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    The staff believes that the problem of separating the benefit to
the principal stockholder from the benefit to the company cited in FASB
ASC Topic 718 is not limited to transactions involving stock
compensation. Therefore, similar accounting is required in this and
other \36\ transactions where a principal stockholder pays an expense
for the company, unless the stockholder's action is caused by a
relationship or obligation completely unrelated to his position as a
stockholder or such action clearly does not benefit the company.
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    \36\ For example, SAB Topic 1.B indicates that the separate
financial statements of a subsidiary should reflect any costs of its
operations which are incurred by the parent on its behalf.
Additionally, the staff notes that AICPA Technical Practice Aids
Sec.  4160 also indicates that the payment by principal stockholders
of a company's debt should be accounted for as a capital
contribution.
---------------------------------------------------------------------------

    Some registrants and their accountants have taken the position that
since FASB ASC Topic 850, Related Party Disclosures, applies to these
transactions and requires only the disclosure of material related party
transactions, the staff should not analogize to the accounting called
for by FASB ASC paragraph 718-10-15-4 for transactions other than those
specifically covered by it. The staff notes, however, that FASB ASC
Topic 850 does not address the measurement of related party
transactions and that, as a result, such transactions are generally
recorded at the amounts indicated by their terms.\37\ However, the
staff believes that transactions of the type described above differ
from the typical related party transactions.
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    \37\ However, in some circumstances it is necessary to reflect,
either in the historical financial statements or a pro forma
presentation (depending on the circumstances), related party
transactions at amounts other than those indicated by their terms.
Two such circumstances are addressed in Staff Accounting Bulletin
Topic 1.B.1, Questions 3 and 4. Another example is where the terms
of a material contract with a related party are expected to change
upon the completion of an offering (i.e., the principal shareholder
requires payment for services which had previously been contributed
by the shareholder to the company).
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    The transactions for which FASB ASC Topic 850 requires disclosure
generally are those in which a company receives goods or services
directly from, or provides goods or services directly to, a related
party, and the form and terms of such transactions may be structured to
produce either a direct or indirect benefit to the related party. The
participation of a related party in such a transaction negates the
presumption that transactions reflected in the financial statements
have been consummated at arm's length. Disclosure is therefore required
to compensate for the fact that, due to the related party's
involvement, the terms of the transaction may produce an accounting
measurement for which a more faithful measurement may not be
determinable.
    However, transactions of the type discussed in the facts given do
not have such problems of measurement and appear to be transacted to
provide a benefit to the stockholder through the enhancement or
maintenance of the value of the stockholder's investment. The staff
believes that the substance of such transactions is the payment of an
expense of the company through contributions by the stockholder.
Therefore, the staff believes it would be inappropriate to account for
such transactions according to the form of the transaction.

U. Removed by SAB 112

V. Certain Transfers of Nonperforming Assets

    Facts: A financial institution desires to reduce its nonaccrual or
reduced rate loans and other nonearning assets, including foreclosed
real estate (collectively, ``nonperforming assets''). Some or all of
such nonperforming assets are transferred to a newly-formed entity (the
``new entity''). The financial

institution, as consideration for transferring the nonperforming
assets, may receive (a) the cash proceeds of debt issued by the new
entity to third parties, (b) a note or other redeemable instrument
issued by the new entity, or (c) a combination of (a) and (b). The
residual equity interests in the new entity, which carry voting rights,
initially owned by the financial institution, are transferred to
outsiders (for example, via distribution to the financial institution's
shareholders or sale or contribution to an unrelated third party).
    The financial institution typically will manage the assets for a
fee, providing necessary services to liquidate the assets, but
otherwise does not have the right to appoint directors or legally
control the operations of the new entity.
    FASB ASC Topic 860, Transfers and Servicing, provides guidance for
determining when a transfer of financial assets can be recognized as a
sale. The interpretive guidance provided in response to Questions 1 and
2 of this SAB does not apply to transfers of financial assets falling
within the scope of FASB ASC Topic 860. Because FASB ASC Topic 860 does
not apply to distributions of financial assets to shareholders or a
contribution of such assets to unrelated third parties, the
interpretive guidance provided in response to Questions 1 and 2 of this
SAB would apply to such conveyances.
    Further, registrants should consider the guidance contained in FASB
ASC Topic 810, Consolidation, in determining whether it should
consolidate the newly-formed entity.
    Question 1: What factors should be considered in determining
whether such transfer of nonperforming assets can be accounted for as a
disposition by the financial institution?
    Interpretive Response: The staff believes that determining whether
nonperforming assets have been disposed of in substance requires an
assessment as to whether the risks and rewards of ownership have been
transferred.\38\ The staff believes that the transfer described should
not be accounted for as a sale or disposition if (a) the transfer of
nonperforming assets to the new entity provides for recourse by the new
entity to the transferor financial institution, (b) the financial
institution directly or indirectly guarantees debt of the new entity in
whole or in part, (c) the financial institution retains a participation
in the rewards of ownership of the transferred assets, for example
through a higher than normal incentive or other management fee
arrangement,\39\ or (d) the fair value of any material non-cash
consideration received by the financial institution (for example, a
note or other redeemable instrument) cannot be reasonably estimated.
Additionally, the staff believes that the accounting for the transfer
as a sale or disposition generally is not appropriate where the
financial institution retains rewards of ownership through the holding
of significant residual equity interests or where third party holders
of such interests do not have a significant amount of capital at risk.
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    \38\ [Original footnote removed by SAB 114.]
    \39\ The staff recognizes that the determination of whether the
financial institution retains a participation in the rewards of
ownership will require an analysis of the facts and circumstances of
each individual transaction. Generally, the staff believes that, in
order to conclude that the financial institution has disposed of the
assets in substance, the management fee arrangement should not
enable the financial institution to participate to any significant
extent in the potential increases in cash flows or value of the
assets, and the terms of the arrangement, including provisions for
discontinuance of services, must be substantially similar to
management arrangements with third parties.
---------------------------------------------------------------------------

    Where accounting for the transfer as a sale or disposition is not
appropriate, the nonperforming assets should remain on the financial
institution's balance sheet and should continue to be disclosed as
nonaccrual, past due, restructured or foreclosed, as appropriate, and
the debt of the new entity should be recorded by the financial
institution.
    Question 2: If the transaction is accounted for as a sale to an
unconsolidated party, at what value should the transfer be recorded by
the financial institution?
    Interpretive Response: The staff believes that the transfer should
be recorded by the financial institution at the fair value of assets
transferred (or, if more clearly evident, the fair value of assets
received) and a loss recognized by the financial institution for any
excess of the net carrying value \40\ over the fair value.\41\ Fair
value is the amount that would be realizable in an outright sale to an
unrelated third party for cash.\42\ The same concepts should be applied
in determining fair value of the transferred assets, i.e., if an active
market exists for the assets transferred, then fair value is equal to
the market value. If no active market exists, but one exists for
similar assets, the selling prices in that market may be helpful in
estimating the fair value. If no such market price is available, a
forecast of expected cash flows, discounted at a rate commensurate with
the risks involved, may be used to aid in estimating the fair value. In
situations where discounted cash flows are used to estimate fair value
of nonperforming assets, the staff would expect that the interest rate
used in such computations will be substantially higher than the cost of
funds of the financial institution and appropriately reflect the risk
of holding these nonperforming assets. Therefore, the fair value
determined in such a way will be lower than the amount at which the
assets would have been carried by the financial institution had the
transfer not occurred, unless the financial institution had been
required under GAAP to carry such assets at market value or the lower
of cost or market value.
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    \40\ The carrying value should be reduced by any allocable
allowance for credit losses or other valuation allowances. The staff
believes that the loss recognized for the excess of the net carrying
value over the fair value should be considered a credit loss and
this should not be included by the financial institution as loss on
disposition.
    \41\ The staff notes that FASB ASC paragraph 942-810-45-2
(Financial Services--Depository and Lending Topic) provides guidance
that the newly created ``liquidating bank'' should continue to
report its assets and liabilities at fair values at the date of the
financial statements.
    \42\ FASB ASC paragraph 845-10-30-14 (Nonmonetary Transactions
Topic) provides guidance that an enterprise that distributes loans
to its owners should report such distribution at fair value.
---------------------------------------------------------------------------

    Question 3: Where the transaction may appropriately be accounted
for as a sale to an unconsolidated party and the financial institution
receives a note receivable or other redeemable instrument from the new
entity, how should such asset be disclosed pursuant to Item III C,
``Risk Elements,'' of Industry Guide 3? What factors should be
considered related to the subsequent accounting for such instruments
received?
    Interpretive Response: The staff believes that the financial
institution may exclude the note receivable or other asset from its
Risk Elements disclosures under Guide 3 provided that: (a) The
receivable itself does not constitute a nonaccrual, past due,
restructured, or potential problem loan that would require disclosure
under Guide 3, and (b) the underlying collateral is described in
sufficient detail to enable investors to understand the nature of the
note receivable or other asset, if material, including the extent of
any over-collateralization. The description of the collateral normally
would include material information similar to that which would be
provided if such assets were owned by the financial institution,
including pertinent Risk Element disclosures.
    The staff notes that, in situations in which the transaction is
accounted for as a sale to an unconsolidated party and a portion of the
consideration received by the registrant is debt or another

redeemable instrument, careful consideration must be given to the
appropriateness of recording profits on the management fee arrangement,
or interest or dividends on the instrument received, including
consideration of whether it is necessary to defer such amounts or to
treat such payments on a cost recovery basis. Further, if the new
entity incurs losses to the point that its permanent equity based on
GAAP is eliminated, it would ordinarily be necessary for the financial
institution, at a minimum, to record further operating losses as its
best estimate of the loss in realizable value of its investment.\43\
---------------------------------------------------------------------------

    \43\ Typically, the financial institution's claim on the new
entity is subordinate to other debt instruments and thus the
financial institution will incur any losses beyond those incurred by
the permanent equity holders.
---------------------------------------------------------------------------

W. Contingency Disclosures Regarding Property-Casualty Insurance
Reserves for Unpaid Claim Costs

    Facts: A property-casualty insurance company (the ``Company'') has
established reserves, in accordance with FASB ASC Topic 944, Financial
Services--Insurance, for unpaid claim costs, including estimates of
costs relating to claims incurred but not reported (``IBNR'').\44\ The
reserve estimate for IBNR claims was based on past loss experience and
current trends except that the estimate has been adjusted for recent
significant unfavorable claims experience that the Company considers to
be nonrecurring and abnormal. The Company attributes the abnormal
claims experience to a recent acquisition and accelerated claims
processing; however, actuarial studies have been inconclusive and
subject to varying interpretations. Although the reserve is deemed
adequate to cover all probable claims, there is a reasonable
possibility that the abnormal claims experience could continue,
resulting in a material understatement of claim reserves.
---------------------------------------------------------------------------

    \44\ FASB ASC paragraph 944-40-30-1 prescribes that ``[t]he
liability for unpaid claims shall be based on the estimated ultimate
cost of settling the claims (including the effects of inflation and
other societal and economic factors), using past experience adjusted
for current trends, and any other factors that would modify past
experience.'' [Footnote reference omitted]
---------------------------------------------------------------------------

    FASB ASC Topic 450, Contingencies, requires, among other things,
disclosure of loss contingencies.\45\ However, FASB ASC paragraph 450-
10-05-6 notes that ``[n]ot all uncertainties inherent in the accounting
process give rise to contingencies.''
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    \45\ FASB ASC paragraphs 450-20-50-3 through 450-20-50-4 provide
guidance that if no accrual is made for a loss contingency because
one or both of the conditions in FASB ASC paragraph 450-20-25-2 are
not met, or if an exposure to loss exists in excess of the amount
accrued pursuant to the provisions of FASB ASC paragraph 450-20-25-
2, disclosure of the contingency shall be made when there is at
least a reasonable possibility that a loss or an additional loss may
have been incurred. The disclosure shall indicate the nature of the
contingency and shall give an estimate of the possible loss or range
of loss or state that such an estimate cannot be made.'' [Footnote
reference omitted and emphasis added.]
---------------------------------------------------------------------------

