July 10, 2007, Meeting Highlights

 John Wolfson, Chair

 Chris Holmes, Vice Chair

 Michael Cinalli

 Brad Davidson

 Melanie Dolan

 David Follett

 Karin French

 Steve Henning

 Bob Laux

 Jeff Lenz

 Steve Meisel

 Scott Pohlman

 Amy Ripepi

 Kurtis Wolff

 B. Securities and Exchange Commission

 Office of the Chief Accountant

 John Albert, Senior Associate Chief Accountant

 Muneera Carr, Professional Accounting Fellow

 Brian Croteau, Associate Chief Accountant

 Jeff Ellis, Professional Accounting Fellow

Julie Erhardt, Deputy Chief Accountant

 Josh Forgione, Assistant Chief Accountant

 Amy Hargrett, Associate Chief Accountant

 Josh Jones, Professional Accounting Fellow

 Len Jui, Associate Chief Accountant

 Sandie Kim, Professional Accounting Fellow

 Katrina Kimpel, Professional Accounting Fellow

 Jim Kroeker, Deputy Chief Accountant

 Janet Luallen, Associate Chief Accountant

 Mark Mahar, Associate Chief Accountant

 Robert Malhotra, Professional Accounting Fellow

 Jenifer Minke-Girard, Senior Associate Chief Accountant

 Jeff Minton, Chief Counsel

 Marlene Plumlee, Academic Fellow

 Nili Shah, Assistant Chief Accountant

 Cheryl Tjon-Hing, Valuation Specialist

 Joseph Ucuzoglu, Senior Advisor to the Chief Accountant

 Courtney Windler, Intern

 Oscar M. Young, Jr. Associate Chief Accountant

 Division of Corporation Finance

 Craig Olinger, Deputy Chief Accountant

 Louise Dorsey, Associate Chief Accountant

 Paula Dubberly, Associate Director (Legal)

 Parveen P. Gupta, Academic Fellow

 Stephanie Hunsaker, Associate Chief Accountant

 Todd Hardiman, Associate Chief Accountant

 Steven Jacobs, Associate Chief Accountant

 Joel Levine, Associate Chief Accountant

 Leslie Overton, Associate Chief Accountant

 Barry Summer, Associate Director (Operations)

 Division of Enforcement

 Charles Wright, Senior Legal Advisor

 Division of Investment Management

 Rick Sennett, Chief Accountant

 Toai Cheng, Assistant Chief Accountant

 Bryan Morris, Assistant Chief Accountant

 C. Center for Audit Quality

 Kellie Sclafani

 Jeanne Parsons

 Annette Schumacher Barr

 D. Guests

 Nedra Downing, D&T

 John May, PwC

Julie Erhardt provided the following update of the activities in the Office of the Chief Accountant:

• Staffing Update

  Jeff Minton has been named Chief Counsel in OCA, replacing Bob Burns.

  Four new Professional Accounting Fellows have been named: Robert Malhotra, Muneera Carr, Liza McAndrew Moberg and Jeffrey Ellis.

  Nancy Salisbury has left the Commission.
• Julie Erhardt stated that OCA staff has been working on various initiatives including AS 5 and IFRS.

Craig Olinger provided the following Division of Corporation Finance update:

• Cheryl Linthicum will re-join the Commission staff in August as the new Corp Fin Academic Fellow. Linthicum previously served as an OCA Academic Fellow
• Corp Fin staff has been busy working on the various rulemaking proposals that were issued in the second and third quarter of this year, including the recent IFRS rulemaking and small business initiatives. The proposals that the staff is referring to can be obtained from the SEC website at http://sec.gov/rules/proposed.shtml

Charles Wright provided the following update of activities in the Division of Enforcement:

• Staffing Update
  The Enforcement Division has 35 accountants at headquarters and 90 accountants nationwide.
• Recent Enforcement Cases and Investigations
  Enforcement staff continues to investigate stock option grant backdating cases. In addition, the Enforcement staff investigates the steady stream of cases that are referred to them from other divisions and whistleblowers.

Rick Sennett stated that Investment Management has hired two staff members since April.

 In September 2005, the Committee provided the SEC staff with a copy of the draft compilation that incorporates joint meeting discussion documents from the 1994 to 2005 highlights. John Wolfson reported that work continues on this project this summer. As soon as a draft is finalized it will be submitted to the staff for review.

