June 20, 2006, Meeting Highlights

 John Wolfson, Chair 

 Jack Ciesielski

 Melanie Dolan

 Clarence Ebersole

 David Follett

 Karin French

 Jay Hartig

 Steve Henning

 David Hinshaw

 Chris Holmes

 Bob Laux

 Jeff Lenz

 Scott Pohlman

 Amy Ripepi

 B.  Securities and Exchange Commission

 Office of the Chief Accountant

 Scott Taub, Acting Chief Accountant

 John Albert, Senior Associate Chief Accountant

 Tammy Bieber, Senior Advisor to the Chief Accountant

 Robert Burns, Chief Counsel

 Cathy Cole, Associate Chief Accountant

 Brian Croteau, Associate Chief Accountant

 Julie Erhardt, Deputy Chief Accountant

 Mike Gaynor, Professional Accounting Fellow

 Melanie Jacobson, Special Counsel

 Len Jui, Assistant Chief Accountant

 Mike Kigin, Senior Associate Chief Accountant

 Cheryl Linthicum, Academic Fellow

 Mark Mahar, Associate Chief Accountant

 Joseph McGrath, Professional Accounting Fellow

 Jennifer Minke-Girard, Senior Associate Chief Accountant

 Nancy Salisbury, Senior Associate Chief Accountant

 Alison Spivey, Associate Chief Accountant

 Charlotte Thomas, Research Specialist

 Division of Corporation Finance

 Carol Stacey, Chief Accountant

 Louise Dorsey, Associate Chief Accountant

 Stephanie Hunsaker, Associate Chief Accountant

 Todd Hardiman, Associate Chief Accountant

 Joel Levine, Associate Chief Accountant

 Andrew McLelland, Academic Fellow

 Leslie Overton, Associate Chief Accountant

 Sondra Stokes, Associate Chief Accountant

 Division of Enforcement

 Susan Markel, Chief Accountant

 Charles Wright, Senior Legal Advisor

 Division of Investment Management

 Brian Bullard, Chief Accountant

 Toai Cheng, Assistant Chief Accountant

 C. AICPA Center for Public Company Audit Firms

 Lillian Ceynowa

 Annette Schumacher Barr

 D. Guests

 Karen Van Compernolle, D&T

Scott Taub provided an update on personnel changes at the Commission and in OCA:

 B. Division of Corporation Finance Update

Carol Stacey provided the following update of activities in the Division of Corporation Finance:

 C. Enforcement Update

Susan Markel provided the following update of activities in the Division of Enforcement:

 D. Investment Management (IM) Update

Brian Bullard provided the following update of activities in the Division of Investment Management:

 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. The draft compilation, which is organized by rule/regulation, contains numerous superseded discussion documents. Upon finalization of the draft the staff will review the compilation.

 This project deals with the use of the "iron curtain" and "rollover" methods of quantifying errors. The SEC staff reported that the proposed guidance includes specific transition provisions to address items that existed at the beginning of the year and is similar to the treatment of these items to SFAS No. 154, Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3. Mr. Taub noted that the proposed guidance is in the process of internal review and it is uncertain at this point if or when the guidance will be issued.

 The SEC staff is also considering guidance for interim periods, but noted that this guidance could not be issued until the annual materiality guidance is issued.

 The SEC staff is making progress on finalizing the Updated Staff Training Manual and hopes to complete the update by the end of 2006. The SEC staff is currently considering whether the document should be made publicly available as interpretive guidance. The Committee encouraged the staff to make the Staff Training Manual available for auditors, preparers and attorneys as it provides useful information about how to apply specific rules and interpretations. The Committee also plans to include in the Compilation of SEC Regulations Committee Highlights changes in SEC staff positions reflected in the Updated Staff Training Manual.

  1. Potential guidance on interpretation of EITF 03-9, Determination of Useful Life of Renewable Intangible Assets under FASB Statement No. 142

 The Office of the Chief Accountant discussed the possibility of the SEC staff writing and issuing interpretive guidance related to the determination of the useful life of an intangible asset that is believed to be renewable. The guidance would address questions related to the meaning of specific terms used in FASB Statement No. 142 and EITF 03-9 including "substantial cost" and "material modifications". The SEC staff noted that there are significant judgments and assumptions required to evaluate these types of intangible assets and indicated that many believe additional guidance is needed to interpret the literature.