    FASB ASC Topic 275, Risks and Uncertainties,\46\ also provides
disclosure guidance regarding certain significant estimates.
---------------------------------------------------------------------------

    \46\ FASB ASC Topic 275 provides that disclosures regarding
certain significant estimates should be made when certain criteria
are met. The guidance provides that the disclosure shall indicate
the nature of the uncertainty and include an indication that it is
at least reasonably possible that a change in the estimate will
occur in the near term. If the estimate involves a loss contingency
covered by FASB ASC Topic 450, the disclosure also should include an
estimate of the possible loss or range of loss, or state that such
an estimate cannot be made. Disclosure of the factors that cause the
estimate to be sensitive to change is encouraged but not required.
    FASB ASC Topic 275 requires disclosures regarding current
vulnerability due to certain concentrations which may be applicable
as well.
---------------------------------------------------------------------------

    Question 1: In the staff's view, do FASB ASC Topics 450 and 275
disclosure requirements apply to property-casualty insurance reserves
for unpaid claim costs? If so, how?
    Interpretive Response: Yes. The staff believes that specific
uncertainties (conditions, situations and/or sets of circumstances) not
considered to be normal and recurring because of their significance
and/or nature can result in loss contingencies \47\ for purposes of
applying FASB ASC Topics 450 and 275 disclosure requirements. General
uncertainties, such as the amount and timing of claims, that are
normal, recurring, and inherent to estimations of property-casualty
insurance reserves are not considered subject to the disclosure
requirements of FASB ASC Topic 450. Some specific uncertainties that
may result in loss contingencies pursuant to FASB ASC Topic 450,
depending on significance and/or nature, include insufficiently
understood trends in claims activity; judgmental adjustments to
historical experience for purposes of estimating future claim costs
(other than for normal recurring general uncertainties); significant
risks to an individual claim or group of related claims; or catastrophe
losses. The requirements of FASB ASC Topic 275 apply when ``[i]t is at
least reasonably possible that the estimate of the effect on the
financial statements of a condition, situation, or set of circumstances
that existed at the date of the financial statements will change in the
near term due to one or more future confirming events * * * [and] the
effect of the change would be material to the financial statements.''
---------------------------------------------------------------------------

    \47\ The loss contingency referred to in this document is the
potential for a material understatement of reserves for unpaid
claims.
---------------------------------------------------------------------------

    Question 2: Do the facts presented above describe an uncertainty
that requires disclosures under FASB ASC Topics 450 and 275?
    Interpretive Response: Yes. The staff believes the judgmental
adjustments to historical experience for insufficiently understood
claims activity noted above results in a loss contingency within the
scope of FASB ASC Topics 450 and 275. Based on the facts presented
above, at a minimum the Company's financial statements should disclose
that for purposes of estimating IBNR claim reserves, past experience
was adjusted for what management believes to be abnormal claims
experience related to the recent acquisition of Company A and
accelerated claims processing. It should also be disclosed that there
is a reasonable possibility that the claims experience could be the
indication of an unfavorable trend which would require additional IBNR
claim reserves in the approximate range of $XX-$XX million
(alternatively, if Company management is unable to estimate the
possible loss or range of loss, a statement to that effect should be
disclosed).
    Additionally, the staff also expects companies to disclose the
nature of the loss contingency and the potential impact on trends in
their loss reserve development discussions provided pursuant to
Property-Casualty Industry Guides 4 and 6. Consideration should also be
given to the need to provide disclosure in MD&A.
    Question 3: Does the staff have an example in which specific
uncertainties involving an individual claim or group of related claims
result in a loss contingency the staff believes requires disclosure?
    Interpretive Response: Yes. A property-casualty insurance company
(the ``Company'') underwrites product liability insurance for an
insured manufacturer which has produced and sold millions of units of a
particular product which has been used effectively and without problems
for many years. Users of the product have recently begun to report
serious health problems that they attribute to long term use of the
product and have asserted claims under the insurance policy
underwritten and retained by the Company. To date, the number of users
reporting such problems is relatively small, and there is presently no
conclusive evidence that demonstrates a causal link between long term
use of the product and the health problems experienced by the
claimants. However,

the evidence generated to date indicates that there is at least a
reasonable possibility that the product is responsible for the problems
and the assertion of additional claims is considered probable, and
therefore the potential exposure of the Company is material. While an
accrual may not be warranted since the loss exposure may not be both
probable and estimable, in view of the reasonable possibility of
material future claim payments, the staff believes that disclosures
made in accordance with FASB ASC Topics 450 and 275 would be required
under these circumstances.
    The disclosure concepts expressed in this example would also apply
to an individual claim or group of claims that are related to a single
catastrophic event or multiple events having a similar effect.

X. Removed by SAB 103

Y. Accounting and Disclosures Relating to Loss Contingencies

    Facts: A registrant believes it may be obligated to pay material
amounts as a result of product or environmental remediation liability.
These amounts may relate to, for example, damages attributed to the
registrant's products or processes, clean-up of hazardous wastes,
reclamation costs, fines, and litigation costs. The registrant may seek
to recover a portion or all of these amounts by filing a claim against
an insurance carrier or other third parties.
    Question 1: Assuming that the registrant's estimate of an
environmental remediation or product liability meets the conditions set
forth in FASB ASC paragraph 410-30-35-12 (Asset Retirement and
Environmental Obligations Topic) for recognition on a discounted basis,
what discount rate should be applied and what, if any, special
disclosures are required in the notes to the financial statements?
    Interpretive Response: The rate used to discount the cash payments
should be the rate that will produce an amount at which the
environmental or product liability could be settled in an arm's-length
transaction with a third party. Further, the discount rate used to
discount the cash payments should not exceed the interest rate on
monetary assets that are essentially risk free \48\ and have maturities
comparable to that of the environmental or product liability.
---------------------------------------------------------------------------

    \48\ As described in Concepts Statement 7, Using Cash Flow
Information and Present Value in Accounting Measurements.
---------------------------------------------------------------------------

    If the liability is recognized on a discounted basis to reflect the
time value of money, the notes to the financial statements should, at a
minimum, include disclosures of the discount rate used, the expected
aggregate undiscounted amount, expected payments for each of the five
succeeding years and the aggregate amount thereafter, and a
reconciliation of the expected aggregate undiscounted amount to amounts
recognized in the statements of financial position. Material changes in
the expected aggregate amount since the prior balance sheet date, other
than those resulting from pay-down of the obligation, should be
explained.
    Question 2: What financial statement disclosures should be
furnished with respect to recorded and unrecorded product or
environmental remediation liabilities?
    Interpretive Response: FASB ASC Section 450-20-50, Contingencies--
Loss Contingencies--Disclosure, identify disclosures regarding loss
contingencies that generally are furnished in notes to financial
statements. FASB ASC Section 410-30-50, Asset Retirement and
Environmental Obligations--Environmental Obligations--Disclosure,
identifies disclosures that are required and recommended regarding both
recorded and unrecorded environmental remediation liabilities. The
staff believes that product and environmental remediation liabilities
typically are of such significance that detailed disclosures regarding
the judgments and assumptions underlying the recognition and
measurement of the liabilities are necessary to prevent the financial
statements from being misleading and to inform readers fully regarding
the range of reasonably possible outcomes that could have a material
effect on the registrant's financial condition, results of operations,
or liquidity. In addition to the disclosures required by FASB ASC
Section 450-20-50 and FASB ASC Section 410-30-50, examples of
disclosures that may be necessary include:
     Circumstances affecting the reliability and precision of
loss estimates.
     The extent to which unasserted claims are reflected in any
accrual or may affect the magnitude of the contingency.
     Uncertainties with respect to joint and several liability
that may affect the magnitude of the contingency, including disclosure
of the aggregate expected cost to remediate particular sites that are
individually material if the likelihood of contribution by the other
significant parties has not been established.
     Disclosure of the nature and terms of cost-sharing
arrangements with other potentially responsible parties.
     The extent to which disclosed but unrecognized contingent
losses are expected to be recoverable through insurance,
indemnification arrangements, or other sources, with disclosure of any
material limitations of that recovery.
     Uncertainties regarding the legal sufficiency of insurance
claims or solvency of insurance carriers.\49\
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    \49\ The staff believes there is a rebuttable presumption that
no asset should be recognized for a claim for recovery from a party
that is asserting that it is not liable to indemnify the registrant.
Registrants that overcome that presumption should disclose the
amount of recorded recoveries that are being contested and discuss
the reasons for concluding that the amounts are probable of
recovery.
---------------------------------------------------------------------------

     The time frame over which the accrued or presently
unrecognized amounts may be paid out.
     Material components of the accruals and significant
assumptions underlying estimates.
    Registrants are cautioned that a statement that the contingency is
not expected to be material does not satisfy the requirements of FASB
ASC Topic 450 if there is at least a reasonable possibility that a loss
exceeding amounts already recognized may have been incurred and the
amount of that additional loss would be material to a decision to buy
or sell the registrant's securities. In that case, the registrant must
either (a) disclose the estimated additional loss, or range of loss,
that is reasonably possible, or (b) state that such an estimate cannot
be made.
    Question 3: What disclosures regarding loss contingencies may be
necessary outside the financial statements?
    Interpretive Response: Registrants should consider the requirements
of Items 101 (Description of Business), 103 (Legal Proceedings), and
303 (MD&A) of Regulation S-K. The Commission has issued interpretive
releases that provide additional guidance with respect to these
items.\50\ In a 1989 interpretive release, the Commission noted that
the availability of insurance, indemnification, or contribution may be
relevant in determining whether the criteria for disclosure have been
met with respect to a contingency.\51\ The registrant's assessment in
this regard should include consideration of facts such as the periods
in which claims for recovery may be realized, the likelihood that the
claims may be contested, and

the financial condition of third parties from which recovery is
expected.
---------------------------------------------------------------------------

    \50\ See Securities Act Release No. 6130, FR 36, Securities Act
Release No. 33-8040, Securities Act Release No. 33-8039, and
Securities Act Release 33-8176.
    \51\ See, e.g., footnote 30 of FR 36 (footnote 17 of Section
501.02 of the Codification of Financial Reporting Policies).
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    Disclosures made pursuant to the guidance identified in the
preceding paragraph should be sufficiently specific to enable a reader
to understand the scope of the contingencies affecting the registrant.
For example, a registrant's discussion of historical and anticipated
environmental expenditures should, to the extent material, describe
separately (a) recurring costs associated with managing hazardous
substances and pollution in on-going operations, (b) capital
expenditures to limit or monitor hazardous substances or pollutants,
(c) mandated expenditures to remediate previously contaminated sites,
and (d) other infrequent or non-recurring clean-up expenditures that
can be anticipated but which are not required in the present
circumstances. Disaggregated disclosure that describes accrued and
reasonably likely losses with respect to particular environmental sites
that are individually material may be necessary for a full
understanding of these contingencies. Also, if management's
investigation of potential liability and remediation cost is at
different stages with respect to individual sites, the consequences of
this with respect to amounts accrued and disclosed should be discussed.
    Examples of specific disclosures typically relevant to an
understanding of historical and anticipated product liability costs
include the nature of personal injury or property damages alleged by
claimants, aggregate settlement costs by type of claim, and related
costs of administering and litigating claims. Disaggregated disclosure
that describes accrued and reasonably likely losses with respect to
particular claims may be necessary if they are individually material.
If the contingency involves a large number of relatively small
individual claims of a similar type, such as personal injury from
exposure to asbestos, disclosure of the number of claims pending at
each balance sheet date, the number of claims filed for each period
presented, the number of claims dismissed, settled, or otherwise
resolved for each period, and the average settlement amount per claim
may be necessary. Disclosures should address historical and expected
trends in these amounts and their reasonably likely effects on
operating results and liquidity.
    Question 4: What disclosures should be furnished with respect to
site restoration costs or other environmental remediation costs? \52\
---------------------------------------------------------------------------