 The SEC staff is making steady progress on finalizing an update of its Staff Training Manual and has completed drafting most sections. An expected completion date has not been set.

 The staff has previously indicated that it might issue alerts or letters containing general guidance and identifying additional factors registrants should consider in evaluating filings. At the meeting, both OCA and Division of Corporation Finance staff stated that no alerts are planned at this time. Jim Kroeker added that issues relating to expanded disclosures on sub-prime loans would be a potential issue for such an alert, and he believes the profession is currently addressing the issue.

 Rick Sennett noted that the Division of Investment Management issued a Letter to Fidelity Investments, Massachusetts Financial Services Company and Oppenheimer Funds, Inc. on June 28, 2007 providing the staff’s views on the implementation of FASB Interpretation No. 48 by registered investment companies (RICs). The SEC staff did not support certain accommodations requested on behalf of RICs. Instead the SEC staff essentially concluded that RICs should (1) exercise reasonable diligence to expeditiously include the current status of FIN 48 liabilities in each net asset value computation (e.g., as often as daily), (2) determine FIN 48 liabilities without regard to any anticipated reimbursement (even where there is an established history of reimbursement), and (3) recognize an indemnification receivable only if anticipated reimbursement is probable (e.g., based on a contractual commitment from the investment advisor or another third party to reimburse a recognized income tax contingency).

 The Division of Corporation Finance published an update of its Current Accounting and Disclosures Issues in November 2006 and the current efforts are underway for the next update.

1.  Rule 3-10, 3-16 Task Force Discussion Document. A document addressing the application of Rules 3-10 and 3-16 of Regulation S-X to automatic shelf registration statements has been sent to the staff. The staff indicated it is still considering this issue.

2.  Financial Statements of Credit Enhancers and Related Accountants’ Consents in Filings by Asset-Backed Issuers. A discussion document addressing the application of Regulation AB was sent to the SEC staff on July 31, 2006. The SEC staff did not object to the Committee’s recommendations on the first of the two questions posed in the document (see Appendix B to the September 26, 2006 Joint Meeting Highlights). Paula Dubberly indicated that the staff will review the document’s second issue (addressing whether a credit enhancer’s quarterly financial statements are required to be filed on Form 10-D). In the interim, registrants with live fact patterns in this area should discuss the issue with the staff.

3.  Financial Statement Requirements in an IPO When a Merger of Entities Under Common Control Occurs at the Closing Date (Documents D from the April 2007 Meeting). Craig Olinger stated that the staff encourages registrants with the fact pattern discussed in this paper to consult with the staff regarding the primary financial statement requirements in their particular facts and circumstances. Mr. Olinger also indicated that they would consider requests for relief to use combined financial amounts as the denominator for purposes of significance calculations in determining other financial statement requirements for the filing (e.g., Rules 3-05 and 3-09 of Regulation S-X). Note: The finalized Document D from the April 17, 2007 Joint Meeting is posted on the Center’s website.

 The staff noted that the SEC has not yet issued the final rules on mandatory internet availability of proxy materials, which will become effective January 1, 2008. The staff expects the final rule to be issued soon. The staff also noted that three issuers had already followed the new rule on voluntary internet availability of proxy materials, which became effective July 1, 2007. The final rules were issued July 26, 2007. The new rules become effective for large accelerated filers for proxy solicitations made on or after January 1, 2008. Registrants that are not large accelerated filers may follow the new rules for proxy solicitations on or after January 1, 2008 and must follow the new rules for proxy solicitations on or after January 1, 2009.

 The staff summarized recent internal control initiatives, including the issuance of final interpretive guidance regarding management’s report on internal control over financial reporting and request for comments on the definition of a significant deficiency. The staff added that it is likely that the Commission will act on AS 5 by July 27 (45 days after publication in the Federal Register).

 [Note: The SEC approved AS 5 and adopted the definition of significant deficiency at its July 25, 2007 Open Meeting. The AS 5 order and the rule amendments relating to the definition of significant deficiency are available on the SEC's website.]

 Julie Erhardt discussed the recent SEC proposal Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards Without Reconciliation to U.S. GAAP, adding that comments are due 75 days after publication in the Federal Register (September 24, 2007). The SEC also plans to release a Concept Release soliciting views on the possibility of allowing domestic registrants the option of reporting under either IFRS or U.S. GAAP. [Note: The SEC voted to publish the Concept Release at its July 25, 2007 Open Meeting. The comment period will extend for 90 days after it is published in the Federal Register.]