 2. Practice developments involving EITF Topic D-97

 Mr. Taub expressed concern with recent developments in practice regarding the matters addressed in EITF Topic D-97, Push-Down Accounting. The SEC staff is considering whether its push down accounting guidance requires clarification or amplification.

 The Commission issued a press release on May 17, 2006 which provides additional information related to the concept release, revisions to Auditing Standard No. 2 and the extension for non-accelerated filers to comply with Section 404. The press release can be found at http://www.sec.gov/news/press/2006/2006-75.htm.

 The SEC staff indicated that the SEC expects to issue the final rule on executive compensation disclosures in the summer of 2006. The SEC staff is currently working through the review of comment letters received. Some of the most significant concerns relate to the proposed disclosures of compensation for "other highly paid executives" and disclosures of the fair value of options granted in the current year rather than only the period cost of share-based payments as determined under FAS 123(R).

 [Note: On July 26, 2006 the SEC voted to approve the issuance of the final executive compensation disclosure rules. The press release discussing the final rules can be obtained at http://www.sec.gov/news/press/2006/2006-123.htm]

 The SEC staff indicated that they are in the process of working on an update of the Current Accounting and Disclosure Issues which was last issued in December 2005. The SEC staff indicated it will be at least a couple of months before an update is issued.

 The Office of the Chief Accountant indicated that they are receiving an increased number of questions regarding the determination of operating segments and the meaning of "similar economic characteristics" as the term is used in SFAS No. 131 paragraph 17. The SEC staff indicated that the economic characteristics evaluated should be based on the financial information provided to the chief operating decision maker ("CODM") along with basic financial information such as revenue and gross margin of each operating segment. The Division of Corporation Finance noted that if the CODM is receiving financial information, it is assumed to be useful information not only to the CODM but also to investors. The SEC staff cautioned registrants about appealing an answer regarding the aggregation of operating segments to the Office of the Chief Accountant when revenues and gross margins for each operating segment are significantly different.

 The Division of Corporation Finance also indicated that they continue to issue frequent comments related to SFAS No. 131. The SEC staff noted that registrants will often include a description of products or locations, but then do not consider these to be separate operating segments for disclosure purposes in MD&A and the financial statements. The SEC staff indicated that several registrants have been questioned regarding the lack of segments disclosed when the registrant reports specific geographic regions of the Untied States to the Chief Operating Decision Maker. The SEC staff has questioned among other things, how the business is being run and the way decisions are made for each geographic region (i.e. local management, regionally, corporate, etc.), the economic differences in the geographic regions and the differences in work forces in the geographic regions. The SEC staff declined to make any broad statement regarding specific industries, but noted that some industries are experiencing more issues than others.

 The SEC staff indicated that the Commission expects to issue final rules on the Internet Availability of Proxy Materials and the Amendments to the Tender Offer Best Price Rules in the summer of 2006. The proposed rules and comment letters received can be obtained from the SEC website at http://www.sec.gov/rules/proposed/proposedarchive/proposed2005.shtml.

 The SEC staff indicated that the Manual of Publicly Available Telephone Interpretations posted on the SEC website is now classified by topic rather than by date. The Manual can be obtained at: http://www.sec.gov/interps/telephone.shtml

 The Committee asked about SEC staff requests in recent comment letters regarding the requirements to disclose gross profit within the income statement. The SEC staff observed that certain entities (most commonly in the financial institution/banking industry) have been reporting income statement items by nature of the item rather than by function even though Regulation S-X 5-03 requires the reporting by function. Also, the practice of reporting a combination of both function and nature and the inconsistent application of nature/function between revenues and expenses can be confusing to the reader. The SEC staff expressed concern regarding this noncompliance with Regulation S-X and added that it is considering remedial actions to address the issue.

