July 16, 2002
Mr. Jonathan G. Katz
File No. S7-16-02
Secretary, U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
RE: Proposed Rule: Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies
File No. S7-16-02
Dear Mr. Katz:
The Accounting Principles and Auditing Standards Committee of the Florida Institute of Certified Public Accountants (the "Committee") has reviewed and discussed the above referenced "Proposed Rule". The Committee has the following comments:
1. The Committee agrees with the intent of the Proposed Rule requiring discussion of "critical accounting estimates" which would allow investors to understand more completely the manner in which the financial statements depend on estimates. The Committee believes more clarification is needed on the second criteria for an accounting estimate to meet the definition of a "critical accounting estimate". The first criteria that the estimate must have a material impact on the company's financial presentation is straightforward and understandable. The second criteria "It includes any accounting estimate that is reasonably likely to change from period to period" is more confusing. The requirement calls for management to discuss all material estimates that could have financial statement impact to the Company on an ongoing basis, and considering factors often uncertain to management. The Committee believes the `second criteria' for determining a "critical accounting estimate" is subjective and requires further explanation. What management determines could have an impact on an ongoing basis could differ from company to company, based on contractual and other unknown circumstances.
2. The Committee believes that most complex accounting scenarios cannot be easily translated into language that the average investor would easily understand. The Proposed Rule assumes accounting estimates are mutually exclusive of each other, when in fact, accounting estimates and decisions regarding accounting matters overlap. The Committee believes further examples of situation
s that meet the definition/criteria of "critical accounting estimate" and examples of situations where estimates overlap different accounting polices should be provided.
3. The Proposed Rule on MD&A discussion of "critical accounting estimates" requires disclosure of assumptions, near term changes and range estimates. The Proposed Rule requires that management discuss the "critical accounting estimates" and discuss changes that would result from (i) making reasonably possible, near-term changes in the most material assumptions underlying the estimate; or (ii) the range of reasonably possible amounts. The Committee believes it is not practicable to discuss all assumptions or disclose ranges of possible amounts. The Committee believes this requirement would be too voluminous and confusing for investors.
4. The Committee agrees with the Proposed Rule requiring disclosure regarding the initial adoption of an accounting policy that has a material impact on the Company's financial results. The Committee disagrees with the requirement to explain the choices among acceptable alternatives of GAAP (other GAAP choices). The Committee also disagrees with the requirement for a Company to describe why it made a specific choice among acceptable GAAP accounting polices. The Committee believes the investing public can review the accounting principle selected by the Company and judge whether to invest in the Company, but mandating additional discussion of all potential applications of GAAP and the requirement to describe why the Company made the choice of adopting that accounting policy is not necessary and could impeded on a company's competitive market edge.
5. The Proposed Rule requires disclosure of the initial adoption of an accounting policy that has a material impact on the Company. Commission seeks comment on whether there should be required discussion of accounting policies (acceptable under GAAP) followed by other entities in that Company's industry. The Committee believes there should not be discussion of accounting policies followed by other companies in a particular industry.
6. The Committee questions whether the costs required to present this additional disclosure regarding critical accounting estimates exceed the benefits. The Committee is also concerned with the added cost required for a Company to quantify this information and with the added requirement placed on auditors to audit this information.
The Committee appreciates this opportunity to share our views and concerns. Members of the Committee are available to discuss any questions you may have regarding this communication.
Very truly yours,
Frank Mason, CPA, Vice-Chairman
FICPA Accounting Principles and Auditing Standards Committee
Committee members coordinating this response:
Scott Montgomery, CPA
Frank Mason, CPA
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