statement No. 123R beginning with:
    (A) The first interim or annual reporting period of the 
registrant's first fiscal year beginning on or after June 15, 2005, 
provided the registrant does not file as a small business issuer; and
    (B) The first interim or annual reporting period of the 
registrant's first fiscal year beginning on or after December 15, 2005, 
provided the registrant files as a small business issuer.
    (ii) For periods prior to the effective dates set forth in this 
paragraph, both Statement No. 123R and Statement of Financial 
Accounting Standards No. 123, Accounting for Stock-Based Compensation 
(October 1995), shall be considered to be generally accepted accounting 
principles.
* * * * *

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

0
3. The authority citation for Part 228 continues to read in part 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, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350.
* * * * *

0
4. Section 228.310 is amended by adding Note 6 to read as follows:


Sec.  228.310 (Item 310)  Financial Statements.

    Notes:
* * * * *
    6. Rule 4-01(a)(3) of Regulation S-X, 17 CFR 210.4-01(a)(3), shall 
apply to the preparation of financial statements of small business 
issuers.
* * * * *

    By the Commission.

    Dated: April 15, 2005.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 05-8013 Filed 4-20-05; 8:45 am]
BILLING CODE 8010-01-P