 The Committee discussed the PCAOB FAQ on Adjustments to Prior-Period Financial Statements Audited by a Predecessor Auditor that was issued on June 9, 2006. Specifically, the Committee referred to question number 9 (Q9) which would allow a predecessor auditor to issue an audit report to be filed with the SEC which included "except for" language. The Committee noted that historically the SEC has not accepted these types of reports and asked whether the SEC staff agreed with this position. The SEC staff noted that they would accept this type of a report provided the totality of both audit reports provides coverage over all the financial statements for all periods (i.e., there are no gaps in the audit balances or periods). The SEC staff stated that it considers this position consistent with the guidance provided in AU 9508.

 The Committee further asked the SEC staff for clarification regarding question number 11 (Q11), which indicates that a successor auditor may not audit and report on the adjustments made to the prior-period financial statements if he or she has not yet completed an audit of the current-period financial statements. The Committee asked for clarification for situations in which the predecessor auditor is no longer independent and is not able to audit the adjustments and the successor auditor has not completed an audit. The staff emphasized that if the successor auditor has not completed an audit, the staff believes that he or she has not gained sufficient knowledge of the company to adequately plan and perform an audit and as such they can not audit and report on the adjustments made to prior-period financial statements.

 The SEC staff acknowledged that the Q&A addresses many, but not all, of the issues that frequently arise when changes are required to financial statements in periods audited by a predecessor auditor. The SEC staff indicated that registrants should consult with the staff if they encounter circumstances that are not clearly addressed in the Q&A.

 The Committee noted that it is finalizing a discussion document that addresses the requirement to include financial statements of credit enhancers and related accountants' consents in filings pursuant to Regulation AB. In addition, the Committee is also finalizing a discussion document that addresses various application issues relating to Regulation S-X 3-10 and 3-16. Both documents will be forwarded to the SEC staff for consideration in the near future.

 SAB Topic 6-K, which provides an interpretation of ASR No. 302 – Separate Financial Statements Required by Regulation S-X, states that parent company disclosures 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, and the presentation of condensed parent company financial information and other data in a schedule (Rule 12-04) are required in certain circumstances. SAB Topic 6-K provides guidance in determining which disclosures, if any, are required. It states that 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.

 SAB Topic 6-K indicates in Question 3 that a subsidiary with excess of liabilities over assets would not be considered to have any restricted assets for purposes of the test. However, SAB Topic 6-K does not provide guidance on conducting the test when the registrant has a consolidated shareholders' deficit. The guidance in the SAB states that "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."

 Question: Is Company X required to provide any parent company financial information in its annual report on Form 10-K?

 View A: Yes. Company X should exclude Subsidiary B from the calculation of restricted net assets (because Subsidiary B has net liabilities). However, Company X must compare the restricted net assets of Subsidiary A to the absolute value of the consolidated shareholders' deficit (i.e., $20). Since this amount exceeds 25% Company X must provide parent company financial information.

 View B: No. Since Company X has a consolidated shareholders' deficit it does not have any net assets to be considered "restricted." This is consistent with the guidance in SAB Topic 6-K which states that a subsidiary with net liabilities has no restricted net assets and therefore should be counted as $0 in calculating the amount of restricted net assets.

 View C: Yes. Since Company X has a consolidated shareholders' deficit its net asset base for purposes of calculating the proportionate share of restricted net assets of consolidated subsidiaries should be $0. Therefore, any restrictions placed on the net assets of subsidiaries with positive equity would result in the 25% threshold being met and a corresponding requirement to provide parent company financial information. This is consistent with the guidance in SAB Topic 6-K which states that a subsidiary with an excess of liabilities over assets has no restricted assets. Therefore, a parent with an excess of liabilities over assets should be considered to have no net assets.

 View D: The answer would depend on the facts and circumstances as illustrated below. For purposes of the 25% calculation:

 The following illustrates the application of View D to the three example scenarios:

 Committee Recommendation: The Committee believes that View C is most consistent with existing guidance. However, the Committee believes that View D is a more reasonable and appropriate approach.

