September 26, 2006, Meeting Highlights

 John Wolfson, Chair

 Jack Ciesielski

 Melanie Dolan

 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, Deputy Chief Accountant

 Tammy Bieber, Senior Advisor to the Chief Accountant

 Mark Barrysmith, Professional Accounting Fellow

 Robert Burns, Chief Counsel

 Cathy Cole, Associate Chief Accountant

 Brian Croteau, Associate Chief Accountant

 Mike Gaynor, Professional Accounting Fellow

 Amy Hargrett, Assistant Chief Accountant

 Melanie Jacobsen, Special Counsel

 Josh Jones, Professional Accounting Fellow

 Jeff Kessman, Assistant Chief Accountant

 Sandie Kim, Professional Accounting Fellow

 Mark Mahar, Associate Chief Accountant

 Joseph McGrath, Professional Accounting Fellow

 Jennifer Minke-Girard, Senior Associate Chief Accountant

 Thomas Noland, Academic Fellow

 Zoe-Vonna Palmrose, Deputy Chief Accountant for Professional Practice

 Marlene Plumlee, Academic Fellow

 Nancy Salisbury, Senior Associate Chief Accountant

 Alison Spivey, Associate Chief Accountant

 Charlotte Thomas, Research Specialist

 Cheryl Tjon-Hing, Valuation Specialist

 Joseph Ucuzoglu, Professional Accounting Fellow

 Division of Corporation Finance

 Carol Stacey, Chief Accountant

 Craig Olinger, Deputy Chief Accountant

 Parveen P. Gupta, Academic Fellow

 Stephanie Hunsaker, Associate Chief Accountant

 Todd Hardiman, Associate Chief Accountant

 Joel Levine, Associate Chief Accountant

 Rachel Mincin, Associate Chief Accountant

 Leslie Overton, Associate Chief Accountant

 Michael Stehlik, Business Associate

 Sondra Stokes, Associate Chief Accountant

 Division of Enforcement

 Susan Markel, Chief Accountant

 C.  AICPA Center for Public Company Audit Firms

 Annette Schumacher Barr

 D.  Guests

 Karen Van Compernolle, D&T

 Wes Williams, Crowe Chizek

Scott Taub provided the following update of the activities in the Office of the Chief Accountant:

• Other OCA Developments

 B. Division of Corporation Finance Update

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

• Reviews of Registrant Filings
  Division staff members are still in the process of reviewing 2005 10-K filings with the expectation of meeting internal deadlines (Sarbanes-Oxley mandates that the Division complete reviews of all public companies at least once every three years). The Division initially focused on larger companies and has started reviews of some smaller companies with the hopes of having any comment letters issued before the end of the year. In large part, the issues that are raising comments are similar to those noted in previous reporting seasons. Carol Stacey provided the following summary of the most frequent issues raised in comment letters.

 

 C. Enforcement Update

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

 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. The Committee indicated that it plans to reorganize the compilation to include only the issues, background and conclusion sections, together with links to the original meeting highlights. Superseded items would be maintained in a separate archived section. The SEC staff agreed with this approach.

 Following Staff Accounting Bulletin No. 108, the SEC staff is considering developing guidance about quantifying financial statement misstatements on a quarterly basis, considering the relevant recommendations of the SEC Advisory Committee on Smaller Public Companies, as well as the provisions of paragraph 29 of APB 28, Interim Financial Reporting.

 The SEC staff indicated that it plans to address Staff Accounting Bulletin No. 108 at the AICPA SEC/PCAOB Conference in December 2006. SAB 108 states, "Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such correction may be made the next time the registrant files the prior year financial statements." The SEC staff confirmed that, in cases like this where a pending restatement is immaterial, an Item 4.02 Form 8-K would not be required. However, the SEC staff cautioned that, if the error being corrected materially affected a prior quarter of the current fiscal year, the SEC staff would expect the registrant to file an Item 4.02 Form 8-K with respect to those interim financial statements.

 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 SEC staff is still considering whether the document should be made publicly available as interpretive guidance.

 As discussed above, the Division of Corporation Finance noted that it might issue general guidance and identify additional factors registrants should consider in evaluating filings that require amendment as a result of stock option issues. The guidance might be in the form of an alert or letter.

