IMC Global Inc.
100 South Saunders Road
Lake Forest, Illinois 60045-2561
July 19, 2002
Jonathon G. Katz
Secretary, U.S. Securities and Exchange Commission
File No. S7-16-02
450 Fifth Street, NW
Washington, DC 20549-0609
You have requested comments on the Proposed Rule: Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies (Proposed Rule). At IMC Global Inc. (IMC), the Proposed Rule will have a significant impact on the preparation of IMC's Form 10-Ks and 10-Qs as well as other SEC filings. We have structured our response to address the Proposed Rule's questions that are most applicable to IMC's SEC reporting.
B. Scope of the Proposals
The following are responses to the questions set forth to solicit comment with regard to broadening the scope of the Proposed Rule to achieve a more expansive objective.
- The Proposed Rule should not require additional MD&A disclosure specifically regarding the effects of a change from one accounting policy to another acceptable accounting policy under GAAP. The reporting requirements of GAAP specify that this type of accounting change be disclosed in the notes to the financial statements. Including this information in both sections of the Annual Report is repetitive and unnecessary.
- The Proposed Rule should not require a discussion in MD&A of the impact that an alternative acceptable method of accounting under GAAP would have on the financial statements. Essentially this would force companies to have two sets of accounting records for the same transaction in order to create this information. This could impose significant costs to a company's accounting and information systems departments, which far outweigh the gains of including this type of information in MD&A.
- For unusual or innovative transactions, the accounting policy used and the reasons why it was choosen should be discussed in MD&A because it provides financial statement users insight as to the substance of the transaction. However, the Proposed Rule should not require companies to disclose in MD&A the effects of accounting policies the company could have adopted for these same transactions. Those financial statement users that would be interested in this additional information will most likely be informed of the potential alternate accounting polices. This additional disclosure would further escalate the increased reporting requirements of the past few years. Additionally, discussing alternatives will not lend any clarity to an investor's understanding of a transaction, and, in fact, may lead to confusion.
- The Proposed Rule should require more disclosure about the process of making estimates as long as it is not duplicative with requirements from GAAP.
- A company should disclose whether its accounting policies differ from those generally used by its industry. The Proposed Rule should not require the inclusion of the impact of the different accounting policy because this once again forces a company to have two sets of accounting records as well as an understanding of other companies' accounting policies.
C. Proposed Disclosure about Critical Accounting Estimates
1. Accounting estimates covered under the proposals
The following are responses to the questions set forth to solicit comment with regard to the proposed definition of critical accounting estimates.
- The definition of critical accounting estimates is appropriately tailored and is appropriately designed to identify the accounting estimates that require management's judgement and involve a high potential to result in a material impact on the company's financial presentation.
- The Proposed Rule should consider setting a minimum percentage impact on results of operations because this will provide a clear threshold for determining whether or not an accounting policy is critical, which removes further judgement from whether disclosure is necessary.
- Based on the definition, IMC would most likely identify three or four critical accounting estimates for disclosure.
- It is possible for a company with multiple segments to have a greater number of critical accounting estimates than a company without multiple segments. If an accounting estimate were immaterial to the company as a whole, but material to a segment, then disclosure would be required under the Proposed Rule.
- The Proposed Rule should not establish a maximum number of critical accounting estimates. If a critical accounting estimate is determined to need disclosure, then a financial statement reader will want to be informed of such a critical accounting estimate. By setting a maximum, a critical accounting estimate could be absent which could impact the decision of a financial statement user.
- The Proposed Rule should not expand the definition to include MD&A disclosure of volatile accounting estimates that use complex methodologies but do not involve significant management judgment. A good portion of this information is already included in the notes to the financial statements as required by GAAP. Further inclusion in the MD&A is repetitive. Some responsibility needs to be placed on investors to gain an understanding of accounting methodologies used by companies in which the investors are going to invest as well as to read the filing in its entirety.
4a. Quantitative disclosures to demonstrate sensitivity
The following are responses to the questions set forth to solicit comment with regard to the proposed identification and analysis of changes of critical accounting estimates.
- Since a critical accounting estimate by definition requires judgment by management, the use of sensitivity analysis would be meaningful to investors.
- The Proposed Rule should not require that all companies use the same method for assuming changes related to the critical accounting estimates to analyze sensitivity because each company will have different critical accounting estimates and either of the two choices discussed will provide an investor with the appropriate information.
- The Proposed Rule should require a company to use the accounting estimate, which demonstrates the greatest impact on the company's financial position because this provides an investor with the worst case scenario.
- IMC is not aware of any circumstances that would require both of the proposed choices for sensitivity analysis.
- IMC is not aware of any critical accounting estimates for which neither of the two choices for selecting the assumed changes would be appropriate.
- Although companies should be able to select the appropriate changes in the most material assumptions, additional guidance would provide improved clarity in meeting the requirements of the Proposed Rule.
- The Proposed Rule should not have standardized changes that companies must assume for various types of estimates. Although this might enhance an investors' ability to compare the sensitivity of various companies' financial statements, companies have different methods for determining an accounting estimate and having a specific standard may not provide the investor with sufficient information as a result.
4b. Quantitative and qualitative disclosures concerning past changes in the estimate
The following are responses to the questions set forth to solicit comment with regard to the proposed disclosure of past material changes in critical accounting estimates.
- Sufficient disclosure of significant changes in accounting estimates is already required under current MD&A standards.
- A three-year period is the most appropriate period to discuss these changes because of the current requirement to include three years of income statements and statements of cash flows. If investors want to understand the trends of changes in accounting estimates for longer than three years, they have the ability to review previously filed SEC documents.