 SEC Staff Position: The staff takes View C but also indicated that registrants should consult with the staff if they have a specific fact pattern which would lead to an answer that would provide more meaningful disclosure to investors.

 Question: It is not clear how a registrant should apply the income test of Rule 3-05 and Rule 3-09 when the registrant is a successor to a predecessor company, such as in the case when a registrant emerges from bankruptcy and adopts fresh-start reporting during the year or push down accounting is used to reflect a change in basis, and as such the registrant does not have a full year of income statement information to serve as the basis in the calculation of the income test under Rule 1-02(w).

 In seeking to interpret Rule 3-05 and Rule 3-09, although not authoritative, the interpretive guidance in C.C.H.'s Accounting Research Manager relating to the significant subsidiary test in predecessor/successor situations states:

 In addition, a Big 4 accounting firm's guidance relating to successor/predecessor financial statements states:

 View A: The registrant should use the successor registrant period to serve as the basis for the application of the significant subsidiary income test in Rule 1-02(w).

 View B: The registrant may use the combined results of operations of the predecessor and successor for a full year to serve as the basis for the application of the significant subsidiary income test in Rule 1-02(w).

 View C: The registrant may use the pro forma results of operations of the successor computed as if the transactions that resulted in the predecessor and successor periods (i.e. emergence from bankruptcy and adoption of fresh-start reporting) for the registrant had occurred as of the beginning of the year to serve as the basis for the application of the significant subsidiary income test in Rule 1-02(w).

 Committee Recommendation: The committee recommends View B but also notes that View C would be acceptable provided it is pre-cleared with the staff.

 SEC Staff Response: The staff agrees with View A and indicated that View C may be acceptable on a facts and circumstances basis, provided it is pre-cleared with the staff. Related to View B, the staff noted that in most cases, combining the results of the successor and predecessor does not yield a meaningful result. If a registrant believes View B is appropriate, it should be pre-cleared with the staff.

 Discussion Document B identified the following two scenarios:

 One: Assume a registrant-parent guarantees the registered debt of a subsidiary/issuer and that the parent has relied on the relief provided by 3-10(c) (i.e., the parent files condensed consolidating financial information in its periodic reports). Further assume that the registrant-parent is also a registrant because it has publicly traded equity securities outstanding. If the subsidiary-issuer files a Form 15 relating to the debt that is guaranteed by the registrant-parent, must the parent file a Form 15 relating to its guarantee (which is a separately registered security)? If the parent cannot or does not file a Form 15, does the registrant-parent have to continue to report the condensed consolidating financial information specified by S-X 3-10(c) after the subsidiary-issuer's Form 15 is filed?

 Two: Parent is the issuer of a debt security and its subsidiaries guarantee the debt. Even though the parent has less than 300 debt holders, the trust indenture requires reporting with the SEC until the debt matures. Heretofore, the parent has presented condensed consolidating financial information under Rule 3-10 of Regulation S-X in lieu of its subsidiaries filing separate audited financial statements. The subsidiary guarantors file a Form 15 relating to their guarantees as required by section 15d-6 of the Exchange Act Rule because there are less than 300 debt holders. Following the Form 15 filings by all subsidiary guarantors, must the parent-issuer continue to report the condensed consolidating financial information specified by S-X 3-10(c)?

 The SEC staff concluded the following (View A in Discussion Document B):

 A parent should continue to provide the condensed consolidating information under S-X Rule 3-10 for as long as the debt is outstanding. The August 2000 adopting release (No. 33-7878) that amended Rule 3-10 states "the parent company periodic reports must include the modified financial information permitted by paragraphs (b) through (f) of Rule 3-10 . . . for as long as the subject securities are outstanding." In the first case above, whether or not the parent files a Form 15 with respect to its guarantee of its subsidiary's debt, the parent-guarantor continues to have an Exchange Act reporting requirement as a result of its publicly traded equity securities. As a result, the parent's financial statements must comply fully with SX, including Rule 3-10 as long as the subsidiary's debt is outstanding. Similarly in the second case, the parent-issuer has Exchange Act reporting requirements from both its registered debt securities and its publicly traded equity securities. Therefore, the parent's financial statements should continue to include the condensed consolidating financial information under Rule 3-10 as long as its guaranteed debt is outstanding.