 The Division of Corporation Finance hopes to publish an update of its Current Accounting and Disclosures Issues in October 2006. The SEC staff indicated that no new significant items are expected to be included.

1.  Rule 3-10, 3-16 Task Force Discussion Documents. Three discussion documents addressing the application of Rule 3-10 and Rule 3-16 were sent to the SEC staff on June 29, 2006. Based on a review of the documents, the SEC staff believes it would be most effective to schedule a separate meeting to discuss the issues with the Committee's Task Force. The Committee agreed to coordinate such a meeting with the SEC staff.

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 indicated they agreed with the Committee's recommendation on the first of the two questions posed in the document (See Appendix B).

 The SEC's Office of Inspector General issued a report on the Division of Corporation Finance's filing process entitled "Preliminary Review of Filings" (dated June 22, 2006) (see http://www.sec.gov/about/oig/audit/2006/401fin.pdf). The SEC staff made the following comments regarding this publication:

 

• In general, the SEC staff tries not to issue comment letters on calendar year end registrants in the October through December time frame. There may be unavoidable delays, however, that would cause an exception.

 A recent GAO report on restatements observed that many companies did not file an 8-K under Item 4.02 (nonreliance on prior financial statements) to notify investors of a restatement of historical financial statements. Some simply filed 10-Qs or 10-Ks with this information. The GAO recommended that the SEC clarify/harmonize its rules so that the Item 4.02 8-K requirement is better understood. (The GAO report can be obtained at http://www.gao.gov/new.items/d06678.pdf). The SEC staff indicated that their position regarding the filing of a Form 8-K Item 4.02(a) has not changed and the determination by a registrant to file is one which requires judgment.

 The SEC staff indicated that it is not pleased with the number of instances identified in the GAO report in which registrants apparently should have filed a Form 8-K Item 4.02(a). The SEC staff indicated that it is considering investigating these instances.

 The SEC staff provided the following points of clarification regarding their views about when a Form 8-K Item 4.02(a) should be filed:

• If a number on the face of the financial statements changes in an amended filing, the SEC staff presumes that there is a restatement and investors should not rely on the prior financial statements. The Committee observed that financial statement line item changes might be immaterial changes. The SEC staff questioned why a registrant would amend a previous filing if the change is not material.
• Once the determination is made that a registrant needs to restate their financial statements, a Form 8-K Item 4.02(a) should be filed. A registrant should not include this information in another Exchange Act filing (e.g. Form 10-K, Form 10-Q), which investors might overlook, or under another Item of Form 8-K. As discussed in Question 1 of the SEC staff's Form 8-K FAQs (http://www.sec.gov/divisions/corpfin/form8kfaq.htm), the SEC staff believes all Item 4.02 events should be reported using Form 8-K.
• The SEC staff expressed concern over potential delays in reporting non-reliance conclusions under Item 4.02 and reiterated that Item 4.02(b) should be looked to by the auditor if they believe the company has not fulfilled their obligation under 4.02(a). The SEC staff questioned the process used by management, the auditor and the audit committee to resolve concerns about potential misstatements. The Committee responded that the process often requires the registrant to undertake significant analysis, as well as an evaluation of materiality, which can be time-consuming. In addition, as a matter of good corporate governance, the company's ultimate conclusion usually is based on discussions with the audit committee. Further, the Committee noted that if a registrant files a Form 8-K Item 4.02(a) prior to completing this process, there is a risk the ultimate conclusion might differ. The SEC staff reminded auditors that the 4.02 reporting is triggered when the party responsible for concluding on non-reliance has so concluded and that often does not include consultation with the audit committee.
• The Committee expressed their view that, if a registrant does not need to amend previously issued financial statements, there is no requirement for a Form 8-K Item 4.02(a) filing. As discussed above, the SEC staff confirmed that if there is an immaterial error in a prior year and the registrant waits until the next Form 10-K to correct it, a Form 8-K Item 4.02(a) filing is not required.

 

The SEC staff indicated that Chairman Cox recently testified before the United States Senate Committee on Banking, Housing, and Urban Affairs and Linda Thomsen, Director, Division of Enforcement, recently testified before the United States Senate Committee on Finance regarding stock option backdating practices. Other than the testimony publicly available, the SEC staff had no further comments.