    \52\ Registrants are reminded that FASB ASC Subtopic 410-20,
Asset Retirement and Environmental Obligations--Asset Retirement
Obligations, provides guidance for accounting and reporting for
costs associated with asset retirement obligations.
---------------------------------------------------------------------------

    Interpretive Response: The staff believes that material liabilities
for site restoration, post-closure, and monitoring commitments, or
other exit costs that may occur on the sale, disposal, or abandonment
of a property as a result of unanticipated contamination of the asset
should be disclosed in the notes to the financial statements.
Appropriate disclosures generally would include the nature of the costs
involved, the total anticipated cost, the total costs accrued to date,
the balance sheet classification of accrued amounts, and the range or
amount of reasonably possible additional losses. If an asset held for
sale or development will require remediation to be performed by the
registrant prior to development, sale, or as a condition of sale, a
note to the financial statements should describe how the necessary
expenditures are considered in the assessment of the asset's value and
the possible need to reflect an impairment loss. Additionally, if the
registrant may be liable for remediation of environmental damage
relating to assets or businesses previously disposed, disclosure should
be made in the financial statements unless the likelihood of a material
unfavorable outcome of that contingency is remote.\53\ The registrant's
accounting policy with respect to such costs should be disclosed in
accordance with FASB ASC Topic 235, Notes to Financial Statements.
---------------------------------------------------------------------------

    \53\ If the company has a guarantee as defined by FASB ASC Topic
460, Guarantees, the entity is required to provide the disclosures
and recognize the fair value of the guarantee in the company's
financial statements even if the ``contingent'' aspect of the
guarantee is deemed to be remote.
---------------------------------------------------------------------------

Z. Accounting and Disclosure Regarding Discontinued Operations

1. Removed by SAB 103
2. Removed by SAB 103
3. Removed by SAB 103
4. Disposal of Operation With Significant Interest Retained
    Facts: A Company disposes of its controlling interest in a
component of an entity as defined by the FASB ASC Master Glossary. The
Company retains a minority voting interest directly in the component or
it holds a minority voting interest in the buyer of the component.
Controlling interest includes those controlling interests established
through other means, such as variable interests. Because the Company's
voting interest enables it to exert significant influence over the
operating and financial policies of the investee, the Company is
required by FASB ASC Subtopic 323-10, Investments--Equity Method and
Joint Ventures--Overall, to account for its residual investment using
the equity method.\54\
---------------------------------------------------------------------------

    \54\ In some circumstances, the seller's continuing interest may
be so great that divestiture accounting is inappropriate.
---------------------------------------------------------------------------

    Question: May the historical operating results of the component and
the gain or loss on the sale of the majority interest in the component
be classified in the Company's statement of operations as
``discontinued operations'' pursuant to FASB ASC Subtopic 205-20,
Presentation of Financial Statements--Discontinued Operations?
    Interpretive Response: No. A condition necessary for discontinued
operations reporting, as indicated in FASB ASC paragraph 205-20-45-1 is
that an entity ``not have any significant continuing involvement in the
operations of the component after the disposal transaction.'' In these
circumstances, the transaction should be accounted for as the disposal
of a group of assets that is not a component of an entity and
classified within continuing operations pursuant to FASB ASC paragraph
360-10-45-5 (Property, Plant, and Equipment Topic).\55\
---------------------------------------------------------------------------

    \55\ However, a plan of disposal that contemplates the transfer
of assets to a limited-life entity created for the single purpose of
liquidating the assets of a component of an entity would not
necessitate classification within continuing operations solely
because the registrant retains control or significant influence over
the liquidating entity.
---------------------------------------------------------------------------

5. Classification and Disclosure of Contingencies Relating to
Discontinued Operations
    Facts: A company disposed of a component of an entity in a previous
accounting period. The Company received debt and/or equity securities
of the buyer of the component or of the disposed component as
consideration in the sale, but this financial interest is not
sufficient to enable the Company to apply the equity method with
respect to its investment in the buyer. The Company made certain
warranties to the buyer with respect to the discontinued business, or
remains liable under environmental or other laws with respect to
certain facilities or operations transferred to the buyer. The
disposition satisfied the criteria of FASB ASC Subtopic 205-20 for
presentation as ``discontinued operations.'' The Company estimated the
fair value of the securities received in the transaction for purposes
of calculating the gain or loss on disposal that was recognized in its
financial statements. The results of discontinued operations prior to
the

date of disposal or classification as held for sale included provisions
for the Company's existing obligations under environmental laws,
product warranties, or other contingencies. The calculation of gain or
loss on disposal included estimates of the Company's obligations
arising as a direct result of its decision to dispose of the component,
under its warranties to the buyer, and under environmental or other
laws. In a period subsequent to the disposal date, the Company records
a charge to income with respect to the securities because their fair
value declined materially and the Company determined that the decline
was other than temporary. The Company also records adjustments of its
previously estimated liabilities arising under the warranties and under
environmental or other laws.
    Question 1: Should the writedown of the carrying value of the
securities and the adjustments of the contingent liabilities be
classified in the current period's statement of operations within
continuing operations or as an element of discontinued operations?
    Interpretive Response: Adjustments of estimates of contingent
liabilities or contingent assets that remain after disposal of a
component of an entity or that arose pursuant to the terms of the
disposal generally should be classified within discontinued
operations.\56\ However, the staff believes that changes in the
carrying value of assets received as consideration in the disposal or
of residual interests in the business should be classified within
continuing operations.
---------------------------------------------------------------------------

    \56\ Registrants are reminded that FASB ASC Topic 460,
Guarantees, requires recognition and disclosure of certain
guarantees which may impose accounting and disclosure requirements
in addition to those discussed in this SAB Topic.
---------------------------------------------------------------------------

    FASB ASC paragraph 205-20-45-4 requires that ``adjustments to
amounts previously reported in discontinued operations that are
directly related to the disposal of a component of an entity in a prior
period shall be classified separately in the current period in
discontinued operations.'' The staff believes that the provisions of
FASB ASC paragraph 205-20-45-4 apply only to adjustments that are
necessary to reflect new information about events that have occurred
that becomes available prior to disposal of the component of the
entity, to reflect the actual timing and terms of the disposal when it
is consummated, and to reflect the resolution of contingencies
associated with that component, such as warranties and environmental
liabilities retained by the seller.
    Developments subsequent to the disposal date that are not directly
related to the disposal of the component or the operations of the
component prior to disposal are not ``directly related to the
disposal'' as contemplated by FASB ASC paragraph 205-20-45-4.
Subsequent changes in the carrying value of assets received upon
disposition of a component do not affect the determination of gain or
loss at the disposal date, but represent the consequences of
management's subsequent decisions to hold or sell those assets. Gains
and losses, dividend and interest income, and portfolio management
expenses associated with assets received as consideration for
discontinued operations should be reported within continuing
operations.
    Question 2: What disclosures would the staff expect regarding
discontinued operations prior to the disposal date and with respect to
risks retained subsequent to the disposal date?
    Interpretive Response: MD&A \57\ should include disclosure of known
trends, events, and uncertainties involving discontinued operations
that may materially affect the Company's liquidity, financial
condition, and results of operations (including net income) between the
date when a component of an entity is classified as discontinued and
the date when the risks of those operations will be transferred or
otherwise terminated. Disclosure should include discussion of the
impact on the Company's liquidity, financial condition, and results of
operations of changes in the plan of disposal or changes in
circumstances related to the plan. Material contingent liabilities,\58\
such as product or environmental liabilities or litigation, that may
remain with the Company notwithstanding disposal of the underlying
business should be identified in notes to the financial statements and
any reasonably likely range of possible loss should be disclosed
pursuant to FASB ASC Topic 450, Contingencies. MD&A should include
discussion of the reasonably likely effects of these contingencies on
reported results and liquidity. If the Company retains a financial
interest in the discontinued component or in the buyer of that
component that is material to the Company, MD&A should include
discussion of known trends, events, and uncertainties, such as the
financial condition and operating results of the issuer of the
security, that may be reasonably expected to affect the amounts
ultimately realized on the investments.
---------------------------------------------------------------------------

    \57\ Item 303 of Regulation S-K.
    \58\ Registrants also should consider the disclosure
requirements of FASB ASC Topic 460.
---------------------------------------------------------------------------

6. Removed by SAB 103
7. Accounting for the Spin-Off of a Subsidiary
    Facts: A Company disposes of a business through the distribution of
a subsidiary's stock to the Company's shareholders on a pro rata basis
in a transaction that is referred to as a spin-off.
    Question: May the Company elect to characterize the spin-off
transaction as resulting in a change in the reporting entity and
restate its historical financial statements as if the Company never had
an investment in the subsidiary, in the manner specified by FASB ASC
Topic 250, Accounting Changes and Error Corrections?
    Interpretive Response: Not ordinarily. If the Company was required
to file periodic reports under the Exchange Act within one year prior
to the spin-off, the staff believes the Company should reflect the
disposition in conformity with FASB ASC Topic 360. This presentation
most fairly and completely depicts for investors the effects of the
previous and current organization of the Company. However, in limited
circumstances involving the initial registration of a company under the
Exchange Act or Securities Act, the staff has not objected to financial
statements that retroactively reflect the reorganization of the
business as a change in the reporting entity if the spin-off
transaction occurs prior to effectiveness of the registration
statement. This presentation may be acceptable in an initial
registration if the Company and the subsidiary are in dissimilar
businesses, have been managed and financed historically as if they were
autonomous, have no more than incidental common facilities and costs,
will be operated and financed autonomously after the spin-off, and will
not have material financial commitments, guarantees, or contingent
liabilities to each other after the spin-off. This exception to the
prohibition against retroactive omission of the subsidiary is intended
for companies that have not distributed widely financial statements
that include the spun-off subsidiary. Also, dissimilarity contemplates
substantially greater differences in the nature of the businesses than
those that would ordinarily distinguish reportable segments as defined
by FASB ASC paragraph 280-10-50-10 (Segment Reporting Topic).