 The Committee would like the SEC Staff to consider the application of Rule 3-10 of Regulation S-X after a subsidiary issuer files a Form 15 and condensed consolidating information had not been previously filed under Rule 3-10.

 Consider the following scenario:

 Company X is a calendar year-end SEC registrant with a reporting obligation under Section 12 of the Exchange Act. In May 2004, Company X's subsidiary (Subsidiary F) sold $100 million of senior debt in a transaction that was exempt from the registration requirements of the Securities Act (under Rule 144A). Subsidiary F's debt is fully and unconditionally guaranteed by Company X and Company X is the only guarantor. Subsidiary F is not 100% owned because certain voting preferred shares are held by a third party.

 Pursuant to a registration rights agreement entered into with the initial purchasers of the exempt securities, in July 2004 Company X and Subsidiary F filed a joint registration statement on Form S-4 to register their offer to exchange all of the exempt debt and the guarantees for debt and guarantees with substantially identical terms (without the restrictions otherwise required in a sale made under Rule 144A). The registration statement on Form S-4 included the financial statements required by Regulation S-X for Company X as well as the financial statements required by Regulation S-X of Subsidiary F (because Subsidiary F was not eligible to rely on Rule 3-10(b) or (c)). The registration statement on Form S-4 was declared effective in September 2004. The debt is not listed on an exchange.

 Company X and Subsidiary F each filed a quarterly report on Form 10-Q for the quarterly period ended September 30, 2004. Additionally, they each filed an annual report on Form 10-K for the year ended December 31, 2004.

 As of January 1, 2005, there were less than 300 holders of the registered debt (and consequently the guarantees). Accordingly, Subsidiary F's reporting obligation was automatically suspended under Section 15(d) of the Exchange Act. Pursuant to Exchange Act Rule 15d-6, Subsidiary F filed a Form 15 to notify the Commission of the suspension. Company X also filed a Form 15 with respect to its guarantee of the debt.

 Question: Is a registrant (and former parent guarantor) required to continue to include the separate financial statements of its subsidiary issuer under Rule 3-10(a) of Regulation S-X in the parent's periodic reports for as long as the subsidiary's previously registered debt is outstanding?

 View A: No. The concept of "as long as the debt is outstanding" was intended to be a condition for receiving relief under Rule 12h-5. Since Subsidiary F did not qualify for relief under that rule, the "as long as the debt is outstanding" concept is not applicable to Subsidiary F. The adopting release for FRR 55 states:

 Since Subsidiary F was not eligible to use the modified financial reporting requirements provided by Rule 3-10, Company X never provided any such information in its periodic reports. Since Subsidiary F's Exchange Act reporting obligation was automatically suspended on January 1, 2005, Company X is not obligated to include the financial statements of Subsidiary F in its periodic reports for as long as the debt remains outstanding.

 View B: Yes. Consistent with the concept set forth in FRR-55 Company X must include financial statements of Subsidiary F in its (Company X's) periodic reports for as long as the debt is outstanding. Since Subsidiary F complied with Rule 3-10 via Rule 3-10(a), it must continue to do so for as long as the debt is outstanding.

 Committee Recommendation: The Committee supports View A. The Committee believes that the "as long as the debt is outstanding" concept only applies in situations in which relief from separate Exchange Act reporting for subsidiary issuers and subsidiary guarantors was obtained under Exchange Act Rule 12h-5.

 SEC Staff Response: The staff agrees with View A and agrees that the concept of "as long as the debt is outstanding" only applies in situations in which relief from separate Exchange Act reporting for subsidiary issuers and subsidiary guarantors was obtained under Exchange Act Rule 12h-5.

 SAB 107 does not address whether such disclosures should also be included in the subsequent Form 10-Qs filed after the quarter of adoption.