The testimony of Chairman Cox and Linda Thomsen can be obtained at: http://www.sec.gov/news/testimony/2006/ts090606cc.htm and http://www.sec.gov/news/testimony/2006/ts090606lt.htm

The SEC staff indicated that it has not received any questions or comments from the PCAOB or registrants regarding the Q&A.

The SEC staff indicated that they have not received many substantive questions from issuers regarding the adoption of SFAS No. 123(R).

The SEC staff noted it is compiling comments on the September 2005 and April 2006 highlights and expects to have revised drafts to the Committee in the next month. The SEC staff noted it has not started a review of the June 2006 highlights.

The SEC staff indicated it was working with the PCAOB staff on the anticipated revisions to Auditing Standard No. 2. The SEC staff would not speculate on the expected timing of an exposure draft for public comment.

A list of final rules and notices of proposed rulemakings that were issued since the June 20, 2006 Joint Meeting with the SEC Staff is included at Appendix C.

The SEC staff noted that a 2005 study by the Georgia Tech Financial Analysis Lab concluded, "when a company repurchases or redeems zero coupon bonds, it should classify the cash outflow for the repayment of principal amount received from bondholders as a financing use of cash and the amount paid in excess of the principal as operating use of cash." However the study also concluded, "many companies are reporting the entire face amount paid for zero coupon bonds, including principal and interest, as a financing use of cash." The SEC staff concurs with the study's conclusions as the "technically correct" accounting answer. The SEC staff does not have an initiative to systematically comment on the statement of cash flows classification of zero coupon and pay-in-kind interest instruments but believes that companies should consider whether their current classification complies with FAS 95.

The study can be accessed at the following URL: http://mgt.gatech.edu/fac_research/centers_initiatives/files_finlab/ga_tech_cf_zero_2005.pdf

The Committee asked the SEC staff to clarify the definition of a registrant's "worldwide market value of the voting and non-voting common equity held by its non-affiliates" when a registrant does not have common equity registered in the United States. The SEC staff indicated that Exchange Act Rule 12b-2's definitions of accelerated filer and large accelerated filer are not intended to apply to an issuer with only debt registered in the U.S. The SEC staff indicated that the determination of worldwide common equity float is a legal determination, which registrants should discuss with their legal counsel. The SEC staff does not intend to issue any additional guidance in this area but indicated that if registrants have questions they should call Paul Dudek in the Division of Corporation Finance.

A.  Section 404 Reporting by Non-Accelerated Filers After Exiting Accelerated Filing (See Discussion Document A.)

B.  Rule 3-09 Financial Statements in the Year in which an Investee is Disposed (Revisit of discussions from various prior meetings) (Discussion Document B from June '06 Meeting) (See Discussion Document B.)

C.  Treatment in Pre-Adoption Pro Forma Income Statement of Options Given to Employees of a Target in a Business Combination after the Acquirer has Adopted Statement 123(R) (See Discussion Document C.)

D.  Labeling financial statement columns to indicate (1) a change in accounting principle, and (2) a correction of an error, as applicable (See Discussion Document D.)

Issue/Question: What disclosures should be made by a public company in its Form 10-Q in the period of adoption?

The following is a list of the disclosure requirements under FIN 48. For each disclosure requirement please indicate if the disclosure is required (1) as of the date of adoption (i.e., those which must be included in all interim financial statements in the year of adoption), and (2) in interim periods post adoption, which would address interim balances or activity during the current and year-to-date interim periods. The Committee's recommendations are provided in the table below.

Item 601(b)(18) of Regulation S-K requires a preferability letter for changes in accounting principles, except when the change is the result of the application of a new standard. Neither FASB Statement No. 109, Accounting for Income Taxes, nor FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, specifies how interest and penalties on income tax deficiencies should be classified. However, FIN 48 states that classification of these items is an accounting policy that requires disclosure.