AA. Removed by SAB 103

BB. Inventory Valuation Allowances

    Facts: FASB ASC paragraph 330-10-35-1 (Inventory Topic), specifies
that: ``[a] departure from the cost basis of pricing the inventory is
required when the utility of the goods is no longer as great as its
cost. Where there is evidence that the utility of goods, in their
disposal in the ordinary course of business, will be less than cost,
whether due to physical deterioration, obsolescence, changes in price
levels, or other causes, the difference shall be recognized as a loss
of the current period. This is generally accomplished by stating such
goods at a lower level commonly designated as market.''
    FASB ASC paragraph 330-10-35-14 indicates that ``[i]n the case of
goods which have been written down below cost at the close of a fiscal
year, such reduced amount is to be considered the cost for subsequent
accounting purposes.''
    Lastly, the FASB ASC Master Glossary provides ``inventory
obsolescence'' as one of the items subject to a change in accounting
estimate.
    Question: Does the write-down of inventory to the lower of cost or
market, as required by FASB ASC Topic 330, create a new cost basis for
the inventory or may a subsequent change in facts and circumstances
allow for restoration of inventory value, not to exceed original
historical cost?
    Interpretive Response: Based on FASB ASC paragraph 330-10-35-14,
the staff believes that a write-down of inventory to the lower of cost
or market at the close of a fiscal period creates a new cost basis that
subsequently cannot be marked up based on changes in underlying facts
and circumstances.\59\
---------------------------------------------------------------------------

    \59\ See also disclosure requirement for inventory balances in
Rule 5-02(6) of Regulation S-X.
---------------------------------------------------------------------------

CC. Impairments

    Standards for recognizing and measuring impairment of the carrying
amount of long-lived assets including certain identifiable intangibles
to be held and used in operations are found in FASB ASC Topic 360,
Property, Plant, and Equipment. Standards for recognizing and measuring
impairment of the carrying amount of goodwill and identifiable
intangible assets that are not currently being amortized are found in
FASB ASC Topic 350, Intangibles--Goodwill and Other.
    Facts: Company X has mainframe computers that are to be abandoned
in six to nine months as replacement computers are put in place. The
mainframe computers were placed in service in January 20X0 and were
being depreciated on a straight-line basis over seven years. No salvage
value had been projected at the end of seven years and the original
cost of the computers was $8,400. The board of directors, with the
appropriate authority, approved the abandonment of the computers in
March 20X3 when the computers had a remaining carrying value of $4,600.
No proceeds are expected upon abandonment. Abandonment cannot occur
prior to the receipt and installation of replacement computers, which
is expected prior to the end of 20X3. Management had begun reevaluating
its mainframe computer capabilities in January 20X2 and had included in
its 20X3 capital expenditures budget an estimated amount for new
mainframe computers. The 20X3 capital expenditures budget had been
prepared by management in August 20X2, had been discussed with the
company's board of directors in September 20X2 and was formally
approved by the board of directors in March 20X3. Management had also
begun soliciting bids for new mainframe computers beginning in the fall
of 20X2. The mainframe computers, when grouped with assets at the
lowest level of identifiable cash flows, were not impaired on a ``held
and used'' basis throughout this time period. Management had not
adjusted the original estimated useful life of the computers (seven
years) since 20X0.
    Question 1: Company X proposes to recognize an impairment charge
under FASB ASC Topic 360 for the carrying value of the mainframe
computers of $4,600 in March 20X3. Does Company X meet the requirements
in FASB ASC Topic 360 to classify the mainframe computer assets as ``to
be abandoned?''
    Interpretive Response: No. FASB ASC paragraph 360-10-35-47 provides
that ``a long-lived asset to be abandoned is disposed of when it ceases
to be used. If an entity commits to a plan to abandon a long-lived
asset before the end of its previously estimated useful life,
depreciation estimates shall be revised in accordance with FASB ASC
Topic 250, Accounting Changes and Error Corrections, to reflect the use
of the asset over its shortened useful life.''
    Question 2: Would the staff accept an adjustment to write down the
carrying value of the computers to reflect a ``normalized
depreciation'' rate for the period from March 20X3 through actual
abandonment (e.g., December 20X3)? Normalized depreciation would
represent the amount of depreciation otherwise expected to be
recognized during that period without adjustment of the asset's useful
life, or $1,000 ($100/month for ten months) in the example fact
pattern.
    Interpretive Response: No. The mainframe computers would be viewed
as ``held and used'' at March 20X3 under the fact pattern described.
There is no basis under FASB ASC Topic 360 to write down an asset to an
amount that would subsequently result in a ``normalized depreciation''
charge through the disposal date, whether disposal is to be by sale,
abandonment, or other means. FASB ASC paragraph 360-10-35-43 requires
the asset to be valued at the lower of carrying amount or fair value
less cost to sell in order to be classified as ``held for sale.'' For
assets that are classified as ``held and used'' under FASB ASC Topic
360, an assessment must first be made as to whether the asset (asset
group) is impaired. FASB ASC paragraph 360-10-35-17 indicates that an
impairment loss shall be recognized only if the carrying amount of a
long-lived asset (asset group) is not recoverable and exceeds its fair
value. The carrying amount of a long-lived asset (asset group) is not
recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset
(asset group). The staff would object to a write down of long-lived
assets to a ``normalized depreciation'' value as representing an
acceptable alternative to the approaches required in FASB ASC Topic
360.
    The staff also believes that registrants must continually evaluate
the appropriateness of useful lives assigned to long-lived assets,
including identifiable intangible assets and goodwill. In the above
fact pattern, management had contemplated removal of the mainframe
computers beginning in January 20X2 and, more formally, in August 20X2
as part of compiling the 20X3 capital expenditures budget. At those
times, at a minimum, management should have reevaluated the original
useful life assigned to the computers to determine whether a seven year
amortization period remained appropriate given the company's current
facts and circumstances, including ongoing technological changes in the
market place. This reevaluation process should have continued at the
time of the September 20X2 board of directors' meeting to discuss
capital expenditure plans and, further, as the company pursued
mainframe computer bids. Given the contemporaneous evidence that
management's best estimate during much of 20X2 was that the current
mainframe computers would be removed from service in 20X3, the
depreciable life of the computers should

have been adjusted prior to 20X3 to reflect this new estimate. The
staff does not view the recognition of an impairment charge to be an
acceptable substitute for choosing the appropriate initial amortization
or depreciation period or subsequently adjusting this period as company
or industry conditions change. The staff's view applies also to
selection of, and changes to, estimated residual values. Consequently,
the staff may challenge impairment charges for which the timely
evaluation of useful life and residual value cannot be demonstrated.
    Question 3: Has the staff expressed any views with respect to
company-determined estimates of cash flows used for assessing and
measuring impairment of assets under FASB ASC Topic 360?
    Interpretive Response: In providing guidance on the development of
cash flows for purposes of applying the provisions of that Topic, FASB
ASC paragraph 360-10-35-30 indicates that ``estimates of future cash
flows used to test the recoverability of a long-lived asset (asset
group) shall incorporate the entity's own assumptions about its use of
the asset (asset group) and shall consider all available evidence. The
assumptions used in developing those estimates shall be reasonable in
relation to the assumptions used in developing other information used
by the entity for comparable periods, such as internal budgets and
projections, accruals related to incentive compensation plans, or
information communicated to others.''
    The staff recognizes that various factors, including management's
judgments and assumptions about the business plans and strategies,
affect the development of future cash flow projections for purposes of
applying FASB ASC Topic 360. The staff, however, cautions registrants
that the judgments and assumptions made for purposes of applying FASB
ASC Topic 360 must be consistent with other financial statement
calculations and disclosures and disclosures in MD&A. The staff also
expects that forecasts made for purposes of applying FASB ASC Topic 360
be consistent with other forward-looking information prepared by the
company, such as that used for internal budgets, incentive compensation
plans, discussions with lenders or third parties, and/or reporting to
management or the board of directors.
    For example, the staff has reviewed a fact pattern where a
registrant developed cash flow projections for purposes of applying the
provisions of FASB ASC Topic 360 using one set of assumptions and
utilized a second, more conservative set of assumptions for purposes of
determining whether deferred tax valuation allowances were necessary
when applying the provisions of FASB ASC Topic 740, Income Taxes. In
this case, the staff objected to the use of inconsistent assumptions.
    In addition to disclosure of key assumptions used in the
development of cash flow projections, the staff also has required
discussion in MD&A of the implications of assumptions. For example, do
the projections indicate that a company is likely to violate debt
covenants in the future? What are the ramifications to the cash flow
projections used in the impairment analysis? If growth rates used in
the impairment analysis are lower than those used by outside analysts,
has the company had discussions with the analysts regarding their
overly optimistic projections? Has the company appropriately informed
the market and its shareholders of its reduced expectations for the
future that are sufficient to cause an impairment charge? The staff
believes that cash flow projections used in the impairment analysis
must be both internally consistent with the company's other projections
and externally consistent with financial statement and other public
disclosures.

DD. Written Loan Commitments Recorded at Fair Value Through Earnings

    Facts: Bank A enters into a loan commitment with a customer to
originate a mortgage loan at a specified rate. As part of this written
loan commitment, Bank A expects to receive future net cash flows
related to servicing rights from servicing fees (included in the loan's
interest rate or otherwise), late charges, and other ancillary sources,
or from selling the servicing rights to a third party. If Bank A
intends to sell the mortgage loan after it is funded, pursuant to FASB
ASC paragraph 815-10-15-83 (Derivatives and Hedging Topic), the written
loan commitment is accounted for as a derivative instrument and
recorded at fair value through earnings (referred to hereafter as a
``derivative loan commitment''). If Bank A does not intend to sell the
mortgage loan after it is funded, the written loan commitment is not
accounted for as a derivative under FASB ASC Subtopic 815-10,
Derivatives and Hedging--Overall. However, FASB ASC subparagraph 825-
10-15-4(c) (Financial Instruments Topic) permits Bank A to record the
written loan commitment at fair value through earnings (referred to
hereafter as a ``written loan commitment''). Pursuant to FASB ASC
Subtopic 825-10, Financial Instruments--Overall, the fair value
measurement for a written loan commitment would include the expected
net future cash flows related to the associated servicing of the loan.
    Question 1: In measuring the fair value of a derivative loan
commitment accounted for under FASB ASC Subtopic 815-10, should Bank A
include the expected net future cash flows related to the associated
servicing of the loan?
    Interpretive Response: Yes. The staff believes that, consistent
with the guidance in FASB ASC Subtopic 860-50, Transfers and
Servicing--Servicing Assets and Liabilities,\60\ and FASB ASC Subtopic
825-10, the expected net future cash flows related to the associated
servicing of the loan should be included in the fair value measurement
of a derivative loan commitment. The expected net future cash flows
related to the associated servicing of the loan that are included in
the fair value measurement of a derivative loan commitment or a written
loan commitment should be determined in the same manner that the fair
value of a recognized servicing asset or liability is measured under
FASB ASC Subtopic 860-50. However, as discussed in FASB ASC paragraph
860-50-25-1, a separate and distinct servicing asset or liability is
not recognized for accounting purposes until the servicing rights have
been contractually separated from the underlying loan by sale or
securitization of the loan with servicing retained.
---------------------------------------------------------------------------

    \60\ FASB ASC Subtopic 860-50 permits an entity to subsequently
measure recognized servicing assets and servicing liabilities (which
are nonfinancial instruments) at fair value through earnings.
---------------------------------------------------------------------------

    The views in Question 1 apply to all loan commitments that are
accounted for at fair value through earnings. However, for purposes of
electing fair value accounting pursuant to FASB ASC Subtopic 825-10,
the views in Question 1 are not intended to be applied by analogy to
any other instrument that contains a nonfinancial element.
    Question 2: In measuring the fair value of a derivative loan
commitment accounted for under FASB ASC Subtopic 815-10 or a written
loan commitment accounted for under FASB ASC Subtopic 825-10, should
Bank A include the expected net future cash flows related to
internally-developed intangible assets?
    Interpretive Response: No. The staff does not believe that
internally-developed intangible assets (such as customer relationship
intangible assets) should be recorded as part of the fair value of a
derivative loan commitment or a written loan commitment. Such

nonfinancial elements of value should not be considered a component of
the related instrument. Recognition of such assets would only be
appropriate in a third-party transaction. For example, in the purchase
of a portfolio of derivative loan commitments in a business
combination, a customer relationship intangible asset is recorded
separately from the fair value of such loan commitments. Similarly,
when an entity purchases a credit card portfolio, FASB ASC paragraph
310-10-25-7 (Receivables Topic) requires an allocation of the purchase
price to a separately recorded cardholder relationship intangible
asset.
    The view in Question 2 applies to all loan commitments that are
accounted for at fair value through earnings.