 The minimum disclosure requirements and illustrative disclosures included in paragraphs A240-A242 provide guidance related to annual periods and requires disclosures for the most recent year or for each year that an income statement is presented. For example, paragraph A240 includes the following guidance (not all inclusive):

 Neither FAS 123R nor SAB 107 provides guidance on how the minimum disclosure requirements in paragraph A240 should be applied to interim periods other than the interim period of adoption.

 Questions

 Q1: Should the disclosures included in the Form 10-Q in the first quarter of adoption of FAS 123R continue to be included in each subsequent Form 10-Q filed until the first Form 10-K after adoption that contains the required disclosures is filed?

 Recommended Response:

 Yes — Based upon our discussions with the SEC staff, we believe the disclosures required in the first quarter of adoption are also required in the subsequent Form 10-Qs filed until the first Form 10-K after adoption that includes the disclosures is filed.

 SEC Staff Response: The staff agrees with the above response. The staff noted that this question is not unique to the disclosure requirements of FAS 123(R), adding that if any new accounting pronouncement is adopted in an interim period, registrants should continue to include disclosures in their interim periodic reports until the Form 10-K is filed.

 Q2: If the answer to Q1 is yes, and also for purposes of the Form 10-Q in the first quarter of adoption, should prior period comparable information (e.g., June 30, 2005 information in a June 30, 2006 Form 10-Q) be provided?

 Recommended Response:

 No — Based upon our discussions with the SEC staff, we do not believe that prior period comparable information is required. However, companies may conclude such information is useful to investor understanding.

 SEC Staff Response: The staff agreed with the above response.

 Q3: If the answer to Q1 is yes, should the disclosures in the subsequent 10-Qs be made on a year to date basis only or include both quarter to date and year to date information?

 Recommended Response:

 Year to date only — Based upon our discussions with the SEC staff, our understanding is that year to date information is required and quarter to date is not required.

 SEC Staff Response: The staff indicated that only year to date information disclosure is required.

 Q4: Should the disclosures provided in the Form 10-Qs include comparable period disclosures previously required by FAS 123/148, including the quarter and year to date information, as illustrated in Illustration 7 of FAS 148?

 Recommended Response:

 Yes — Based upon our discussions with the SEC staff, we believe that the disclosures previously required by FAS 123/148, including the quarter to date and year to date information is required. However, if the company was non-public during the comparable period of the prior year and used the minimum value method for purposes of measuring the value of employee stock options, the company would be prohibited from presenting the pro forma disclosures pursuant to paragraph 85 of Statement 123(R).

 SEC Staff Response: The staff agrees with the above response. The staff noted that a company which uses the minimum value method should remove all minimum value disclosures once the registrant presents the FAS 123(R) disclosures in the period of adoption. The staff indicated that it would not require registrants to file a Form 8-K to remove the minimum value disclosures from previously filed financial statements.

 Item 11 of Form S-3 requires inclusion/incorporation by reference of restated financial statements prepared in accordance with Regulation S-X if there has been a change in accounting principle or a correction in an error where such change or correction requires a material retroactive restatement of financial statements, or a business combination accounted for by the pooling of interest method. Item 11 also requires any financial information required because of a material disposition of assets outside the normal course of business.

Appendix C of the SEC Staff Training Manual describes situations involving reorganizations of entities under common control and discontinued operations when revised audited financial statements must be included in a registration statement when an event has occurred subsequent to the latest year-end balance sheet but before filing interim period financial statements. For reorganizations of entities under common control (accounted for in a manner similar to a pooling of interests) a company should provide supplemental audited financial statements that reflect retroactive combination of the entities being reorganized.

 When the date of disposal or classification as held for sale occurs after the latest balance sheet included in a registration statement, only pro forma information should be presented for all periods to give effect to the actual or probable disposition, if significant. Under Statement 144, the historical financial statements are not revised to reclassify the business component's operations to discontinued operations until a company reports on a period that includes the date of sale or classification as held for sale.

 Appendix C of the SEC Staff Training Manual indicates that retroactive presentation of stock splits would not require revision of previously filed financial statements when the financial statements are incorporated by reference in a registration statement or proxy as long as an appropriately revised selected financial data table is included in the registration statement.