Regulation AB generally became effective for offerings of asset-backed securities initiated after December 31, 2005. For most asset-backed securities offerings, a sponsor registers the securities using Form S-3. Offerings registered on Form S-3 can be made on a delayed basis (i.e., a "shelf registration"), which would generally have a core prospectus that outlines the types of offerings that may be conducted in the future and a prospectus supplement that provides deal-specific information for each take-down. Many asset-backed securities issuances include credit enhancements provided in the form of financial guarantee insurance. This form of credit enhancement typically guarantees the timely payment of principal and interest on the securities issued should an event of default occur. Issuers obtain this credit enhancement in order to increase the credit rating, reduce interest costs and provide greater marketability to the transaction. The credit enhancement also provides the investor with greater marketability, secondary market price stability, and protection from loss associated with issuer default. There are a handful of entities in the U.S. that specialize in the financial guarantee business for asset-backed securities. This small group of entities guarantees numerous asset-backed securities issuances each year.

Item 1114 of Regulation AB (§ 229.1114(b)(2)), Credit enhancement and other support, except for certain derivatives instruments, requires the inclusion of financial statements in Exchange Act filings (see specific discussion of Forms S-3 and 10-D below) meeting the requirements of Regulation S-X for any provider of credit enhancement or other support arrangements, including guarantees, if such entity or group of affiliated entities is liable or contingently liable to provide payments representing 20% or more of the cash flow supporting any offered class of asset-backed securities. The majority of financial guarantees provided on asset-backed securities issuances will meet this requirement.

For offerings of asset-backed securities on Form S-3, in addition to the items that are otherwise required, the issuer must furnish in the prospectus the information required by Items 1102 through 1120 of Regulation AB. Thus, guarantor financial statements will be required to be included in the Form S-3 if the Item 1114 test is met. Form S-3 requires that all documents subsequently filed by the registrant pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the offering, shall be deemed to be incorporated by reference into the prospectus. Form 10-D (discussed below) is a periodic report filed pursuant to Section 13 or 15(d) of the Exchange Act and thus is automatically incorporated by reference into a Form S-3. It should be noted that industry participants have indicated that many shelf registrations of asset-backed securities are terminated by the issuer a year or so after the effective date of the shelf registration statement.

SEC Release No. 33-8518, Asset-Backed Securities, introduced a new periodic filing requirement for asset-backed securities issuances on Form 10-D. Filings on Form 10-D are required within 15 days after each required distribution date of the asset-backed securities (typically monthly). Item 7 of Form 10-D, Significant Enhancement Provider Information, requires the information in Item 1114(b)(2) to be provided. The instructions to Item 7 indicate that such information need only be provided in the report on the Form 10-D filed for the distribution period in which updated information regarding the enhancement provider is required pursuant to Item 1114(b)(2).

Item 1114(b)(2)(ii) states that if the credit enhancer "is liable or contingently liable to provide payments representing 20% or more of the cash flow supporting any offered class of the asset-backed securities" that it must "provide financial statements meeting the requirements of Regulation S-X (§§210.1-01 through 210.12-29 of this chapter)". Whether or not interim period information is required is not specifically addressed.

Previously, in connection with a financial guarantee, the credit enhancer's financial statements usually were not included or incorporated by reference in each respective asset-backed securities issuer's Form S-3, and related core prospectus, at the effective date. The issuer does not usually contract for financial guarantee insurance until a take-down. Shortly before a take-down of the Form S-3 shelf registration, the asset-backed securities issuer usually would file a Form 8-K with the credit enhancer's audited financial statements. The Form 8-K would be automatically incorporated by reference into the Form S-3 and core prospectus. The Form 8-K would include both the independent accountants' report on the financial statements of the credit enhancer, as well as its consent to the incorporation and reference of that report into the registration statement and prospectus. The Form 8-K often also would be incorporated by reference into the prospectus supplement related to the shelf registration take-down, which might also refer to the independent accountants as experts.

The approach to incorporate the financial statements by reference, as opposed to including them in the registration statement and prospectus, has been the practice used by the issuers and credit enhancers as a result of no action letters from the SEC.

Following the effective date of Regulation AB, asset-backed securities continue to be registered on Form S-3, which now requires compliance with Item 1114(b)(2), if applicable, in the prospectus. As discussed above, practice continues that the issuer usually does not contract for financial guarantee insurance until a take-down. Usually, shortly before a take-down from the Form S-3 shelf registration, the asset-backed security issuer will file a Form 8-K with the credit enhancer's audited financial statements, subject to the related consent requirements discussed above.