TOPIC 6: INTERPRETATIONS OF ACCOUNTING SERIES RELEASES AND FINANCIAL
REPORTING RELEASES

A.1. Removed by SAB 103

B. Accounting Series Release 280--General Revision of Regulation S-X:
Income or Loss Applicable to Common Stock

    Facts: A registrant has various classes of preferred stock.
Dividends on those preferred stocks and accretions of their carrying
amounts cause income applicable to common stock to be less than
reported net income.
    Question: In ASR 280, the Commission stated that although it had
determined not to mandate presentation of income or loss applicable to
common stock in all cases, it believes that disclosure of that amount
is of value in certain situations. In what situations should the amount
be reported, where should it be reported, and how should it be
computed?
    Interpretive Response: Income or loss applicable to common stock
should be reported on the face of the income statement \1\ when it is
materially different in quantitative terms from reported net income or
loss \2\ or when it is indicative of significant trends or other
qualitative considerations. The amount to be reported should be
computed for each period as net income or loss less: (a) Dividends on
preferred stock, including undeclared or unpaid dividends if
cumulative; and (b) periodic increases in the carrying amounts of
instruments reported as redeemable preferred stock (as discussed in
Topic 3.C) or increasing rate preferred stock (as discussed in Topic
5.Q).
---------------------------------------------------------------------------

    \1\ When a registrant reports net income and total comprehensive
income in one continuous financial statement, the registrant must
continue to follow the guidance set forth in the SAB Topic. One
approach may be to provide a separate reconciliation of net income
to income available to common stock below comprehensive income
reported on a statement of income and comprehensive income.
    \2\ The assessment of materiality is the responsibility of each
registrant. However, absent concerns about trends or other
qualitative considerations, the staff generally will not insist on
the reporting of income or loss applicable to common stock if the
amount differs from net income or loss by less than ten percent.
---------------------------------------------------------------------------

C. Accounting Series Release 180--Institution of Staff Accounting
Bulletins (SABs)--Applicability of Guidance Contained in SABs

    Facts: The series of SABs was instituted to achieve wide
dissemination of administrative interpretations and practices of the
Commission's staff. In illustration of certain interpretations and
practices, SABs may be written narrowly to describe the circumstances
of particular matters which resulted in expression of the staff's views
on those particular matters.
    Question: How does the staff intend SABs to be applied in
circumstances analogous to those addressed in SABs?
    Interpretive Response: The staff's purpose in issuing SABs is to
disseminate guidance for application not only in the narrowly described
circumstances, but also, unless authoritative accounting literature
calls for different treatment, in other circumstances where events and
transactions have similar accounting and/or disclosure implications.
    Registrants and independent accountants are encouraged to consult
with the staff if they believe that particular circumstances call for
accounting and/or disclosure different from that which would result
from application of a SAB addressing those same or analogous
circumstances.

D. Redesignated as Topic 12.A by SAB 47

E. Redesignated as Topic 12.B by SAB 47

F. Removed by SAB 103

G. Accounting Series Releases 177 and 286--Relating to Amendments to
Form 10-Q, Regulation S-K, and Regulations S-X Regarding Interim
Financial Reporting

    General Facts: Disclosure requirements for quarterly data on Form
10-Q were amended in ASR 177 and 286 to include condensed interim
financial statements, a narrative analysis of financial condition and
results of operations, a letter from the registrant's independent
public accountant commenting on any accounting change, and a signature
by the registrant's chief financial officer or chief accounting
officer.\3\ In addition, certain selected quarterly data is required to
be disclosed by virtually all registrants (see Item 302(a)(5) of
Regulation S-K).
---------------------------------------------------------------------------

    \3\ These requirements have been further revised to require the
company's CEO and CFO to certify to the information contained in the
company's periodic filing.
---------------------------------------------------------------------------

1. Selected Quarterly Financial Data (Item 302(a) of Regulation S-K)
a. Disclosure of Selected Quarterly Financial Data
    Facts: Item 302(a)(1) of Regulation S-K requires disclosure of net
sales, gross profit, income before extraordinary items and cumulative
effect of a change in accounting, per share data based upon such income
(loss), net income (loss), and net income (loss) attributable to the
registrant for each full quarter within the two most recent fiscal
years and any subsequent interim period for which financial statements
are included. Item 302(a)(3) requires the registrant to describe the
effect of any disposals of components of an entity \4\ and
extraordinary, unusual or infrequently occurring items recognized in
each quarter, as well as the aggregate effect and the nature of year-
end or other adjustments which are material to the results of that
quarter. Furthermore, Item 302(a)(2) requires a reconciliation of
amounts previously reported on Form 10-Q to the quarterly data
presented if the amounts differ.
---------------------------------------------------------------------------

    \4\ See question 5 for a discussion of the meaning of components
of an entity as used in Item 302(a)(2).
---------------------------------------------------------------------------

    Question 1: Are these disclosure requirements applicable to
supplemental financial statements included in a filing with the SEC for
unconsolidated subsidiaries and 50% or less owned persons?
    Interpretive Response: The summarized quarterly financial data
required by Item 302(a)(1) need not be included in supplemental
financial statements for unconsolidated subsidiaries and 50% or less
owned persons unless the financial statements are for a subsidiary or
affiliate that is itself a registrant which meets the criteria set
forth in Item 302(a)(5).
    Question 2: If a company is in a specialized industry where ``gross
profit'' generally is not computed (e.g., banks, insurance companies
and finance companies), what disclosure should be made to comply with
the requirements of Item 302(a)(1)?
    Interpretive Response: Companies in specialized industries should
present summarized quarterly financial data which are most meaningful
in their

particular circumstances. For example, a bank might present interest
income, interest expense, provision for loan losses, security gains or
losses and net income. Similarly, an insurance company might present
net premiums earned, underwriting costs and expenses, investment
income, security gains or losses and net income.
    Question 3: If a company wishes to make its quarterly and annual
disclosures on the same basis, would disclosure of costs and expenses
associated directly with or allocated to products sold or services
rendered, or other appropriate data to enable users to compute ``gross
profit,'' satisfy the requirements of Item 302(a)(1)?
    Interpretive Response: Yes.
    Question 4: What is meant by ``per-share data based upon such
income'' as used in Item 302(a)(1)?
    Interpretive Response: Item 302(a)(1) only requires disclosure of
per share amounts for income before extraordinary items and cumulative
effect of a change in accounting. It is expected that when per share
data is calculated for each full quarter based upon such income, the
per share amounts would be both basic and diluted. Although it is not
required by the rule, there are many instances where it would be
desirable to disclose other per share figures such as net earnings per
share and the per share effect of extraordinary items also. Where such
disclosure is made, per share data should be both basic and diluted.
    Question 5: What is intended by the requirement set forth in Item
302(a)(3) that registrants ``describe the effect of'' disposals of
segments of a business, etc.?
    Interpretive Response: The rule uses the language of segments of a
business that was previously found in the authoritative literature.
Consistent with the terminology used in FASB ASC Subtopic 205-20,
Presentation of Financial Statements--Discontinued Operations, as used
here, segments of a business is intended to mean components of an
entity. The rule is intended to require registrants to ``disclose the
amount'' of such unusual transactions and events included in the
results reported for each quarter. Such disclosure would be made in
narrative form. However, it would not require that matters covered by
MD&A be repeated. In this situation, registrants should disclose the
nature and amount of the unusual transaction or event and refer to MD&A
for further discussion of the matter.
    Question 6: What is intended by the requirement of Item 302(a)(3)
to disclose ``the aggregate effect and the nature of year-end or other
adjustments which are material to the results of that quarter''?
    Interpretive Response: This language is taken directly from FASB
ASC paragraph 270-10-50-2 (Interim Reporting Topic) which relates to
disclosures required for the fourth quarter of the year. FASB ASC Topic
270 indicates that earlier quarters should not be restated to reflect a
change in accounting estimate recorded at year end. However, changes in
an accounting estimate made in an interim period that materially affect
the quarter in which the change occurred are required to be disclosed
in order to avoid misleading comparisons. In making such disclosure,
registrants may wish to identify (but not restate) the prior periods in
which transactions were recorded which relate to the change in the
quarter.
    Question 7: If company has filed a Form 10-Q/A amending a
previously filed Form 10-Q, is a reconciliation of quarterly data in
annual financial statements with the amounts originally reported on
Form 10-Q required?
    Interpretive Response: Yes. However, if the company publishes
quarterly reports to shareholders and has previously made detailed
disclosure to shareholders in such reports of the change reported on
the Form 10-Q/A, no reconciliation would be required.
b. Financial Statements Presented on Other Than a Quarterly Basis
    Facts: Item 302(a)(1) requires disclosure of quarterly financial
data for each full quarter of the last two fiscal years and in any
subsequent interim period for which an income statement is presented.
    Question: If a company reports at interim dates on other than a
calendar-quarter basis (e.g., 12-12-16-12 week basis), will it be
precluded from reporting on such basis in the future?
    Interpretive Response: No, as long as it discloses the basis of
interim fiscal period reporting and the interim fiscal periods on which
it reports are consistently determined from year to year (or, if not,
the lack of comparability is disclosed).
c. Removed by SAB 103
2. Amendments to Form 10-Q
a. Form of Condensed Financial Statements
    Facts: Rules 10-01(a)(2) and (3) of Regulation S-X provide that
interim balance sheets and statements of income shall include only
major captions (i.e., numbered captions) set forth in Regulation S-X,
with the exception of inventories where data as to raw materials, work
in process and finished goods shall be included, if applicable, either
on the face of the balance sheet or in notes thereto. Where any major
balance sheet caption is less than 10% of total assets and the amount
in the caption has not increased or decreased by more than 25% since
the end of the preceding fiscal year, the caption may be combined with
others. When any major income statement caption is less than 15% of
average net income attributable to the registrant for the most recent
three fiscal years and the amount in the caption has not increased or
decreased by more than 20% as compared to the corresponding interim
period of the preceding fiscal year, the caption may be combined with
others. Similarly, the statement of cash flows may be abbreviated,
starting with a single figure of cash flows provided by operations and
showing other changes individually only when they exceed 10% of the
average of cash flows provided by operations for the most recent three
years.
    Question 1: If a company previously combined captions in a Form 10-
Q but is required to present such captions separately in the Form 10-Q
for the current quarter, must it retroactively reclassify amounts
included in the prior-year financial statements presented for
comparative purposes to conform with the captions presented for the
current-year quarter?
    Interpretive Response: Yes.
    Question 2: If a company uses the gross profit method or some other
method to determine cost of goods sold for interim periods, will it be
acceptable to state only that it is not practicable to determine
components of inventory at interim periods?
    Interpretive Response: The staff believes disclosure of inventory
components is important to investors. In reaching this decision, the
staff recognizes that registrants may not take inventories during
interim periods and that managements, therefore, will have to estimate
the inventory components. However, the staff believes that management
will be able to make reasonable estimates of inventory components based
upon their knowledge of the company's production cycle, the costs
(labor and overhead) associated with this cycle as well as the relative
sales and purchasing volume of the company.
    Question 3: If a company has years during which operations resulted
in a net outflow of cash and cash equivalents, should it exclude such
years from the computation of cash and cash equivalents provided by
operations for the three most recent years in

determining what sources and applications must be shown separately?
    Interpretive Response: Yes. Similar to the determination of average
net income, if operations resulted in a net outflow of cash and cash
equivalents during any year, such amount should be excluded in making
the computation of cash flow provided by operations for the three most
recent years unless operations resulted in a net outflow of cash and
cash equivalents in all three years, in which case the average of the
net outflow of cash and cash equivalents should be used for the test.
b. Reporting Requirements for Accounting Changes
1. Preferability
    Facts: Rule 10-01(b)(6) of Regulation S-X requires that a
registrant who makes a material change in its method of accounting
shall indicate the date of and the reason for the change. The
registrant also must include as an exhibit in the first Form 10-Q filed
subsequent to the date of an accounting change, a letter from the
registrant's independent accountants indicating whether or not the
change is to an alternative principle which in his judgment is
preferable under the circumstances. A letter from the independent
accountant is not required when the change is made in response to a
standard adopted by the Financial Accounting Standards Board which
requires such a change.
    Question 1: For some alternative accounting principles,
authoritative bodies have specified when one alternative is preferable
to another. However, for other alternative accounting principles, no
authoritative body has specified criteria for determining the
preferability of one alternative over another. In such situations, how
should preferability be determined?
    Interpretive Response: In such cases, where objective criteria for
determining the preferability among alternative accounting principles
have not been established by authoritative bodies, the determination of
preferability should be based on the particular circumstances described
by and discussed with the registrant. In addition, the independent
accountant should consider other significant information of which he is
aware.\5\
---------------------------------------------------------------------------