 Jim Kroeker described the recent formation of Advisory Committee on Improving Financial Reporting. The Advisory Committee will examine the U.S. financial reporting system with the goals of reducing unnecessary complexity and making information more useful and understandable for investors. [Note: Subsequent to the meeting, the SEC announced the members of the Advisory Committee. The first meeting of the Advisory Committee was held on August 2, 2007.]

 Jim Kroeker stated that the staff continues to consider materiality issues and the need for further guidance in this area. Some issues that are under consideration include 1) classification errors, 2) segment reporting, 3) assessment of quantitatively significant errors in light of qualitative factors, 4) interim materiality, and 5) the application of paragraph 29 of APB 28. As part of their deliberations, the staff has met with representatives of an ad hoc task force (which includes representatives from among the preparer, investor/analyst, academic, legal and public accounting communities) to gain additional insight.

 The SEC staff stated that it is performing reviews of 2007 proxy filings for compliance with the new executive compensation disclosure rules. . The SEC staff has not issued any comment letters on the proxy reviews yet, but has issued comment letters on the executive compensation disclosures in transactional filings. The SEC staff noted that although registrants have generally been doing a good job in adhering to the new rules, there have been a number of recurring observations that have been noted in comment letters:

• The CD&A could provide better analysis of executive compensation decisions.
• If registrants have an adequate basis for omitting incentive plan performance targets, they should provide the alternate disclosure regarding the relative likelihood that those performance targets will be met.
• Descriptions of incentive plan performance targets should be specific.
• Regardless of the terminology used, “benchmarking” executive compensation should be accompanied by an identification of the other companies that were used for benchmarking purposes.
• In disclosing executive compensation decisions, registrants should provide a clear description about the respective roles and responsibilities of the CEO, compensation consultants and the compensation committee in the decision making process.

 The SEC staff is considering what guidance, if any, to issue addressing the results of the compliance reviews.

 Sometimes registrants disclose risk factors identifying potential risks that the registrant might be required to restate or make other changes to financial statements. These risk factors discuss the complexities of the accounting standards, explain that they can be interpreted or applied differently, either by the SEC staff or by successor auditors (when there has been a change in auditors), and communicate that such differences in interpretation or application could cause a restatement of the registrant’s financial statements. The Committee solicited the SEC staff’s views as to when such risk factor disclosures might be appropriate. The SEC staff expressed concern that such disclosures could be an attempt to dilute the responsibility that the registrant takes for its financial statements. The SEC staff also stated that a risk factor would not satisfy the specificity required by SK Item 503(c) if the registrant merely identifies the complexity of financial reporting and the generic risk of a subsequent financial restatement. However, the SEC staff noted that, as part of its review of a specific filing, it will evaluate specific risk factors based on a registrant’s specific facts and circumstances.

 In light of the December 2006 amendments that provide an “IPO accommodation” by deferring Section 404 reporting by a new public company until its second SEC annual report, the Committee asked the SEC staff for its views on whether this accommodation also would apply in a reverse merger when the accounting acquirer was not a public company. The SEC staff noted that it continues to address the reporting requirements of a reverse merger on a facts and circumstances basis. Accordingly, a registrant with this fact pattern is encouraged to consult with the legal staff in the Division of Corporation Finance’s Office of the Chief Counsel to determine its Section 404 reporting requirements.

 The Committee and the SEC staff discussed whether Rule 436 of Regulation C might apply when registrants make reference to the use of valuation specialists in disclosures that are included or incorporated by reference in filings made under the Securities Act of 1933. Specifically, the Committee and the SEC staff discussed whether or not a reference to the use of a valuation specialist would trigger the need to obtain a consent from the specialist. The Committee and the SEC staff plan to further discuss the topic.

 Background: Rule 4-08(g) of Regulation S-X requires disclosure of summarized financial information if an investee or any group of investees meets the definition of a significant subsidiary specified in Rule 1-02(w) (i.e., greater than 10% significant). Rule 4-08(g)(2) states that "the information shall be presented insofar as is practicable as of the same dates and for the same periods as the audited consolidated financial statements…".