Subsequently, the asset-backed securities issuer is required to file a timely periodic report on Form 10-D that is automatically incorporated by reference into the shelf registration statement (Form S-3) if it remains effective. The Form 10-D is required to include the financial statements of the credit enhancer per Item 1114(b)(2), if applicable. In the initial Form 10-D, these financial statements will most likely be the same financial statements that were filed in the Form 8-K and incorporated by reference into the Form S-3 and core prospectus.

When the credit enhancer issues updated audited annual financial statements (e.g., in its subsequent Form 10-K), the following Form 10-D filed by the asset-backed issuer is required to provide those updated financial statements (e.g., by incorporating them by reference from the credit enhancer's Form 10-K).

When a Form S-3 shelf registration statement includes or incorporates by reference the credit enhancer's financial statements, when must a subsequent Form 10-D provide the credit enhancer's financial statements?

View A: The Exchange Act reporting requirement is separate from the Securities Act filing requirement. Accordingly, in order to comply with Item 1114(b)(2) of Regulation AB, the first Form 10-D filed after issuance of the asset-backed securities also must include or incorporate by reference the credit enhancer's financial statements. Whenever updated (new) financial statements are issued by the credit enhancer, those financial statements would also have to be provided in the next Form 10-D filed.

View B: The reporting requirements of the Exchange Act and the Securities Act are integrated. Accordingly, presuming the Form S-3 includes or incorporates by reference the most recent audited financial statements of a credit enhancer, the next Form 10-D filed after the credit enhancer files updated (i.e., new) audited financial statements must include or incorporate by reference those audited financial statements. An issuer would not have to include a credit enhancer's financial statements in its first Form 10-D filed after issuance of asset-backed securities if those financial statements would be exactly the same as the credit enhancer's financial statements included or incorporated by reference in the registration statement.

Committee Recommendation: View B

Executive Compensation and Related Person Disclosure

Internal Control Over Financial Reporting In Exchange Act Periodic Reports of Foreign Private Issuers That Are Accelerated Filers

Amendments to the Informal and Other Procedures; Public Company Accounting Oversight Board Budget Approval Process

Joint Final Rules: Application of the Definition of Narrow-Based Security Index to Debt Securities Indexes and Security Futures on Debt Securities

Fund of Funds Investments

Executive Compensation Disclosure (Request for Additional Comment)

Electronic Filing of Transfer Agent Forms

Internal Control Over Financial Reporting In Exchange Act Periodic Reports of Non-Accelerated Filers and Newly Public Companies

Amendments to Regulation SHO

Investment Company Governance (Request for additional comments)

Proposed Amendment to Rule 14a-8 under the Securities Exchange Act of 1934 concerning director nominating by shareholders 19

 Accelerated Filing Exit Provisions: In December 2005, the SEC issued a final rule, Revisions to Accelerated Filer Definition and Accelerated Deadlines for Filing Periodic Reports (SEC Release No. 33-8644; 34-52989). Among other things, the final rule amended the provisions for exiting accelerated filer status. Under the amended exit provisions, a large accelerated filer or an accelerated filer whose public float falls below $50 million as of the last business day of its second fiscal quarter would become a non-accelerated filer for that fiscal year. Further, an accelerated filer or large accelerated filer that ceases to have public equity float altogether (e.g., as a result of the company being acquired), would immediately become a non-accelerated filer. Previously, an accelerated filer had to continue reporting on an accelerated basis until it qualified to file as a small business issuer.

 Section 404 Transition Provisions: The SEC has adopted several revisions to the transition provisions for beginning to comply with the internal control reporting requirements of Section 404 of the Sarbanes-Oxley Act of 2002. The current Section 404 reporting deadlines are as follows (based on SEC Release No. 33-8618; 34-52492 (dated September 22, 2005) for domestic filers and SEC Release No. 33-8730; 34-54294 (dated August 9, 2006) for foreign private issuers):

• Non-accelerated filers currently are required to begin complying with all aspects of Section 404 reporting for fiscal years ending on or after July 15, 2007. However, on August 9, 2006, the SEC proposed further revisions to the transition provisions for non-accelerated filers. As proposed, for non-accelerated filers (including foreign private issuers that qualify as non-accelerated filers), Section 404 reporting by management would be delayed to fiscal years ending on or after December 15, 2007, and Section 404 attestation by the auditor would be delayed to fiscal years ending on or after December 15, 2008.