    \5\ Registrants also are reminded that FASB ASC paragraph 250-
10-50-1 (Accounting Changes and Error Corrections Topic) requires
that companies disclose the nature of and justification for the
change as well as the effects of the change on net income for the
period in which the change is made. Furthermore, the justification
for the change should explain clearly why the newly adopted
principle is preferable to the previously-applied principle.
---------------------------------------------------------------------------

    Question 2: Management may offer, as justification for a change in
accounting principle, circumstances such as: their expectation as to
the effect of general economic trends on their business (e.g., the
impact of inflation), their expectation regarding expanding consumer
demand for the company's products, or plans for change in marketing
methods. Are these circumstances which enter into the determination of
preferability?
    Interpretive Response: Yes. Those circumstances are examples of
business judgment and planning and should be evaluated in determining
preferability. In the case of changes for which objective criteria for
determining preferability have not been established by authoritative
bodies, business judgment and business planning often are major
considerations in determining that the change is to a preferable method
because the change results in improved financial reporting.
    Question 3: What responsibility does the independent accountant
have for evaluating the business judgment and business planning of the
registrant?
    Interpretive Response: Business judgment and business planning are
within the province of the registrant. Thus, the independent accountant
may accept the registrant's business judgment and business planning and
express reliance thereon in his letter. However, if either the plans or
judgment appear to be unreasonable to the independent accountant, he
should not accept them as justification. For example, an independent
accountant should not accept a registrant's plans for a major expansion
if he believes the registrant does not have the means of obtaining the
funds necessary for the expansion program.
    Question 4: If a registrant, who has changed to an accounting
method which was preferable under the circumstances, later finds that
it must abandon its business plans or change its business judgment
because of economic or other factors, is the registrant's justification
nullified?
    Interpretive Response: No. A registrant must in good faith justify
a change in its method of accounting under the circumstances which
exist at the time of the change. The existence of different
circumstances at a later time does not nullify the previous
justification for the change.
    Question 5: If a registrant justified a change in accounting method
as preferable under the circumstances, and the circumstances change,
may the registrant revert to the method of accounting used before the
change?
    Interpretive Response: Any time a registrant makes a change in
accounting method, the change must be justified as preferable under the
circumstances. Thus, a registrant may not change back to a principle
previously used unless it can justify that the previously used
principle is preferable in the circumstances as they currently exist.
    Question 6: If one client of an independent accounting firm changes
its method of accounting and the accountant submits the required letter
stating his view of the preferability of the principle in the
circumstances, does this mean that all clients of that firm are
constrained from making the converse change in accounting (e.g., if one
client changes from FIFO to LIFO, can no other client change from LIFO
to FIFO)?
    Interpretive Response: No. Each registrant must justify a change in
accounting method on the basis that the method is preferable under the
circumstances of that registrant. In addition, a registrant must
furnish a letter from its independent accountant stating that in the
judgment of the independent accountant the change in method is
preferable under the circumstances of that registrant. If registrants
in apparently similar circumstances make changes in opposite
directions, the staff has a responsibility to inquire as to the factors
which were considered in arriving at the determination by each
registrant and its independent accountant that the change was
preferable under the circumstances because it resulted in improved
financial reporting. The staff recognizes the importance, in many
circumstances, of the judgments and plans of management and recognizes
that such management judgments may, in good faith, differ. As indicated
above, the concern relates to registrants in apparently similar
circumstances, no matter who their independent accountants may be.
    Question 7: If a registrant changes its accounting to one of two
methods specifically approved by the FASB in the Accounting Standards
Codification, need the independent accountant express his view as to
the preferability of the method selected?
    Interpretive Response: If a registrant was formerly using a method
of accounting no longer deemed acceptable, a change to either method
approved by the FASB may be presumed to be a change to a preferable
method and no letter will be required from the independent accountant.
If, however, the registrant was formerly using one of the methods
approved by

the FASB for current use and wishes to change to an alternative
approved method, then the registrant must justify its change as being
one to a preferable method in the circumstances and the independent
accountant must submit a letter stating that in his view the change is
to a principle that is preferable in the circumstances.
2. Filing of a Letter From the Accountants
    Facts: The registrant makes an accounting change in the fourth
quarter of its fiscal year. Rule 10-01(b)(6) of Regulation S-X requires
that the registrant file a letter from its independent accountants
stating whether or not the change is preferable in the circumstances in
the next Form 10-Q. Item 601(b)(18) of Regulation S-K provides that the
independent accountant's preferability letter be filed as an exhibit to
reports on Forms 10-K or 10-Q.
    Question: When the independent accountant's letter is filed with
the Form 10-K, must another letter also be filed with the first
quarter's Form 10-Q in the following year?
    Interpretive Response: No. A letter is not required to be filed
with Form 10-Q if it has been previously filed as an exhibit to the
Form 10-K.

H. Accounting Series Release 148--Disclosure of Compensating Balances
and Short-Term Borrowing Arrangements (Adopted November 13, 1973 as
Modified by ASR 172 Adopted on June 13, 1975 and ASR 280 Adopted on
September 2, 1980)

    Facts: ASR 148 (as modified) amends Regulation S-X to include:
    1. Disclosure of compensating balance arrangements.
    2. Segregation of cash for compensating balance arrangements that
are legal restrictions on the availability of cash.
1. Applicability
a. Arrangements With Other Lending Institutions
    Question: In addition to banks, is ASR 148 applicable to
arrangements with factors, commercial finance companies or other
lending entities?
    Interpretive Response: Yes.
b. Bank Holding Companies and Brokerage Firms
    Question: Do the provisions of ASR 148 apply to bank holding
companies and to brokerage firms filing under Rule 17a-5?
    Interpretive Response: Yes; however, brokerage firms are not
expected to meet these requirements when filing Form X-17a-5.
c. Financial Statements of Parent Company and Unconsolidated
Subsidiaries
    Question: Are the provisions of ASR 148 applicable to parent
company financial statements in addition to consolidated financial
statements? To financial statements of unconsolidated subsidiaries?
    Interpretive Response: ASR 148 data for consolidated financial
statements only will generally be sufficient when a filing includes
consolidated and parent company financial statements. Such data are
required for each unconsolidated subsidiary or other entity when a
filing is required to include complete financial statements of those
entities. When the filing includes summarized financial data in a
footnote about such entities, the disclosures under ASR 148 relating to
the consolidated financial statements will be sufficient.
d. Foreign Lenders
    Question: Are ASR 148 disclosure requirements applicable to
arrangements with foreign lenders?
    Interpretive Response: Yes.
2. Classification of Short-Term Obligations--Debt Related to Long-Term
Projects
    Facts: Companies engaging in significant long-term construction
programs frequently arrange for revolving cover loans which extend
until the completion of long-term construction projects. Such revolving
cover loans are typically arranged with substantial financial
institutions and typically have the following characteristics:
    1. A firm long-term mortgage commitment is obtained for each
project.
    2. Interest rates and terms are in line with the company's normal
borrowing arrangements.
    3. Amounts are equal to the expected full mortgage amount of all
projects.
    4. The company may draw down funds at its option up to the maximum
amount of the agreement.
    5. The company uses short-term interim construction financing
(commercial paper, bank loans, etc.) against the revolving cover loan.
Such indebtedness is rolled over or drawn down on the revolving cover
loan at the company's option. The company typically has regular bank
lines of credit, but these generally are not legally enforceable.
    Question: Under FASB ASC Subtopic 470-10, Debt--Overall, will the
classification of loans such as described above as long-term be
acceptable?
    Interpretive Response: Where such conditions exist providing for a
firm commitment throughout the construction program as well as a firm
commitment for permanent mortgage financing, and where there are no
contingencies other than the completion of construction, the guideline
criteria are met and the borrowing under such a program should be
classified as long-term with appropriate disclosure.
3. Compensating Balances
a. Compensating Balances for Future Credit Availability
    Facts: Rule 5-02.1 of Regulation S-X requires disclosure of
compensating balances in order to avoid undisclosed commingling of such
balances with other funds having different liquidity characteristics
and bearing no determinable relationship to borrowing arrangements. It
also requires footnote disclosure distinguishing the amounts of such
balances maintained under a formal agreement to assure future credit
availability.
    Question: In disclosing compensating balances maintained to assure
future credit availability, is it necessary to segregate compensating
balances for an unused portion of a regular line of credit when a total
compensating balance amount covering both used and unused amounts of a
line of credit is disclosed?
    Interpretive Response: No.
b. Changes in Compensating Balances
    Facts: ASR 148 guidelines indicate the need for additional
disclosures where compensating balances were materially greater during
the period than at the end of the period.
    Question: Does this disclosure relate to changes in the arrangement
(e.g., the required compensating balance percentage) or changes in
borrowing levels?
    Interpretive Response: Both.
c. Float
    Facts: ASR 148 states that ``compensating balance arrangements * *
* are normally expressed in terms of collected bank ledger balances but
the financial statements are presented on the basis of the company's
books. In order to make the disclosure of compensating balance amounts
* * * consistent with the cash amounts reflected in the financial
statements, the balance figure agreed upon by the bank and the company
should be adjusted if possible by the estimated float.''

    Question: In determining the amount of ``float'' as suggested by
ASR 148 guidelines, frequently an adjustment to the bank balance is
required for ``uncollected funds.'' On what basis should this
adjustment be estimated?
    Interpretive Response: The adjustment should be estimated based
upon the method used by the bank or a reasonable approximation of that
method. The following is a sample computation of the amount of
compensating balances to be disclosed where uncollected funds are
involved.
    Assumptions: The company has agreed to maintain compensating
balances equal to 20% of short-term borrowings.

Short-term borrowings...................................     $10,000,000
Compensating balances per bank balances.................       2,000,000
Estimated float (approximates the excess of outstanding          480,000
 checks over deposits in transit).......................
Estimated uncollected funds.............................         320,000
Computation:
  Compensating balances per bank balances...............       2,000,000
  Estimated uncollected funds...........................         320,000
  Estimated float.......................................       (480,000)
Compensating balances stated in terms of a book cash           1,840,000
 balance and to be disclosed............................

 4. Miscellaneous
a. Periods required
    Question: For what periods are ASR 148 disclosures required?
    Interpretive Response: Disclosure of compensating balance
arrangements and other disclosures called for in ASR 148 are required
for the latest fiscal year but are generally not required for any later
interim period unless a material change has occurred since year end.
b. 10-Q Disclosures
    Question: Are ASR 148 disclosures required in 10-Q's?
    Interpretive Response: In general, ASR 148 disclosures are not
required in Form 10-Q. However, in some instances material changes in
borrowing arrangements or borrowing levels may give rise to the need
for disclosure either in Form 10-Q or Form 8-K.

