October 29, 2001, Meeting Highlights

 Topic: Regulation S-X Article 11 Pro Formas and a Change in Accounting Principle

 Question: When a registrant changes an accounting principle (either voluntarily or to reflect a new standard), how should that change in accounting be reflected in Article 11 pro forma financial statements?

 Background: When a registrant voluntarily changes an accounting principle that is accounted for as a cumulative effect, APB No. 20 requires disclosure of pro forma information related to the effect of the change on prior periods. When a registrant changes and accounting principle to reflect a new standard, that new standard often has specific transition requirements that may or may not call for the disclosure of pro forma information related to the effect of the change on prior periods. For example, the adoption of SAB No. 101 followed the requirements of APB No. 20 and thus a cumulative effect change reported as a result of SAB No. 101 was accompanied by pro forma information. However, the adoption of SFAS No. 133 does not require the presentation of pro forma information.

 The 1996 edition of the Staff Training Manual stated the following related to changes in accounting and Article 11 pro formas.

 7. Where the registrant has adopted a change in accounting principle, the pro forma information should apply consistently the newly adopted accounting principle to all periods presented.

 The 2000 edition of the Staff Training Manual (Item II.C.4.c)(3) of Topic Three; page 3-5) states the following:

 Discussion: Based on the 1996 Training Manual, we believe that the Article 11 presentation of pro forma effects of a new accounting standard was driven by GAAP. In other words, registrants would reflect accounting changes in the Article 11 pro forma if GAAP (i.e., APB No. 20 or the new standard) required pro forma information. For example, Article 11 pro forma information would reflect the effect of SAB No. 101 in the prior period because that change resulted in pro forma information under APB No. 20. However, Article 11 pro forma effects would not be presented for SFAS No. 133 because that standard did not require pro forma information.

 The guidance in the 2000 edition of the Staff Training Manual was changed to add the word "conforming". What did the staff intend to convey by this change? Our initial thought was that perhaps this change was made to indicate that the guidance related to conforming adjustments made following a business combination accounted for as a pooling of interests. However, that may not be an appropriate reading because the guidance specifically mentions a "change in accounting principles adopted by registrant" and "the newly adopted accounting principles. " Thus this section does not seem to relate to adjustments to conform accounting policies following a pooling. Further, Item II.G.2.a) of Topic Three of the 2000 edition of the Staff Training Manual, on page 3-10, specifically discusses pro forma adjustments for conformity of accounting policies following a business combination accounted for as a pooling of interests. Did the staff intend to change practice by adding the word "conforming"?

 Staff Response

 The staff did not intend to change practice with respect to changes in accounting principle made either voluntarily or to reflect a new standard. In those circumstances, the staff agrees with the analysis in the first paragraph under "Discussion" above. The reference to "conforming change" in the Staff Training Manual excerpt cited above is intended to address circumstances where accounting principles of the combining company in a business combination accounted for as a pooling are being conformed to those of the issuer. It also applies to circumstances where accounting principles of the acquiree in a purchase are being conformed to those of the acquirer.

 Questions:

1. What SAB 74 disclosures should registrants make in filings made prior to the adoption of Statements 141 and 142?
2. What disclosures should registrants make in interim financial statements covering the quarter in which they adopt Statements 141 and 142?
3. How should registrants present the effects of Statements 141 and 142 in Article 11 pro forma information?

 Question 1 — Background and Discussion

 Statement 141, Business Combinations, and Statement 142, Goodwill and Other Intangible Assets, have been issued, but most registrants have not adopted them yet. We understand that if the effects of these Statements are expected to be material, these registrants should make SAB 74 (Topic 11-M) disclosures in periodic reports and transactional filings. These disclosures should be made in filings made or declared effective after these Statements were issued.

 SAB 74 requires a registrant to disclose:

• A brief description of the new standard.
• The date the registrant must adopt the new standard.
• If early adoption is permitted and the registrant plans to adopt early, the date that it plans to adopt.
• The impact the new standard will have on reported financial position and results of operations. If the registrant has quantified the impact, it should indicate the estimated amount. If not, the registrant should so state.

 What issues should registrants consider in preparing their disclosures?

 We understand that a registrant's initial SAB No. 74 disclosures may indicate, if true, that a registrant has not yet quantified the effects of adoption or the Adoption date. However, we also understand that a registrant should disclose whatever information it does know and update its disclosures when it has new information.