 Consider the following example:

 Company X owns 30% of the common equity of Investee I and 40% of the common equity of Investee J. Company X accounts for its investments in both investees under the equity method of accounting. In connection with the preparation of its Form 10-K for the year ended December 31, 2006, Company X has determined the significance of Investee I and Investee J. In each year, the income test yielded the greatest level of significance as follows:

 

 There are no qualitative factors which suggest that the information for 2005 and 2004 would be material to an investor.

 Question 1: For what periods is Company X required to provide summarized financial information under Rule 4-08(g)?

 View A: Company X is required to present summarized balance sheet financial information for 2006 and 2005 and summarized income statement information for 2006, 2005 and 2004. This is true even though the investees only exceeded the significance threshold in 2006. None of the periods may be provided on an unaudited basis.

 View A-1: Same as View A, except, consistent with the provisions of Rule 3-09, Company X may present the information on an unaudited basis for years in which the investees did not exceed the significance threshold.

 View B: Absent any qualitative factors that make the 2005 and 2004 information material to investors, Company X is only required to present summarized financial information for 2006 because that is the only year for which the investees exceeded the significance threshold. If there are qualitative characteristics relating to the 2005 and 2004 summarized financial data that would make that information material to an investor, the registrant should provide that information.

 Committee Recommendation: The Committee supports View B. If the registrant concludes that the comparative information for 2005 and 2004 is not material, then it need not be presented. However, a registrant could elect to include the information for additional periods (i.e., 2005 and 2004) on either an audited or unaudited basis for comparative purposes.

 SEC Staff Response: The staff supports View A.

 Question 2: For what periods would Company X be required to provide (in its 2006 Form 10-K) summarized financial information under Rule 4-08(g) if the significance tests were as follows:

 

 There are no qualitative factors which suggest that the information for 2006 and 2004 would be material to an investor.

 View A: Company X is required to present summarized balance sheet financial information for 2006 and 2005 and summarized income statement information for 2006, 2005 and 2004. This is true even though the investees only exceeded the significance threshold in 2005. None of the periods may be provided on an unaudited basis.

 View A-1: Same as View A, except, consistent with the provisions of Rule 3-09, Company X may present the information on an unaudited basis for years in which the investees did not exceed the significance threshold.

 View B: Absent any qualitative factors that make the 2006 and 2004 information material to investors, Company X is only required to present summarized financial information for 2005 because that is the only year for which the investees exceeded the significance threshold. If there are qualitative characteristics relating to the 2006 and 2004 summarized financial data that would make that information material to an investor, the registrant should provide that information.

 View C: Company X is not required to provide any summarized information pursuant to Rule 4-08(g) because the investees were not significant in the most recent fiscal year.

 Committee Recommendation: The Committee supports View B. If the registrant concludes that the comparative information for 2006 and 2004 is not material, then it need not be presented. However, a registrant could elect to include the information for additional periods (i.e., 2006 and 2004) on either an audited or unaudited basis for comparative purposes.

 SEC Staff Response: The staff supports View A.

 Question 3: For what periods would Company X be required to provide (in its 2006 Form 10-K) summarized financial information under Rule 4-08(g) if the significance tests were as follows:

 

 There are no qualitative factors which suggest that the information for 2006 and 2005 would be material to an investor.

 View A: Company X is required to present summarized balance sheet financial information for 2006 and 2005 and summarized income statement information for 2006, 2005 and 2004. This is true even though the investees only exceeded the significance threshold in 2004. None of the periods may be provided on an unaudited basis.

 View A-1: Same as View A, except, consistent with the provisions of Rule 3-09, Company X may present the information on an unaudited basis for years in which the investees did not exceed the significance threshold.

 View B: Absent any qualitative factors that make the 2006 and 2005 information material to investors, Company X is only required to present summarized financial information for 2004 because that is the only year for which the investees exceeded the significance threshold. If there are qualitative characteristics relating to the 2006 and 2005 summarized financial data that would be make that information material to an investor, the registrant should provide that information.

 View C: Company X is not required to provide any summarized information pursuant to Rule 4-08(g) because the investees were not significant in the most recent fiscal year.

 View C-1: Summarized financial information under SX 4-08(g) need not be presented in the 2006 Form 10-K because complete financial statements are not presented for 2004, (i.e., the 2004 financial statements are incomplete because they do not include a 2004 balance sheet). The 2004 income statement and statements of cash flows and shareholders’ equity are presented for comparative purposes to the 2005 and 2006 financial statements. Accordingly, if the investees are only significant in 2004, summarized financial information need not be provided in the 2006 Form 10-K.