 

 As a result of the relaxed provisions for exiting accelerated filer status, there are likely to be more instances in which an accelerated filer that had reported under Section 404 becomes a non-accelerated filer. Particularly given the SEC's pending proposal to further defer Section 404 reporting by non-accelerated filers, the Committee wishes to confirm with the SEC staff that the Section 404 transition provisions apply to all non-accelerated filers, including a former accelerated filer that met the applicable exit provisions. That is, a former accelerated filer that had reported under Section 404 can suspend Section 404 reporting while a non-accelerated filer, until either (a) it again becomes an accelerated filer, or (b) as a non-accelerated filer, it must begin to comply with Section 404 under the SEC's applicable transition provisions.

 As an example, Company X is a calendar year-end SEC registrant. For its fiscal year ended December 31, 2005, Company X was an accelerated filer and complied with all applicable SEC filing and Section 404 reporting requirements and deadlines. For the fiscal year ending December 31, 2006, Company X will qualify as a non-accelerated filer by virtue of its public float dropping below $50 million as of the last business day of its second fiscal quarter (June 30, 2006). As a non-accelerated filer, Company X is not required to comply with Section 404 in its 2006 Form 10-K.

 The Committee understands that on several occasions, the Office of Chief Counsel in the Division of Corporation Finance has responded to registrants with similar fact patterns that they were not required to comply with Section 404 if they were filing as a non-accelerated filer. In addition, at the 2005 AICPA National Conference on Current SEC and PCAOB Developments, Carol Stacey expressed that same view in response to a question.

 Issue/Question: If an issuer previously met the definition of an accelerated filer or a large accelerated filer, but that issuer subsequently meets the exit provisions and becomes a non-accelerated filer, must the issuer comply with Section 404 in its SEC annual report?

 Answer: Whether and how an issuer must comply with Section 404 is determined on an annual basis. Accordingly, an accelerated filer previously subject to Section 404 reporting should reassess its Section 404 reporting requirements if it becomes a non-accelerated filer.

 Committee Recommendation: The Committee concurs with the answer.

 SEC Staff Position: The SEC staff agrees with the answer.

 Discussion: The Committee believes that Rule 3-09(a), which is written in the present tense, could be read to apply only to an equity method investment that is owned by the registrant at the end of the year in question. The Committee believes that this would be a logical reading of the Rule, because it believes that audited investee financial statements are not relevant to investors once the registrant has disposed of its investment. We acknowledge that the amount of any gains or losses on disposition may be of relevance to investors in evaluating management's track record. But we question a reading of Rule 3-09 which seemingly concludes that an investor needs more information regarding a disposed equity method investment than he or she needs regarding a consolidated investment. Rather, we believe that sufficient information is already required by APB 18, Rule 4-08(g), and the MD&A rules. Based on our experiences in working with registrants that have encountered this issue, our sense is that registrants share this view.

 Question: We ask the SEC Staff to reconsider its previous interpretations regarding the need for Rule 3-09 financial statements and calculating significance of investees in these fact patterns. If the staff concludes these are the only appropriate interpretations of the Rule, then we ask the staff to consider asking the Commission to modify the Rule. Any such modification could address these issues, clarify the time at which investee financial statements must be filed when the registrant and investee have different year-ends (this has been a source of practice questions; see, for example, the minutes of our June 2001 meeting), and address the need for technical corrections discussed with the staff in our April 2006 meeting.

 Excerpts From Prior Discussions:

 The minutes of the March 2001 Committee meeting state:

 The minutes of the July 2003 meeting of the International Practices Task Force state:

 The minutes of the June 2005 Committee meeting state:

 SEC Staff Position: There has been no change in the SEC staff position on this matter.