I. Accounting Series Release 149--Improved Disclosure of Income Tax
Expense (Adopted November 28, 1973 and Modified by ASR 280 Adopted on
September 2, 1980)

    Facts: ASR 149 and 280 amend Regulation S-X to include:
    1. Disclosure of tax effect of timing differences comprising
deferred income tax expense.
    2. Disclosure of the components of income tax expense, including
currently payable and the net tax effects of timing differences.
    3. Disclosure of the components of income [loss] before income tax
expense [benefit] as either domestic or foreign.
    4. Reconciliation between the statutory Federal income tax rate and
the effective tax rate.
1. Tax rate
    Question 1: In reconciling to the effective tax rate should the
rate used be a combination of state and Federal income tax rates?
    Interpretive Response: No, the reconciliation should be made to the
Federal income tax rate only.
    Question 2: What is the ``applicable statutory Federal income tax
rate''?
    Interpretive Response: The applicable statutory Federal income tax
rate is the normal rate applicable to the reporting entity. Hence, the
statutory rate for a U.S. partnership is zero. If, for example, the
statutory rate for U.S. corporations is 22% on the first $25,000 of
taxable income and 46% on the excess over $25,000, the ``normalized
rate'' for corporations would fluctuate in the range between 22% and
46% depending on the amount of pretax accounting income a corporation
has.
2. Taxes of Investee Company
    Question: If a registrant records its share of earnings or losses
of a 50% or less owned person on the equity basis and such person has
an effective tax rate which differs by more than 5% from the applicable
statutory Federal income tax rate, is a reconciliation as required by
Rule 4-08(g) necessary?
    Interpretive Response: Whenever the tax components are known and
material to the investor's (registrant's) financial position or results
of operations, appropriate disclosure should be made. In some instances
where 50% or less owned persons are accounted for by the equity method
of accounting in the financial statements of the registrant, the
registrant may not know the rate at which the various components of
income are taxed and it may not be practicable to provide disclosure
concerning such components.
    It should also be noted that it is generally necessary to disclose
the aggregate dollar and per-share effect of situations where temporary
tax exemptions or ``tax holidays'' exist, and that such disclosures are
also applicable to 50% or less owned persons. Such disclosures should
include a brief description of the factual circumstances and give the
date on which the special tax status will terminate. See Topic 11.C.
3. Net of Tax Presentation
    Question: What disclosure is required when an item is reported on a
net of tax basis (e.g., extraordinary items, discontinued operations,
or cumulative adjustment related to accounting change)?
    Interpretive Response: When an item is reported on a net of tax
basis, additional disclosure of the nature of the tax component should
be provided by reconciling the tax component associated with the item
to the applicable statutory Federal income tax rate or rates.
4. Loss Years
    Question: Is a reconciliation of a tax recovery in a loss year
required?
    Interpretive Response: Yes, in loss years the actual book tax
benefit of the loss should be reconciled to expected normal book tax
benefit based on the applicable statutory Federal income tax rate.
5. Foreign Registrants
    Question 1: Occasionally, reporting foreign persons may not operate
under a normal income tax base rate such as the current U.S. Federal
corporate income tax rate. What form of disclosure is acceptable in
these circumstances?
    Interpretive Response: In such instances, reconciliations between
year-to-year effective rates or between a weighted average effective
rate and the current effective rate of total tax expense may be
appropriate in meeting the requirements of Rule 4-08(h)(2). A brief
description of how such a rate was determined would be required in
addition to other required disclosures. Such an approach would not be
acceptable for a U.S. registrant with foreign operations. Foreign
registrants with unusual tax situations may find that these guidelines
are not fully responsive to their needs. In such instances, registrants
should discuss the matter with the staff.
    Question 2: Where there are significant reconciling items that
relate in significant part to foreign operations as well as domestic
operations, is it necessary to disclose the separate amounts of the tax
component by geographical area, e.g., statutory depletion allowances
provided for by U.S. and by other foreign jurisdictions?
    Interpretive Response: It is not practicable to give an all-
encompassing answer to this question. However, in many cases such
disclosure would seem appropriate.

6. Securities Gains and Losses
    Question: If the tax on the securities gains and losses of banks
and insurance companies varies by more than 5% from the applicable
statutory Federal income tax rate, should a reconciliation to the
statutory rate be provided?
    Interpretive Response: Yes.
Tax Expense Components v. ``Overall'' Presentation
    Facts: Rule 4-08(h) requires that the various components of income
tax expense be disclosed, e.g., currently payable domestic taxes,
deferred foreign taxes, etc. Frequently income tax expense will be
included in more than one caption in the financial statements. For
example, income taxes may be allocated to continuing operations,
discontinued operations, extraordinary items, cumulative effects of an
accounting change and direct charges and credits to shareholders'
equity.
    Question: In instances where income tax expense is allocated to
more than one caption in the financial statements, must the components
of income tax expense included in each caption be disclosed or will an
``overall'' presentation such as the following be acceptable?
    The components of income tax expense are:

Currently payable (per tax return):
Federal.................................................        $350,000
Foreign.................................................         150,000
State...................................................          50,000
Deferred:
  Federal...............................................         125,000
  Foreign...............................................          75,000
                                                         ---------------
  State.................................................          50,000
                                                                 800,000

    Income tax expense is included in the financial statements as
follows:

Continuing operations...................................        $600,000
Discontinued operations.................................       (200,000)
Extraordinary income....................................         300,000
                                                         ---------------
Cumulative effect of change in accounting principle.....         100,000
                                                                 800,000

    Interpretive Response: An overall presentation of the nature
described will be acceptable.

J. Removed by SAB 47

K. Accounting Series Release 302--Separate Financial Statements
Required By Regulation S-X

1. Removed by SAB 103
2. Parent Company Financial Information
a. Computation of Restricted Net Assets of Subsidiaries
    Facts: The revised rules for parent company disclosures adopted in
ASR 302 require, in certain circumstances, (1) footnote disclosure in
the consolidated financial statements about the nature and amount of
significant restrictions on the ability of subsidiaries to transfer
funds to the parent through intercompany loans, advances or cash
dividends [Rule 4-08(e)(3)], and (2) the presentation of condensed
parent company financial information and other data in a schedule (Rule
12-04). To determine which disclosures, if any, are required, a
registrant must compute its proportionate share of the net assets of
its consolidated and unconsolidated subsidiary companies as of the end
of the most recent fiscal year which are restricted as to transfer to
the parent company because the consent of a third party (a lender,
regulatory agency, foreign government, etc.) is required. If the
registrant's proportionate share of the restricted net assets of
consolidated subsidiaries exceeds 25% of the registrant's consolidated
net assets, both the footnote and schedule information are required. If
the amount of such restrictions is less than 25%, but the sum of these
restrictions plus the amount of the registrant's proportionate share of
restricted net assets of unconsolidated subsidiaries plus the
registrant's equity in the undistributed earnings of 50% or less owned
persons (investees) accounted for by the equity method exceed 25% of
consolidated net assets, the footnote disclosure is required.
    Question 1: How are restricted net assets of subsidiaries computed?
    Interpretative Response: The calculation of restricted net assets
requires an evaluation of each subsidiary to identify any circumstances
where third parties may limit the subsidiary's ability to loan, advance
or dividend funds to the parent. This evaluation normally comprises a
review of loan agreements, statutory and regulatory requirements, etc.,
to determine the dollar amount of each subsidiary's restrictions. The
related amount of the subsidiary's net assets designated as restricted,
however, should not exceed the amount of the subsidiary's net assets
included in consolidated net assets, since parent company disclosures
are triggered when a significant amount of consolidated net assets are
restricted. The amount of each subsidiary's net assets included in
consolidated net assets is determined by allocating (pushing down) to
each subsidiary any related consolidation adjustments such as
intercompany balances, intercompany profits, and differences between
fair value and historical cost arising from a business combination
accounted for as a purchase. This amount is referred to as the
subsidiary's adjusted net assets. If the subsidiary's adjusted net
assets are less than the amount of its restrictions because the push
down of consolidating adjustments reduced its net assets, the
subsidiary's adjusted net assets is the amount of the subsidiary's
restricted net assets used in the tests.
    Registrants with numerous subsidiaries and investees may wish to
develop approaches to facilitate the determination of its parent
company disclosure requirements. For example, if the parent company's
adjusted net assets (excluding any interest in its subsidiaries) exceed
75% of consolidated net assets, or if the total of all of the
registrant's consolidated and unconsolidated subsidiaries' restrictions
and its equity in investees' earnings is less than 25% of consolidated
net assets, then the allocation of consolidating adjustments to the
subsidiaries to determine the amount of their adjusted net assets would
not be necessary since no parent company disclosures would be required.
    Question 2: If a registrant makes a decision that it will
permanently reinvest the undistributed earnings of a subsidiary, and
thus does not provide for income taxes thereon because it meets the
criteria set forth in FASB ASC Subtopic 740-30, Income Taxes--Other
Considerations or Special Areas, is there considered to be a
restriction for purposes of the test?
    Interpretive Response: No. The rules require that only third party
restrictions be considered. Restrictions on subsidiary net assets
imposed by management are not included.
b. Application of Tests for Parent Company Disclosures
    Facts: The balance sheet of the registrant's 100%-owned subsidiary
at the most recent fiscal year-end is summarized as follows:

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

----------------------------------------------------------------------------------------------------------------
Current assets.............................              $120   Current liabilities...........               $30
Noncurrent assets..........................                45   Long-term debt................                60
                                             .................                                                90
                                             .................  Common stock..................                25
                                             .................  Retained earnings.............                50
                                             .................                                                75
                                                          165                                                165
----------------------------------------------------------------------------------------------------------------

    Net assets of the subsidiary are $75. Assume there are no
consolidating adjustments to be allocated to the subsidiary.
Restrictive covenants of the subsidiary's debt agreements provide that:
    Net assets, excluding intercompany loans, cannot be less than $35
    60% of accumulated earnings must be maintained
    Question 1: What is the amount of the subsidiary's restricted net
assets?
    Interpretive Response:

------------------------------------------------------------------------
                                                             Computed
                       Restriction                         restrictions
------------------------------------------------------------------------
Net assets: Currently $75, cannot be less than $35;                  $35
 therefore..............................................
Dividends: 60% of accumulated earnings ($50) cannot be                30
 paid out; therefore....................................
------------------------------------------------------------------------

    Restricted net assets for purposes of the test are $35. The maximum
amount that can be loaned or advanced to the parent without violating
the net asset covenant is $40 ($75 - 35). Alternatively, the subsidiary
could pay a dividend of up to $20 ($50 - 30) without violating the
dividend covenant, and loan or advance up to $20, without violating the
net asset provision.
    Facts: The registrant has one 100%-owned subsidiary. The balance
sheet of the subsidiary at the latest fiscal year-end is summarized as
follows:

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

----------------------------------------------------------------------------------------------------------------
Current assets.............................               $75   Current liabilities...........               $23
Noncurrent assets..........................                90   Long-term debt................                57
                                             .................  Redeemable preferred stock....                10
                                             .................  Common stock..................                30
                                                                                -----------------
                                             .................  Retained earnings.............                45
                                            -------------------                                -----------------
                                             .................                                                75
                                                          165                                                165
----------------------------------------------------------------------------------------------------------------

    Assume that the registrant's consolidated net assets are $130 and
there are no consolidating adjustments to be allocated to the
subsidiary. The subsidiary's net assets are $75. The subsidiary's
noncurrent assets are comprised of $40 in operating plant and equipment
used in the subsidiary's business and a $50 investment in a 30%
investee. The subsidiary's equity in this investee's undistributed
earnings is $18. Restrictive covenants of the subsidiary's debt
agreements are as follows:
    1. Net assets, excluding intercompany balances, cannot be less than
$20.
    2. 80% of accumulated earnings must be reinvested in the
subsidiary.
    3. Current ratio of 2:1 must be maintained.
    Question 2: Are parent company footnote or schedule disclosures
required?
    Interpretive Response: Only the parent company footnote disclosures
are required. The subsidiary's restricted net assets are computed as
follows:

------------------------------------------------------------------------
                                                             Computed
                       Restriction                          restriction
------------------------------------------------------------------------
Net assets: Currently $75, cannot be less than $20;                  $20
 therefore..............................................
Dividends: 80% of accumulated earnings ($45) cannot be                36
 paid; therefore........................................
Current ratio: Must be at least 2:1 ($46 current assets               46
 must be maintained since current liabilities are $23 at
 fiscal year-end); therefore............................
------------------------------------------------------------------------