 Committee Recommendation: The Committee supports View B. If the registrant concludes that the information for 2006 and 2005 is not material, then it need not be presented. However, a registrant could elect to include the information for additional periods (i.e., 2006 and 2005) on either an audited or unaudited basis for comparative purposes.

 SEC Staff Response: The staff supports View A.

 Release 33-7355 addresses this question. It appears to provide an exception to the general requirement to provide financial statements for acquisitions that are more than 50% significant as soon as they become probable if the offering is a secondary offering. It states (underlining added):

 Guidance in the 2000 edition of the Staff Training Manual seems to support the view that there is an exception to the general requirement if the offering is a secondary offering.

 Topic Two.I.A.1 states:

 Topic Two.I.F.4 states (underlining added):

 Interpretation S21 from the Telephone Interpretations Manual appears to conflict with this. It states (italics added):

 Instruction 2 referred to in S21 no longer exists. The remaining instruction to Item 9.01 of Form 8-K states (underlining added):

 In a recent situation, the SEC staff took the position that (as indicated in Interpretation S21) the guidance in Release 33-7355 and the instruction to Item 9.01 of Form 8-K means that in the case of a secondary offering (and the other types of offerings listed in the instruction) there is no exception to the general requirement to provide financial statements for acquisitions that are more than 50% significant as soon as they become probable. Rather, the guidance and instruction simply mean that an offering pursuant to an effective registration statement does not have to be suspended and the registrant does not have to evaluate whether there has been a fundamental change and whether acquired business financial statements need to be provided. This position took the registrant by surprise, since (1) the language in Release 33-7355 and the Staff Training Manual seems to clearly say the financial statements need not be provided, (2) the SEC staff routinely waives the requirement (for registration statements filed both before and after the 75 day period) when a registrant cannot provide the financial statements and asks for relief and (3) the registrant viewed the determination as to whether a fundamental change has occurred to be its responsibility (as discussed in Topic I.F.4.b)(2) of the Staff Training Manual), rather than something that is dictated by rule or SEC staff interpretation.

 Issue/Question: Is a registration statement covering a secondary offering required to include Rule 3-05 financial statements when a greater than 50% significant acquisition becomes probable before the registration statement can become effective?

 View A: No. Pursuant to Release 33-7355, and supported by the language in the Staff Training Manual and the instruction to Item 9.01 of Form 8-K, secondary offerings of securities may proceed notwithstanding that financial statements of the greater than 50% significant business acquisition (probable or completed) have not been filed.

 View B: Yes. The guidance in Release 33-7355, the Staff Training Manual, and the instruction to Item 9.01 of Form 8-K only apply to existing effective registration statements. All new registration statements should provide the Rule 3-05 financial statements of a probable or completed acquisition of a greater than 50% significant business.

 Committee Recommendation: The Committee supports View A. The Committee recommends the SEC staff consider revising Interpretation S21 in the Telephone Interpretations Manual to clarify this view.

 SEC Staff Response: The staff supports View B and noted that View B applies to both new registration statements and post-effective amendments. The SEC staff expects to revise the Staff Training Manual to reflect this position.

 Background:

 Under Rule 3-09 of Regulation S-X, the significance of a registrant’s equity investee is determined by reference to the significance tests in Rule 1-02(w) of Regulation S-X. The income test of significance under Rule 1-02(w) of Regulation S-X requires the comparison of income from continuing operations before income taxes, extraordinary items, and cumulative effect of a change in accounting principle of the equity method investee with such income of the registrant.

 The SEC staff previously expressed its view (SEC Regulations Committee Minutes of June 14, 2005, Discussion Document H) that in the year in which a consolidated subsidiary becomes an equity method investee, the numerator in the income test of significance should include the investee’s pretax earnings for the period of the fiscal year in which it was accounted for by the equity method and any gain or loss arising from the transaction that caused the subsidiary to become an equity method investee.

 A question has been raised as to whether the SEC staff’s view of inclusion of any gain or loss arising from the transaction in the numerator of the income test applies to real estate transactions described below.