 Question: If a registrant acquires a business after it implements Statement 123(R) and grants options to the target's employees as part of the acquisition (e.g., exchange such employee's previous options related to target securities to options related to registrant securities), and the unvested portion of those options are to be accounted for as compensation, how should the compensation related to those options be treated in the pro forma income statement covering the year before Statement 123(R) was adopted? Does the answer depend on which transition method the registrant uses?

 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 and filed its March 31, 2006 Form 10-Q on May 1, 2006. Company X acquired a significant business in June 2006; accordingly, Company X's Form 8-K must include pro forma income statements for the year ended December 31, 2005 and for the three months ended March 31, 2006.

 If the registrant uses the modified retrospective transition method to adopt Statement 123(R)–

 View A: The pro forma income statement in the example above should not include an adjustment to reflect the projected compensation expense related to the options granted on the acquisition date.

 Although the issuance of the options is factually supportable, any pro forma adjustment would be calculated in accordance with Statement 123(R) (i.e., it would be measured and recognized following the principles in Statement 123(R)) because that is the accounting standard that applies at the date of acquisition. However, these amounts are calculated differently than the amounts computed in accordance with the retrospective adoption of Statement 123(R). Under the modified retrospective approach, Statement 123 applies to the 2005 financial statements. Because of these differences, no adjustment should be made.

 View B: The pro forma income statements in the example above should include an adjustment to reflect the projected compensation expense related to the options granted on the acquisition date computed in accordance with Statement 123(R), the accounting standard applicable to the options issued in the acquisition. In order to avoid "double counting," a pro forma adjustment should be made to eliminate the compensation expense, if any, reflected in the target's historical financial statements related to options exchanged in the business combination.

 The additional options granted in connection with the acquisition are essentially a change in the pay level for the target's employees which were made in connection with the acquisition. The amount is factually supportable and directly attributable to the transaction, so an adjustment is required.

 The fact that the adjustment is not computed in the same manner as the adjustments retrospectively reflected in the registrant's financial statements is not relevant. What is relevant is that these adjustments will affect the registrant's financial statements after the acquisition date. This was the rationale for the approach used in making pro forma adjustments when registrants transitioned to Statements 141 and 142. Acquisitions made after the effective date of those standards were reflected in pro forma income statements covering prior years using the accounting prescribed by those standards (i.e., purchase accounting was applied and goodwill was not amortized).

 If the registrant uses the modified prospective transition method to adopt Statement 123(R) –

 View A: The pro forma income statement should not include an adjustment to reflect the projected compensation expense related to the options granted on the acquisition date. Any adjustment should be calculated in accordance with Statement 123(R) (i.e., it should be based on the value calculated on the acquisition date in accordance with Statement 123(R) and reflected as a pro forma expense using the recognition method in Statement 123(R)) because those are the amounts that are factually supportable. However, these amounts are calculated differently than the amounts computed in accordance with APB 25 that the registrant recorded in its historical financial statements. In addition, it would be inconsistent and therefore not meaningful to reflect compensation expense computed under Statement 123(R) for options granted to the target's employees but not the registrants' employees in the pro forma income statement. Therefore, no adjustment should be made.

 View B: The pro forma income statement should include an adjustment to reflect the projected compensation expense related to the options granted on the acquisition date. In order to avoid "double counting," a pro forma adjustment should be made to eliminate the compensation expense, if any, reflected in the target's historical financial statements related to options exchanged in the business combination.

 The additional options granted in connection with the acquisition are essentially a change in the pay level for the target's employees which were made in connection with the acquisition. The amount is factually supportable and directly attributable to the transaction, so an adjustment is required.

 The fact that the registrant did not record stock option expense retrospectively in its financial statements is not relevant. What is relevant is that these adjustments will affect the registrant's financial statements after the acquisition date. This was the rationale for the approach used in making pro forma adjustments when registrants transitioned to Statements 141 and 142. Acquisitions made after the effective date of those standards were reflected in pro forma income statements covering prior years using the accounting prescribed by those standards (i.e., purchase accounting was applied and goodwill was not amortized).