- Although a standardized format for quantitative disclosures about past changes in critical accounting estimates will provide investors with additional information, such a chart may prove difficult to summarize for a concise presentation if a company has a number of critical accounting estimates present and is required to included the impact on each line item of the financial statements as well as other effects.
5. Senior management's discussions with the audit committee
The following are responses to the questions set forth to solicit comment with regard to the proposed disclosure about discussion between senior management and the audit committee regarding the development, selection and disclosure of critical accounting estimates.
- Senior management discusses critical accounting estimates with both the audit committee and the external auditors as the need arises.
- Since the proposed requirement only entails including a statement asserting whether such discussions have occurred, the proposed requirement does not provide a great deal of useful information to investors.
- Although, the proposed disclosure would be a catalyst for discussion between audit committees and senior management, in most situations this should already be occurring at most companies.
- If there are any unresolved concerns of the audit committee about the critical accounting estimates or the MD&A disclosure, it should be resolved prior to filing with the SEC.
- The specific procedures employed by the audit committee do not need to be disclosed, but they should be documented within the minutes of the audit committee meeting.
- It does make more sense to include the proposed disclosure about the audit committees activities in relation to critical accounting estimates in the audit committee report as well as making the discussions between senior management and the audit committee one of the bases for the audit committee's recommendation to include the financial statements in the annual report.
- Items 306 should be expanded to require disclosure of whether the audit committee has reviewed and discussed the entire MD&A disclosure with management and the auditors and whether they consent to the inclusion of the MD&A in the company's annual report.
- A company is required under GAAP to disclose all of its significant accounting policies in the notes to the financial statements. Such material divergences from industry practice will be disclosed here. Requiring separate disclosure in the MD&A is repetitive. It is redundant and unnecessary to include statements in the MD&A regarding such discussions with the audit committee.
6. Disclosure relating to segments
The following are responses to the questions set forth to solicit comment with regard to the proposed disclosure regarding identification of the segments affected and the proposed additional disclosure of the critical accounting estimates on a segment basis.
- More guidance should be provided for determining the circumstances that warrant segment disclosure.
- The additional segment discussion should be required when a critical accounting estimate impacts only one or more segments but not the entire company. The disclosure should not be more than a statement to that effect as well as the magnitude of the critical accounting estimate on the results of the segment.
E. Auditor Examination of MD&A Disclosure Relating to Critical Accounting Estimates
The following are responses to the questions set forth to solicit comment with regard to the proposed independent auditor examinations of the proposed MD&A disclosure regarding critical accounting estimates.
- The Proposed Rule should require that the critical accounting estimates disclosure in the MD&A undergo auditor examination comparable to that enumerated in AT Section 701 because it will improve and elicit a higher quality disclosure provided in the MD&A.
- Some type of disclosure stating that the auditor has performed the work as well as the results of the engagement should be included regardless of whether this type examination becomes required under the Proposed Rule.
F. Quarterly Updates
The following are responses to the questions set forth to solicit comment with regard to the proposed quarterly updating requirements for U.S. companies.
- IMC agrees with the proposed requirements for quarterly reporting.
G. Proposed Disclosure about Initial Adoption of Accounting Policies
The following are responses to the questions set forth to solicit comment with regard to the proposed disclosures related to initial adoption of accounting policies.
- Although this information would be useful for investors, it is repetitive with the information already required under Accounting Principles Board Opinion (APB) No. 22. If it is determined that APB No. 22 does not require enough disclosure, then the Accounting Principles Board should be requested to amend APB No. 22 to require such additional disclosure.
- The Proposed Rule should not require companies to disclose the estimated effect of adopting accounting polices that they could have adopted. This is overly burdensome to companies' reporting groups. With each of the proposed forms of dual reporting discussed throughout the Proposed Rule, a significant amount of additional work is created based on the fact that management was given options under accounting rules and choose a certain direction. If the overall goal is to have companies in the same industry have comparable financial statements, then eliminate the different options.
- The primary costs of such an exercise include the hiring of additional staff and longer hours. However, it is difficult to determine the impact of such a disclosure on the markets view of the company.
- Investors may be confused by this requirement because it may not be clear as to whether this means the company is worse or better off if it used the alternative accounting method.
- The MD&A should not be required to include a discussion of whether the accounting policies followed by a company upon initial adoption differ from the accounting policies applied by other companies in its industry. It is possible that through these disclosures competitors would be able to gain important information that could prove to be detrimental to the operations of the disclosing company. It would also be difficult for a company to ascertain the accounting policies of other companies in its industry if these disclosures are not readily available. Furthermore, this would require monitoring to keep the disclosure accurate and would not necessarily be a useful tool in an investor's decision.
H. Disclosure Presentation
The following are responses to the questions set forth to solicit comment with regard to the proposed disclosure presentation.
- IMC agrees with the proposed disclosure presentation.
IMC believes that disclosures in SEC filings should be made to provide a clear picture of the company to any investor. Although IMC is not opposed to all of the new proposed requirements, the problem is the continuing proliferation of more disclosures over the past few years. This is now coupled with the SEC's pending decision to shorten the annual and quarterly reporting deadlines.
IMC's recommendation is that the SEC and FASB need to form a joint task force to address the issues regarding public disclosure and determine an overall strategy for the best presentation. This will help reduce the issuance of stop-gap disclosure requirements, which constantly change, as well as eliminate the needless duplication of information between MD&A and the notes to the financial statements.
We appreciate your consideration.
Very truly yours,
/s/ Robert M. Qualls
Robert M. Qualls
Vice President and Controller