 Real estate investment trusts (REITs) sometimes enter into transactions whereby a REIT contributes 100% owned (either outright ownership or through wholly-owned entities) operating real estate to a newly formed entity (Newco). Simultaneously, an investor contributes cash to Newco. The intent of the transaction is for the REIT to ultimately own an economic interest in Newco from, say 10% to 30% after the transaction. Thus, cash is distributed from the Newco to the REIT for the difference between the fair value of the real estate and the REITs retained economic interest.

 By way of example, assume a REIT owns an operating real estate property with a cost basis of $5,000 and a fair value of $10,000. The REIT contributes the property to a newly formed LLC and an investor contributes $9,000 of cash. The $9,000 is distributed by the LLC to the REIT. As a result, the REIT and the investor own 10% and 90%, respectively, of the LLC.

 Assuming the requirements of SFAS No. 66 are met, the transaction would be treated as a partial sale by the REIT with the gain on sale of $4,500 ($10,000 fair value less $5,000 cost basis multiplied by 90% reduction in ownership of the property) recognized in the income statement. This gain and the operations of the real estate would not qualify for discontinued operations classification due to continuing involvement with the property under SFAS 144. The REIT would follow the guidance in EITF Topic No. D-46 and account for its 10% investment in the LLC using the equity method of accounting.

 AICPA Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures”, and EITF Topic No. D-46 require investors to account for investments in limited partnerships (and in practice, limited liability corporations) using the equity method unless the investor’s interest is “so minor that the limited partner may have virtually no influence over partnership operating and financial policies” (generally considered to be 3% - 5%). As a result of the lower ownership level at which equity accounting applies to real estate companies, Rule 3-09 applies more frequently to investments in the real estate industry than in other industries where equity accounting is applied following the 20% ownership guidance in APB 18. As a result, situations frequently arise in the real estate industry where the ownership percentage and resulting equity in income of an investee is not significant under Rule 1-02(w), unless the gain on partial sale of the property is included in the income test. Many registrants and accounting practitioners in the real estate industry believe that the registrant’s gain on partial sale of real estate property should be excluded from the income test because it is not indicative of the significance of the retained investment to the registrant.

 Issue / Question: Should registrants in the real estate industry include any gain on partial sale of property in the numerator for computing significance of equity method investees under Rules 3-09 and 1-02(w) of Regulation S-X?

 View A

 No. Rule 3-15 of Regulation S-X, “special provisions as to real estate investment trusts”, requires REITs to include a separate income statement caption titled “gain or loss on sale of properties, net of applicable income tax”. This caption is to be presented on the income statement after discontinued operations and before extraordinary items and changes in accounting principle. As stated above, the income test required by Rule 1-02(w) is based on a comparison of income from continuing operations before income taxes, extraordinary items and cumulative effect of change in accounting principle of the investee and the registrant. Rule 3-15 specifically excludes the gain on sale of real estate from continuing operations for REITs. Therefore, the partial gain on sale of a property as discussed above should be excluded from the numerator and the denominator in performing the income test for entities that apply Rule 3-15.

 In situations where the property is sold at a loss, application of SFAS 144, which was issued subsequent to Rule 3-15, generally results in an impairment charge prior to the sale of a real estate property. The asset impairment is recorded before the sale and, as a result, the loss on sale of real estate properties is generally nil.

 View B

 No. The views previously expressed by the Staff apply to situations where a formerly consolidated wholly-owned subsidiary or majority-owned subsidiary became an equity investee. In the type of transaction discussed above, REITs typically contribute an asset - a real estate property - not a subsidiary to the investee. The gain is therefore related to the partial sale of an asset, not a change in the level of ownership of a subsidiary. The previous interpretations of Rule 3-09 did not intend for the gain on the sale of an asset to be included in the numerator of the significance test.

 View C

 Yes. The SEC Staff’s previous interpretation that any gain or loss related to changes in ownership of a subsidiary / investee should be included in the significance test also applies to the gain on partial sale of a real estate property as described above.

 Committee Recommendation: The Committee supports View A. In reaching this conclusion, the Committee recognizes that the gain on the sale would be included in income from continuing operations for EPS purposes, but the Committee does not believe Rule 3-09 is driven by that guidance. The Committee believes the income test of significance should be based on the income statement classification rather than the EPS treatment.

 SEC Staff Position: The staff supports View C. The staff also indicated that registrants with unusual situations may consult with the staff regarding the application of the test.