 Registrants will typically need to consider the following questions is assessing the effects of Statements 141 and 142:

1. Will we recognize any impairments? If so, how much?
2. Will we eliminate any negative goodwill? If so, how much?
3. How much goodwill amortization will we stop recording?
4. How much will our amortization of identifiable intangible assets be reduced?
5. Which intangibles will we consider to have indefinite lives?
6. What balance sheet reclassifications will we make?

 Many registrants will be able to answer questions 2 and 3 above very soon after reading the new Statements. We understand that these registrants should quantify the effects of these items in their SAB 74 disclosures. If a registrant is unable to answer these questions, we understand that it should inform readers that it is assessing these matters and has not yet determined whether or the extent to which they will affect the financial statements. However, we understand that registrants should communicate what they do know. For example, if a registrant expects to record an impairment but does not know the amount, it should disclose these facts.

 Is our understanding correct? Are there other issues registrants should be aware of?

 Staff Response

 Your understanding is correct.

 Question 2 — Background and Discussion

 Rule 10-01(a)(5) of Regulation S-X states, in part:

 Based on this rule, what disclosures should registrants make in interim financial statements covering the quarter in which they adopt Statements 141 and 142?

 We understand that registrants should comply with the applicable disclosure requirements of Statements 141 and 142 related to both annual and interim financial statements.

 Is our understanding correct? Are there specific issues registrants should be aware of?

 Staff Response

 Your understanding is correct.

 Question 3 — Background and Discussion

 Statements 141 and 142 apply to business combinations completed after June 30, 2001. Acquisitions completed prior to July 1, 2001 must be accounted for under APB 16 and 17 until Statements 141 and 142 are adopted. Statement 142 applies in its entirety to fiscal years beginning after December 15, 2001. Some registrants may adopt Statement 142 early.

 How should registrants present the effects of Statements 141 and 142 in Article 11 pro forma Information? We understand that the answer to this question depends on the date a business combination was completed and the date Statement 142 is adopted in its entirety. Consider the example of a registrant with a calendar year-end that adopts Statement 142 effective January 1, 2002.

• Combinations completed before July 1, 2001 — Registrants should not retroactively apply the new accounting standards to combinations completed before July 1, 2001. Therefore, pro forma financial statements reflecting such combinations should present their effects in accordance with APB 16 and 17.
• Combinations completed after June 30, 2001 — The historical financial statements will reflect these combinations in accordance with Statements 141 and 142. The pro forma financial statements should reflect the accounting that will be applied. Therefore, the pro forma financial statements should also reflect these combinations in accordance with Statements 141 and 142.

 We understand that registrants should disclose the accounting standards that were used to compute the pro forma effects of the transactions they present.

 Rules covering management's discussion and analysis (MD&A) require registrants to disclose the effects of known events that are reasonably likely to materially affect their operating results or financial condition. When a registrant's financial statements will be significantly affected by both a recent acquisition that occurred before July 1, 2001 and new standards for accounting for that acquisition, we understand that the MD&A rules and SAB 74 require it to communicate the effects of both of these events. To accomplish this, a registrant might discuss the effects of the new accounting standards on its pro forma amounts. However, we understand that registrants generally cannot compute the pro forma effects of applying Statement 142 as of an earlier date. Therefore, we understand that these disclosures should be carefully worded to avoid implying that they represent the pro forma effects of retroactively applying Statement 142.

 Is our understanding correct? Are there other issues registrants should be aware of?

 Staff Response

 Your understanding is correct.

 Topic: Status of Topic 2.A.2 of the SAB Codification following issuance of SFAS 141

 Question: Is SAB Topic 2.A.2 still relevant given paragraphs 17-19 of SFAS 141, which superseded APB 16?

 Background: Question 1 of SAB Topic 2.A.2 specifically interprets the APB 16 presumption that the acquiring entity is that whose former common stockholders receive the larger portion of the voting rights in the combined corporation. Paragraph 17 of SFAS 141 provides revised guidance on identifying the acquiring entity, and it is clear from that standard and its basis for conclusions that the FASB did not intend for any one factor to be given more weight in all circumstances.

 Question 2 of SAB Topic 2.A.2 addresses business combinations involving more than two parties, which APB 16 did not specifically address. However, paragraph 18 of SFAS does provide guidance on identifying the acquiring entity in a multi-party business combination.