    Restricted net assets for purposes of the test are $20. The amount
computed from the dividend restriction ($36) and the current ratio
requirement ($46) are not used because net assets may be transferred by
the subsidiary up to the limitation imposed by the requirement to
maintain net assets of at least $20, without violating the other
restrictions. For example, a transfer to the parent of up to $55 of net
assets could be accomplished by a combination of dividends of current
assets of $9 ($45 - 36), and loans or advances of current assets of up
to $20 and noncurrent assets of up to $26.
    Parent company footnote disclosures are required in this example
since the restricted net assets of the subsidiary and the registrant's
equity in the earnings of its 100%-owned subsidiary's investee exceed
25% of consolidated net assets [($20 + 18)/$130 = 29%]. The parent
company schedule information is not required since the restricted net
assets of the subsidiary are only 15% of consolidated net assets ($20/
$130 = 15%).
    Although the subsidiary's noncurrent assets are not in a form which
is readily transferable to the parent company, the illiquid nature of
the assets is not relevant for purposes of the parent company tests.
The objective of the tests is to require parent company disclosures
when the parent company does not have control of its subsidiaries'
funds because it does not have unrestricted access to their net assets.
The tests trigger parent company disclosures only when there are
significant third party restrictions on transfers by subsidiaries of
net assets and the subsidiaries' net assets comprise a significant
portion of consolidated net assets. Practical limitations, other than
third party restrictions on transferability at the measurement date
(most recent fiscal year-end), such as subsidiary illiquidity, are not
considered in computing restricted net assets. However, the potential
effect of any limitations other than those imposed by third parties
should be considered for inclusion in Management's Discussion and
Analysis of liquidity.
    Facts:

------------------------------------------------------------------------
                                                            Net assets
------------------------------------------------------------------------
Subsidiary A............................................          $(500)
Subsidiary B............................................           2,000

Consolidated............................................           3,700
------------------------------------------------------------------------

    Subsidiaries A and B are 100% owned by the registrant. Assume there
are no consolidating adjustments to be allocated to the subsidiaries.
Subsidiary A has restrictions amounting to $200. Subsidiary B's
restrictions are $1,000.
    Question 3: What parent company disclosures are required for the
registrant?
    Interpretive Response: Since subsidiary A has an excess of
liabilities over assets, it has no restricted net assets for purposes
of the test. However, both parent company footnote and schedule
disclosures are required, since the restricted net assets of subsidiary
B exceed 25% of consolidated net assets ($1,000/3,700 = 27%).
    Facts:

------------------------------------------------------------------------
                                                          Net assets
------------------------------------------------------------------------
Subsidiary A........................................                $850
Subsidiary B........................................                 300
Consolidated........................................               3,700
------------------------------------------------------------------------

    The registrant owns 80% of subsidiary A. Subsidiary A owns 100% of
subsidiary B. Assume there are no consolidating adjustments to be
allocated to the subsidiaries. A may not pay any dividends or make any
affiliate loans or advances. B has no restrictions. A's net assets of
$850 do not include its investment in B.
    Question 4: Are parent company footnote or schedule disclosures
required for this registrant?
    Interpretive Response: No. All of the registrant's share of
subsidiary A's net assets ($680) are restricted. Although B may pay
dividends and loan or advance funds to A, the parent's access to B's
funds through A is restricted. However, since there are no limitations
on B's ability to loan or advance funds to the parent, none of the
parent's share of B's net assets are restricted. Since A's restricted
net assets are less than 25% of consolidated net assets ($680/3700 =
18%), no parent company disclosures are required.
    Facts: The consolidating balance sheet of the registrant at the
latest fiscal year-end is summarized as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                Consolidating
                                                    Registrant      Subsidiary      adjustments    Consolidated
----------------------------------------------------------------------------------------------------------------
Current assets..................................            $800            $700              $0          $1,500
30% investment in affiliate.....................             175               0               0             175
Investment in subsidiary........................             350               0           (350)               0
Other noncurrent assets.........................             625             300           (100)             825
                                                 ---------------------------------------------------------------
                                                           1,950           1,000           (450)           2,500
----------------------------------------------------------------------------------------------------------------
Current liabilities.............................             600             400               0           1,000
Concurrent liabilities..........................             375             150               0             525
Redeemable preferred stock......................             275               0               0             275
Common stock....................................             110               1             (1)             110
Paid-in capital.................................             290              49            (49)             290
Retained earnings...............................             300             400           (400)             300
                                                 ---------------------------------------------------------------
                                                             700             450           (450)             700
                                                 ---------------------------------------------------------------
                                                           1,950           1,000           (450)           2,500
----------------------------------------------------------------------------------------------------------------

    The acquisition of the 100%-owned subsidiary was consummated on the
last day of the most recent fiscal year. Immediately preceding the
acquisition, the registrant had net assets of $700, which included its
equity in the undistributed earnings of its 30% investee of $75.
Immediately after acquiring the subsidiary's net assets, which had an
historical cost of $450 and a fair value of $350, the registrant's net
assets were still $700 since debt and preferred stock totaling $350
were issued in the purchase. The subsidiary has debt covenants which
permit dividends, loans or advances, to the extent, if any, that net
assets exceed an amount which is determined by the sum of $100 plus 75%
of the subsidiary's accumulated earnings.
    Question 5: What is the amount of the subsidiary's restricted net
assets? Are parent company footnote or schedule disclosures required?
    Interpretive Response: Restricted net assets for purposes of the
test are $350, and both the parent company footnote and schedule
disclosures are required.
    The amount of the subsidiary's restrictions at year-end is $400
[$100 + (75% x $400)]. The subsidiary's adjusted net assets after the
push down of the consolidation entry to the subsidiary to record the
noncurrent assets acquired at their fair value is $350 ($450 - $100).
Since the subsidiary's adjusted net assets ($350) are less than the
amount of its restrictions ($400), restricted net assets are $350. The
computed percentages applicable to each of the disclosure tests is in
excess of 25%. Therefore, both parent company footnote and schedule
information are required. The percentage applicable to the footnote
disclosure test is 61% [($75 + 350)/$700]. The computed percentage for
the schedule disclosure is 50% ($350/$700).
3. Undistributed Earnings of 50% or Less Owned Persons
    Facts: Rule 4-08(e)(2) of Regulation SX requires footnote
disclosures of the amount of consolidated retained earnings which
represents undistributed earnings of 50% or less owned persons
(investee) accounted for by the equity method. The test adopted in ASR
302 to trigger disclosures about the registrant's restricted net assets
(Rule 4-08(e)(3)) includes the parent's equity in the undistributed
earnings of investees.
    Question: Is the amount required for footnote disclosure the same
as the amount included in the test to determine disclosures about
restrictions?
    Interpretive Response: Yes. The amount used in the test in Rule 4-
08(e)(3) should be the same as the amount required to be disclosed by
Rule 4-08(e)(2). This is the portion of the registrant's consolidated
retained earnings which represents the undistributed earnings of an
investee since the date(s) of acquisition. It is computed by
determining the registrant's cumulative equity in the investee's
earnings, adjusted by any dividends received, related goodwill

write-downs, and any related income taxes provided.
4. Application of Significant Subsidiary Test to Investees and
Unconsolidated Subsidiaries
a. Separate Financial Statement Requirements
    Facts: Rule 3-09 of Regulation SX requires the presentation of
separate financial statements of unconsolidated subsidiaries and of 50%
or less owned persons (investee) accounted for by the equity method
either by the registrant or by a subsidiary of the registrant in
filings with the Commission if any of the tests of a significant
subsidiary are met at a 20% level.
    Question 1: Are the requirements for separate financial statements
also applicable to an investee accounted for by the equity method by an
investee of the registrant?
    Interpretive Response: Yes. Rule 3-09 is intended to apply to all
investees which are material to the financial position or results of
operations of the registrant, regardless of whether the investee is
held by the registrant, a subsidiary or another investee. Separate
financial statements should be provided for any lower tier investee
where such an entity is significant to the registrant's consolidated
financial statements.
    Question 2: How is the significant subsidiary test applied to the
lower tier investee in the situation described in Question 1?
    Interpretive Response: Since the disclosures provided by separate
financial statements of an investee are considered necessary to
evaluate the overall financial condition of the registrant, the
significant subsidiary test is computed based on the materiality of the
lower tier investee to the registrant consolidated. An example of the
application of the assets test of the significant subsidiary rules to
such an investee situation will illustrate the materiality measurement.
A registrant with total consolidated assets of $5,000 owns 50% of
Investee A, whose total assets are $3,800. Investee A has a 45%
investment in Investee B, whose total assets are $4,800. There are no
intercompany eliminations. Separate financial statements are required
for Investee A, and they are required for Investee B because the
registrant's share of B's total assets exceeds 20% of consolidated
assets [(50% x 45% x $4800)/$5000 = 22%].
b. Summarized Financial Statement Requirements
    Facts: Rule 4-08(g) of Regulation S-X requires summarized financial
information about unconsolidated subsidiaries and 50% or less owned
persons (investee) to be included in the footnotes to the financial
statements if, in the aggregate, they meet the tests of a significant
subsidiary set forth in Rule 1-02(w).
    Question 1: Must a registrant which includes separate financial
statements or condensed financial statements for unconsolidated
subsidiaries or investees in its annual report to shareholders also
include in such report the summarized financial information for these
entities pursuant to Rule 4-08(g)?
    Interpretive Response: No. The purpose of the summarized
information is to provide minimum standards of disclosure when the
impact of such entities on the consolidated financial statements is
significant. If the registrant furnishes more information in the annual
report than is required by these minimum disclosure standards, such as
condensed financial information or separate audited financial
statements, the summarized data can be excluded. The Commission's rules
are not intended to conflict with the provisions of FASB ASC
subparagraph 323-10-50-3(c) (Investments--Equity Method and Joint
Ventures Topic), which provide that either separate financial
statements of investees be presented with the financial statements of
the reporting entity or that summarized information be included in the
reporting entity's financial statement footnotes.
    Question 2: Can summarized information be omitted for individual
entities as long as the aggregate information for the omitted entity(s)
does not exceed 10% under any of the significance tests of Rule 1-
02(w)?
    Interpretive Response: The 10% measurement level of the significant
subsidiary rule was not intended to establish a materiality criteria
for omission, and the arbitrary exclusion of summarized information for
selected entities up to a 10% level is not appropriate. Rule 4-08(g)
requires that the summarized information be included for all
unconsolidated subsidiaries and investees. However, the staff
recognizes that exclusion of the summarized information for certain
entities is appropriate in some circumstances where it is impracticable
to accumulate such information and the summarized information to be
excluded is de minimis.

L. Financial Reporting Release 28--Accounting for Loan Losses by
Registrants Engaged in Lending Activities

1. Accounting for Loan Losses
    General: GAAP for recognition of loan losses is provided by FASB
ASC Subtopic 450-20, Contingencies--Loss Contingencies, and FASB ASC
Subtopic 310-10, Receivables--Overall.\6\ An estimated loss from a loss
contingency, such as the collectibility of receivables, should be
accrued when, based on information available prior to the issuance of
the financial statements, it is probable that an asset has been
impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated.\7\
FASB ASC Subtopic 310-10 provides more specific guidance on measurement
of loan impairment and related disclosures but does not change the
fundamental recognition criteria for loan losses provided by FASB ASC
Subtopic 450-20.
---------------------------------------------------------------------------

    \6\ [Original footnote removed by SAB 114.]
    \7\ FASB ASC paragraph 450-20-25-2.
---------------------------------------------------------------------------

    Further guidance for SEC registrants is provided by FRR 28, which
added subsection (b), Procedural Discipline in Determining the
Allowance and Provision for Loan Losses to be Reported, of Section
401.09, Accounting for Loan Losses by Registrants Engaged in Lending
Activities, to the Codification of Financial Reporting Policies
(hereafter referred to as FRR 28). Additionally, public companies are
required to comply with the books and records provisions of the
Securities Exchange Act of 1934 (Exchange Act). Under Sections
13(b)(2)--(7) of the Exchange Act, registrants must make and keep