 We understand there may be some confusion among practitioners regarding the reporting in the SCT for amounts earned by an executive that have been capitalized on the balance sheet. Some believe the second sentence above indicates that compensation earned by an NEO during a fiscal year and capitalized on the company’s balance sheet should be reported in the SCT in the year the compensation is recorded in the financial statements (balance sheet or income statement), as described in FAS 123R, Share-Based Payment (FAS 123R). Others believe the reporting of the compensation in the SCT should occur in future periods when the capitalized costs are recorded in the income statement as a component of depreciation or amortization expense.

 Items 402(c)(2)(v) and (vi) of Regulation S-K require reporting in the SCT “(v) For awards of stock, the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FAS 123R (column(e)); (vi) For awards of options, with or without tandem SARs, the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FAS 123R (column (f));…”

 It is clear that stock and option awards granted in a given fiscal year should be reported in the SCT as those awards are recognized in the financial statements over the requisite service period, in accordance with FAS 123R. This may result in the reporting of a particular award in the SCT over several years as services are provided. However, it is less clear if these compensation costs should be reported in the SCT in the periods when the FAS 123R compensation costs are capitalized (e.g., as part of inventory or property, plant & equipment) or deferred on the balance sheet under other accounting literature (e.g., by directly following, or analogizing to, FAS 91 or FTB 90-1). Paragraph 5 of FAS 123R recognizes “In some circumstances, the cost of services (or goods) may be initially capitalized as part of the cost to acquire or construct another asset, such as inventory, and later recognized in the income statement when that asset is disposed of or consumed.” In addition, FAS 123R refers to the recognition of compensation cost rather than compensation expense because any compensation cost that is capitalized as part of the cost to acquire or construct an asset would not be recognized as compensation expense on the income statement (footnote 5).

 Situation 1 – Cost deferred on balance sheet as deferred costs

 During fiscal 2006, Company X’s Chief Operating Officer (NEO 3) participates in a sales incentive plan whereby NEO 3 is entitled to receive an option award based on a specified formula if NEO 3 generates/sells qualifying new business. NEO 3 is one of the company’s named executive officers for purposes of reporting executive compensation. Assume during fiscal 2006 NEO 3 sells qualifying new business, for which the company will generate new revenues during fiscal 2007 through 2009 (e.g., a new 3 year customer contract to begin in the next fiscal year). In fiscal 2006, resulting from NEO 3’s sale of qualifying new business, Company X’s compensation committee awards NEO 3 options with a 10 year life to purchase 10,000 shares of Company X stock (in addition to her cash salary of $300,000). The option award is fully earned during fiscal 2006, with no future service by NEO 3 required (even if the customer ultimately cancels the contract or is unable to fulfill their obligations), and is fully vested and non-forfeitable. Company X estimates these option awards have a FAS 123R grant date fair value of $500,000. Company X forecasts profits on this new customer contract during fiscal 2007 through 2009 in excess of the grant date fair value of the option award (i.e., not a loss contract).

 Because NEO 3’s sales effort was an integral part of the direct selling effort associated with obtaining the new customer contract, for financial statement reporting purposes Company X defers NEO 3’s option award compensation cost associated with the sales effort (the $500,000 grant date fair value becomes a deferred cost on the balance sheet), and will amortize the deferred cost ratably over the new customer contract life (i.e., 2007 through 2009).

 Question: When should Company X report the $500,000 compensation cost associated with the 2006 option award in column (f), Option Awards, of the SCT?

 View A: Company X should report the entire $500,000 grant date fair value (compensation cost) associated with the 2006 option award in fiscal 2006 in the SCT. Proponents of View A observe that the award was earned and granted during fiscal 2006, and therefore the requisite service period pursuant to FAS 123R is fiscal 2006. Therefore, consistent with Item 402(c)(2)(v) of Regulation S-K, column (e) of the SCT should report “the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FAS 123R.” Proponents of View A also observe the fact that even though Company X deferred this cost under separate accounting literature (e.g., by directly applying, or analogizing to, FAS 91 or FTB 90-1), and will amortize the cost over future contract periods (2007 through 2009), the compensation was earned in fiscal 2006 and should be reported in the SCT.