 Also, changes in reportable segments are not reflected in revised previously issued financial statements until the company reports on a period that includes the date of reorganization giving rise to the change in reportable segments.

 SAB 74 (Topic 11-M) requires a registrant to disclose the effect of a new accounting standard that has not yet been adopted.

 Question 1: If a company has disclosed that it will use the modified retrospective transition method to adopt Statement 123(R) or has disclosed that it will make an accounting change under Statement 154 requiring retrospective treatment in the financial statements and files a registration statement prior to filing its first interim period financial statements reflecting the adoption of Statement 123(R) or the accounting change, what financial information regarding the effects of these changes on previously issued financial statements should be included or incorporated by reference in the registration statement?

 View A: Disclosure of the impending change (via the SAB 74 disclosure, in the case of a new accounting standard, or via repeating or incorporating by reference the previous disclosure of the voluntary accounting change) is sufficient.

 There is no need to provide more extensive information until the accounting change has been reflected in historical financial statements. Requiring more extensive information would serve as an incentive for companies to avoid disclosing the method by which they will adopt new accounting standards in their SAB 74 disclosures and avoid announcing voluntary accounting changes in advance, because avoiding these disclosures reduces the risk of not being able to file a registration statement because the computations of the effect of the change may not be complete.

 View B: Pro forma information depicting the accounting change is required.

 Consistent with the treatment of retrospective changes related to discontinued operations and reportable segments, the historical financial statements should not be revised until a company reports on a period that includes the date of adoption of the accounting change. Thus, if a calendar year-end company adopts Statement 123(R) using the modified retrospective method effective January 1, 2006, the company would present pro forma information in a new registration statement until its Form 10-Q for the quarterly period ending March 31, 2006 is filed.

 It would be inconsistent with GAAP to require the primary historical financial statements to be restated before the period in which the change is adopted. The requirement for audited supplemental financial statements for reorganizations of entities under common control is unique to business combinations of that type.

 View C: Provide audited revised primary financial statements reflecting the accounting change.

 Item 11 of Form S-3 requires inclusion of restated financial statements if there has been a change in accounting principle where such change or correction requires a material retroactive restatement of financial statements regardless of whether financial statements for a period reflecting the event have been issued.

 View D: Provide audited supplemental financial statements reflecting the accounting change.

 Item 11 of Form S-3 requires inclusion of restated financial statements if there has been a change in accounting principle where such change or correction requires a material retroactive restatement of financial statements; however since the event occurred after the balance sheet it should only be reflected in audited supplemental financial statements.

 Committee Recommendation: View A

 SEC Staff Response: The staff agrees with View A and indicated that if the company knows the impact of adoption of FAS 123(R) they should include appropriate disclosures under Staff Accounting Bulletin 74, Disclosures by Registrant When an Accounting Standard Has Been Issued But not yet Adopted.

 Question 2: If a calendar year-end company uses the modified retrospective transition method to adopt Statement 123(R) or has an accounting change under Statement 154 requiring retrospective treatment in the financial statements and files a registration statement after filing its first interim period financial statements reflecting the adoption of Statement 123(R) or the accounting change, what financial information regarding the effects of these changes on previously issued annual financial statements should be included in the registration statement? Would the conclusion be different if the previously issued annual financial statements are incorporated by reference, rather than included?

 View A: Provide audited revised financial statements reflecting the accounting change.

 Item 11 of Form S-3 requires inclusion of restated financial statements if there has been a change in accounting principle where such change or correction requires a material retroactive restatement of financial statements. This approach is also required by Statements 144, 131, 123(R) and 154. The "accommodation approach" described in View B has only been extended to situations where transitional pro forma disclosures are required by a standard (i.e., Statements 142 and 145) or for earnings per share, which is an isolated calculation that appears on the face of the income statement. Net income is not affected in these situations.

 View B: If the previously issued annual financial statements are incorporated by reference, rather than included, registrants may avail themselves of the same accommodations afforded initial adoption of Statements 128, 142 and 145 when financial statements are incorporated by reference in registration or proxy statements. That is, if registrants conclude that the financial statements do not require restatement and independent auditors will permit reissuance of their auditors' report without restatement, registrants can disclose the reclassifications in selected financial data included in a registration or proxy statement, or in a Form 10-Q incorporated by reference.