 In a letter dated August 16, 2001, then-Chief Accountant Lynn Turner provided the staff's preliminary views in urging the EITF to address various implementation issues involving SFAS 141 and 142. The following excerpt from that letter provided the following as the staff's views.

 

 In a letter dated September 13, 2001, Tim Lucas, FASB Director of Research and Technical Activities provided the following FASB staff comments related to thoses SEC staff views:

 

 Discussion: The Turner letter was discussed at the September 20 meeting of the EITF. With respect to SAB Topic 2.A.2, it was the general sense of the EITF that the SEC staff should consider rescinding the old SAB, since the relevant accounting standard interpreted by SAB Topic 2.A.2 has been superseded, and the new accounting standard sets forth a revised framework for the exercise of judgment in identifying the acquiring entity. The SEC Observer indicated that the staff would reconsider the SAB. The Committee is interested to know the status of the staff's plans with respect to Topic 2.A.2.

 With respect to Newco being the accounting acquirer, the discussion at the EITF meeting indicated that the SEC staff might be considering a more formal expression of its views, with which the FASB staff did not disagree. The Committee would be interested to know the status of the staff's plans with respect to any further communication of its views on this topic.

 Staff Response

 The staff is pursuing this issue with the FASB staff and plans to discuss the need for this or similar guidance with the EITF Agenda Committee in November.

 Topic: Predecessor Audited Financial Statements

 Questions:

1. When predecessor audited financial statements are provided for part of a full year and successor audited financial statements for the rest of the year, are interim financial statements necessary for the predecessor for the corresponding period of the preceding fiscal year?

 As an example, Newco (a shell Company with no operations) acquired Predecessor on June 25, 2000. Newco subsequently filed an IPO. The financial statements provided were:

• For the Predecessor - Two audited years ended December 31, 1999 and audited period ended June 25, 2000.
• For Newco (the Registrant) - Audited Financial statements for the period from inception date of January 15, 2000 through December 31, 2000 (there were no operations from formation on January 15 until acquisition on June 25, 2000) and unaudited interims for June 30, 2000 and June 30, 2001.

 The SEC advised the registrant to provide prior year comparable information for the period ended June 25, 1999.

2. Registrants do have to provide unaudited financial statements for the corresponding period of the preceding fiscal year for a transition period. The transition period is either audited currently or subsequently and is considered to be part of the Registrant's audited fiscal year. However, that is usually as of a normal month-end cut-off. In the above example, assuming that the registrant must provide comparable information, could they provide information as of June 30 or must it be June 25 information?

 Discussion:

 We do not believe that interim prior year corresponding financial statements are necessary for an audited predecessor period of less than one year that is provided with audited financial statements for the successor for the rest of that audited fiscal year. The period ended June 25, 2000 is part of the audited December 31, 2000 calendar year of the Registrant and is not considered an interim period We understand that for financial statements provided under Rule 3- 05 of Regulation S-X, registrants are required to provide the comparable period of the preceding fiscal year for any interim period required. However, the audited period through the acquisition date for a predecessor that is presented with the audited financial statements for the successor is part of an audited fiscal year that is provided under the Requirements of Rule 3-02 of Regulation S-X.

 Considerations:

 When pushdown accounting is used to reflect a change in basis in an existing entity, predecessor and successor financial statements are presented, separated by a black line before and after the pushdown date to emphasize the change in basis. In this presentation, the corresponding interim period is not provided for the predecessor period right before the change in basis.

 Staff Response

 The staff agrees. Financial statements are not required for the comparative prior period corresponding to an audited predecessor period of less than one year that is provided with audited financial statements for the successor for the rest of that audited fiscal year.

 TOPIC: Statement 143 and SAB TOPICS 5Y and 10b

 Question:

 Does the staff intend to amend Topics 5Y and 10b to be consistent, where appropriate, with Statement 143?

 Background:

 Questions 7 and 8 of SAB Topic 5Y include questions and interpretative responses relative to the accounting and disclosures associated with site restoration, post-closure and monitoring costs and environmental exit costs. Additionally, SAB Topic 10b includes a question and interpretative response relative to the disclosures associated with spent nuclear fuel and decontamination and decommissioning costs. Certain of these costs are now within the scope of Statement 143.

 Staff Response

 The staff would be interested to see suggestions and examples of how the SAB topics could be changed to clarify their scope and interaction with SFAS 143 and will consider this input in evaluating the continued usefulness of this guidance.