 View B: Company X should report the $500,000 compensation cost associated with the 2006 option award ratably over the three years in which the deferred compensation cost capitalized on the balance sheet is amortized to expense. That is, Company X would report $166,666.67 of compensation cost in the Option Awards column of the SCT in each of fiscal 2007, 2008 and 2009. There would be no compensation cost reported in the Option Awards column of the SCT in fiscal 2006 notwithstanding NEO 3 earning and Company X granting the option award in fiscal 2006. Company X would, however, report the option grant in fiscal 2006 in the Grants of Plan-Based Awards table and should consider footnote disclosure of the relevant features of the award, including its anticipated expense recognition in Company X’s income statement. Proponents of View B argue this approach aligns the reporting of compensation in the SCT with the financial reporting periods that reflect the revenues generated by the NEO.

 Committee Recommendation: The Committee supports View A, though understands the SEC staff may have provided View B as an answer in at least one instance.

 SEC Staff Response: The staff supports View A. For other forms of compensation, registrants should follow the reporting instructions in SK 402. The SCT reporting of other forms of compensation may not necessarily be consistent with the financial statement reporting of the corresponding compensation cost.

 Situation 2 – Cost capitalized on balance sheet as part of an asset

 During fiscal 2006, Company X constructs a new building to be used in the company’s operations. Company X’s Chief Operating Officer (NEO 3) is one of the company’s named executive officers for purposes of reporting executive compensation. Due to the importance of this new building to Company X, NEO 3 is integrally involved in the development of the design and layout of the new building, and oversees the construction of the new building, spending all of her time on the project during the course of fiscal 2006. Due to NEO 3’s significant contributions to the construction project, in fiscal 2006 Company X’s compensation committee awards NEO 3 options with a 10 year contractual term to purchase 10,000 shares of Company X stock (in addition to her cash salary of $300,000). The option award is fully earned during fiscal 2006, with no future service by NEO 3 required, and is fully vested and non-forfeitable. Company X estimated that these option awards have a FAS 123R grant date fair value of $500,000. Company X capitalizes the new building as an asset on its balance sheet, including all “costs necessarily incurred to bring it to the condition and location necessary for its intended use.” [FAS 34] Because NEO 3 spent all of her time during fiscal 2006 working on the new building construction, NEO 3’s total cash and option award compensation cost in fiscal 2006 of $800,000 is capitalized as part of the cost of the new building, which will be depreciated over its estimated 20 year useful life.

 Question: When should Company X report the $500,000 compensation cost associated with the 2006 option award in column (f), Option Awards, of the SCT?

 View A: Company X should report the entire $500,000 grant date fair value (compensation cost) of the option award in the Option Award column of the SCT in fiscal 2006. The award was granted and earned during fiscal 2006, and therefore the requisite service period pursuant to FAS 123R is fiscal 2006. Therefore, consistent with Item 402(c)(2)(v) of Regulation S-K, column (e) of the SCT should report “the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FAS 123R.” Proponents of View A observe that the cash salary compensation of $300,000 paid to NEO 3 during fiscal 2006 is required to be reported in fiscal 2006 in column (c) of the SCT, notwithstanding the company’s capitalization of such amount as part of the new building, and View A provides consistent presentation of these compensation costs in the SCT regardless of their form. Proponents of View A also observe the use of the term “compensation cost” in FAS 123R rather than “compensation expense” clearly indicates the FASB’s view that the principles for recognizing compensation in the financial statements apply to amounts recognized on the balance sheet as well as the income statement.

 View B: Company X should report the compensation cost associated with the 2006 option award in the SCT ratably in each period in which the building is depreciated. That is, assuming a 20 year useful life, with depreciation beginning 1/1/07, $25,000 per year ($500,000 / 20 years) would be reported in the SCT for NEO 3 beginning in fiscal 2007. Proponents of View B observe that the intent of the phrase “as well as any amounts earned by an executive that have been capitalized on the balance sheet for the fiscal year” is intended to focus on when those capitalized costs are actually recognized in the income statement. Opponents of View B believe that the reporting of compensation amounts in the SCT in each period when the building is depreciated does not provide investors with disclosure of the compensation earned by the NEO.

 Committee Recommendation: The Committee supports View A.

 SEC Staff Response: The staff supports View A. For other forms of compensation, registrants should follow the reporting instructions in SK 402. The SCT reporting of other forms of compensation may not necessarily be consistent with the financial statement reporting of the corresponding compensation cost.