 Committee Recommendation:

If the registrant uses the modified retrospective transition method – View B

If the registrant uses the modified prospective transition method – View B

 SEC Staff Position: With respect to the Modified Retrospective Transition Method, the SEC staff agrees with View B. With respect to the Modified Prospective Transition Method, the SEC staff agrees with View A unless incremental value (i.e., a change in value resulting from a change in option terms) is transferred, in which case, the staff agrees that View B would be appropriate (with respect to such incremental value). If View A applies, there is no adjustment, but there should be disclosure as if Statement 123(R) had been adopted.

 We assume current practice related to the correction of an error will continue with columns being labeled "As Restated" unless specifically allowed by current or future SEC guidance.

 Applicable Guidance

 Paragraphs 7c and 17 (a change in accounting principle) of Statement 154 require, among other considerations, that the financial statements of each individual prior period presented be adjusted to reflect the change in accounting principle. However, Statement 154 is silent as to whether each prior period's column headings of the financial statements should be labeled "As Adjusted". Although the example in paragraph A6, which illustrates a change in accounting principle, does in fact label the prior period income statement heading "As Adjusted (Note A)," paragraph A1 indicates that the examples in the appendix do not establish additional requirements.

 Additional Information

 Paragraph 2 indicates that the nature of an error in previously issued financial statements and the effect of its correction on income before extraordinary items, net income, and related EPS should be disclosed in the first Form 10-Q and 10-K after correction and that all columns should be labeled "restated."

 Issue/Question:

 Although Statement 154 is silent, the SEC Staff Training Manual requires labeling the column headings of restated financial statements "As Restated." Presumably, the basis for this requirement, at least in part, is to highlight the lack of comparability with the previously reported information. In addition, Statement 154 provides an illustrative example of the retrospective application of a change in accounting principle which includes labeling the column "As Adjusted". There does not appear to be a conceptual difference in the lack of comparability created by a correction of an error (i.e., a restatement) and the lack of comparability created by retrospective application of a new accounting principle. Therefore, the column headings of financial statements which include a change in accounting principle affected by retrospective application should be labeled "As Adjusted". The conceptual basis underlying this approach is equally applicable for private companies.

 In addition, a recently issued CPCAF Alert addressing changes to previously issued financial statements specific to retrospective modification for the presentation of cash flows from discontinued operations expressed the SEC's views on the need for providing column headings in that particular situation (i.e., the Staff indicated such financial statements should be marked as "revised" or "restated").

 View B: AGAINST requiring labeling of column headings for a change in accounting principle effected by retrospective application

 Considering the guidance in Statement 154 which indicates that the examples in the appendix do not establish additional requirements and Statement 154 is silent regarding labeling of column headings, such labeling should be encouraged, but not required, for retrospective application of a change in accounting principle. The rational for this conclusion includes the following:

 Statement 154 does not require such labeling; rather, it requires specific disclosures of such a change. Presumably the Board concluded that the consistency issues inherent in such a change are sufficiently addressed in Statement 154's stated requirements. As such, regardless of whether the column headings are labeled "As Adjusted," a financial statement user is provided the relevant information to understand that a change in accounting principle has occurred and its impact. In addition, auditing standards address financial statement consistency (more specifically lack thereof), and provide auditor reporting requirements in such situations.

 Second, there appears to be a functional difference in the lack of comparability created by a correction of an error and the lack of comparability created by retrospective application of a change in accounting principle. In retrospective application of a change in accounting principle, the previously issued financial statements were not incorrect at the time of issuance, but a change has occurred subsequent that date. In contrast, with a correction of an error, the previously issued financial statements included an error(s) at the time of issuance, and should no longer be relied upon. Labeling of each of the prior period's columns "As Restated" emphasizes this point.

 Third, Appendix B of APB 20 (APB 20 was superseded by Statement 154) also included similar "as adjusted (Note A)" language in an example illustrating the manner of reporting a change in accounting principle retroactively by restating (which is the current equivalent of retrospective application under Statement 154) the prior periods presented. As the SEC guidance did not address labeling column headings as "As Adjusted" under APB 20, it does not appear warranted under Statement 154.

 Committee Recommendation: The Committee supports View B.

 SEC Staff Position: The SEC staff stated that while labeling financial statement columns "as adjusted" for a change in accounting principle is not explicitly required, it is considered a best practice to facilitate as much transparency as possible.