 There are several situations where GAAP requires restatement of previous period financial statements once a subsequent period's financial statements reflect the GAAP triggering event. These situations include: changes in segments under FASB Statement 131; discontinued operations under Statement 144; initial adoption of Statement 128; transitional disclosures under Statements 142 and 143; and reclassification of debt extinguishment gains and losses under Statement 145 and EITF 03-06. For changes in segments and discontinued operations reclassifications, the SEC staff has insisted on full restatement of annual financial statements to be included or incorporated by reference in a registration or proxy statement, once a registrant has filed subsequent interim period financial statements that reflect the change in segments or discontinued operations treatment. For initial adoption of Statements 128, 142, 143 and 145 and EITF 03-06, the staff has provided accommodations for registrants incorporating financial statements by reference into new registration or proxy statements. In those situations, the SEC staff has allowed registrants to avoid full restatement before filing the next year's Form 10-K if the registrant provided appropriate disclosure for all periods presented in the registration or proxy statement in the filing itself (e.g., along with selected financial data) or in a Form 10-Q or Form 8-K incorporated by reference.

 Committee Recommendation: The Committee recommends View A and notes that the conclusion would not be different if the previously issued financial statements are incorporated by reference, rather than included.

 SEC Staff Response: The staff agrees with View A.

 Discussion Document A from the October 29, 2001 Committee meeting indicates that pro forma financial statements prepared under Article 11 of Regulation S-X should include a pro forma adjustment to reflect an accounting change only if GAAP (i.e., APB 20 or a new accounting standard) requires the pro forma disclosure of the change. FASB Statement 154 supersedes APB 20 and does not include any requirement for pro forma information upon adoption of an accounting change.

 Question: If a registrant that uses the modified prospective transition method provides a pro forma income statement in accordance with Article 11 for some other purpose (e.g., business combination) and that pro forma income statement covers a period prior to the adoption of Statement 123(R), should that pro forma income statement include adjustments to the historical accounting for stock options?

 For example, Company X is a calendar year-end SEC registrant with publicly traded equity. Company X has an employee stock option plan which it has historically accounted for under APB 25 (with pro forma disclosures under Statement 123 included in the notes to the financial statements). Company X adopted the provisions of Statement 123(R) effective January 1, 2006 using the modified prospective transition method. Company X filed its March 31, 2006 Form 10-Q on May 1, 2006. Company X intends to file a registration statement on Form S-3 on June 25, 2006 in order to register the offer and sale by Company X (i.e., a primary offering) of its common stock. Company X acquired a significant business in mid-2005; accordingly, Company X's Form S-3 must include (or incorporate by reference) a pro forma income statement for the year ended December 31, 2005.

 View A: Yes. The pro forma income statement for the year ended December 31, 2005 must include the effects of the business combination and the compensation-related adjustments under Statement 123 disclosed in the footnotes to Company X's historical financial statements.

 View B: No. The pro forma income statement should not include any adjustments to the shared-based expense disclosed in the historical financial statements.

 The "pro forma" disclosures required in the notes to the financial statements under Statement 123(R) do not depict what net income and earnings per share would have been had Statement 123(R) been applied during the earlier periods (i.e., there are differences between Statement 123(R) and Statement 123). Rather, the pro forma disclosures required to be included in the notes to the financial statements continue to depict the application of Statement 123 and are not required because of adoption of a new accounting standard. This would essentially depict application of the modified retrospective transition approach for pro forma purposes, even though the registrant has adopted Statement 123(R) using the modified prospective transition approach.

 This conclusion is consistent with the adoption of Statement 142. The note disclosures required by paragraph 61 of Statement 142 (depicting the impact of non-amortization of goodwill and certain intangible assets) were not considered "pro forma" because they did not require the application of all aspects of Statement 142 in the earlier periods (e.g., the impairment provisions were not applied).

 Committee Recommendation: View B

 SEC Staff Response: The staff agrees with View B.