[Federal Register Volume 64, Number 7 (Tuesday, January 12, 1999)]
[Rules and Regulations]
[Pages 1728-1735]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-589]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 229, 240 and 249
[Release Nos. 33-7620; 34-40884; FR54; File No. S7-17-98]
RIN 3235-AH43
Segment Reporting
AGENCY: Securities and Exchange Commission.
ACTION: Final rules.
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SUMMARY: The Commission today is adopting technical amendments to
conform our reporting requirements with the Financial Accounting
Standards Board's (``FASB'') Statement of Financial Accounting
Standards (``SFAS'') No. 131, governing disclosures relating to a
business enterprise's operating segments.
DATES: Effective Date: The rules will become effective on February 11,
1999. Compliance Date: Issuers may voluntarily comply with the revised
rules before the effective date.
FOR FURTHER INFORMATION CONTACT: James R. Budge, Special Counsel,
Division of Corporation Finance, at (202) 942-2950, Louise M. Dorsey,
Assistant Chief Accountant, Division of Corporation Finance, at (202)
942-2960, or Robert F. Lavery, Assistant Chief Accountant, Office of
the Chief Accountant, at (202) 942-4400, U.S. Securities and Exchange
Commission, 450 Fifth Street, NW, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission today adopts technical
amendments to Rules 3-03 \1\ and 12-16 \2\ of Regulation S-X,\3\ Items
101 \4\ and 102 \5\ of Regulation S-K,\6\ and Schedule 14A \7\ in order
to conform our reporting requirements with the FASB's recently adopted
SFAS No. 131. We also are making consistent changes to Form 20-F \8\
and to Section 501.06 of the Codification of Financial Reporting
Policies (``CFRP'').
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\1\ 17 CFR 210.3-03.
\2\ 17 CFR 210.12-16.
\3\ 17 CFR Part 210.
\4\ 17 CFR 229.101.
\5\ 17 CFR 229.102.
\6\ 17 CFR Part 229.
\7\ 17 CFR 240.14a-101.
\8\ 17 CFR 249.220f.
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I. Background
In 1976, the FASB issued SFAS No. 14, ``Financial Reporting for
Segments of a Business Enterprise.'' SFAS No. 14 required corporations
to disclose certain financial information by ``industry segment'' as
defined in the statement and by geographic area. In December 1977, we
adopted amendments to our rules to integrate the information to be
furnished under SFAS No. 14 with the narrative and financial
disclosures required in various disclosure forms.\9\
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\9\ Release No. 33-5893 (December 23, 1997) (42 FR 65554).
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After extensive deliberations, including solicitation of public
comments, the FASB adopted a number of fundamental changes to its
standards for segment reporting by publishing SFAS No. 131 in June of
1997. SFAS No. 131 superseded SFAS No. 14 and established standards for
reporting information about ``operating segments'' of an enterprise
rather than following the ``industry segment'' standards that were in
place previously.
On June 25, 1998, the Commission proposed for comment a number of
technical changes to its reporting requirements to accommodate these
modifications.\10\ Twelve commenters responded to the solicitation for
public views on the proposed approach. Generally, the commenters were
supportive of our efforts to conform our rules with the FASB standards.
We have determined to adopt the rules essentially as proposed. We
believe that this action is in keeping with our long-standing policy to
look to the private sector for the promulgation of generally accepted
accounting principles (``GAAP'').\11\ It also furthers our goal of
integrating existing accounting information into the narrative
disclosure in documents mandated by the federal securities laws. This
release explains the new reporting requirements.
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\10\ Release No. 33-7549 (June 25, 1998) (63 FR 35886).
\11\ Section 101 of the Codification of Financial Reporting
Policies. The Commission initially issued its administrative policy
concerning financial statements in 1938 and updated it in 1973 to
recognize the establishment of the FASB.
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II. Rule Changes
A. Operating Segment Disclosure
SFAS No. 14 required, and the Commission's rules and forms have
required, disclosure along ``industry segment'' lines. An ``industry
segment,'' as defined by SFAS No. 14, was ``a component of an
enterprise engaged in providing a product or service or a group of
related products and services primarily to unaffiliated customers * * *
for a profit.'' \12\ Recognizing that businesses often evaluate their
operations using criteria not necessarily related to the products or
services offered to the public, the FASB replaced the industry segment
reporting standard with one that requires businesses to
[[Page 1729]]
report financial information on the basis of ``operating segments.''
\13\ Under the new accounting standard, an operating segment is a
component of a business, for which separate financial information is
available, that management regularly evaluates in deciding how to
allocate resources and assess performance.\14\ Specifically, SFAS No.
131 states that an operating segment is a component of a business:
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\12\ SFAS No. 14, para. 10.a.
\13\ We use the proposed terms ``segment'' and ``segments'' as
well as the phrase ``segments as defined by generally accepted
accounting principles'' and similar terms or phrases in the rules
rather than follow the accounting standard's nomenclature of
``operating segment.'' Registrants should construe these terms to
mean a component of a business for which GAAP requires separate
reporting in financial statements.
\14\ We refer to this below as the ``management approach.''
That engages in activities from which it may earn revenues
and incur expenses (including revenues and expenses relating to
transactions with other components of the same business);
Whose operating results are regularly reviewed by the
enterprise's ``chief operating decision maker'' \15\ to make decisions
about resources to be allocated to the segment and assess its
performance; and
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\15\ The term ``chief operating decision maker'' identifies a
function, not a person with that title. This person's function is to
allocate resources to and assess the performance of the company's
segments. A chief operating decision maker frequently might be a
company's chief executive officer or chief operating officer, but it
also could be a group of decision makers, for example, the company's
president, executive vice presidents and others.
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For which discrete financial information is available.
Under SFAS No. 131, a company generally must report separately
information about an operating segment that meets any of the following
thresholds:
Its reported revenue, including both sales to external
customers and intersegment sales and transfers, is 10 percent or more
of the combined revenue of all reported operating segments, whether
generated inside or outside of the company; \16\
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\16\ The FASB has proposed eliminating the word ``reported''
from the phrase ``all reported operating segments.'' See para.
7.t.(1)(a) of Proposed Statement of Financial Accounting Standards--
Amendment to FASB Statement No. 66, Rescission of FASB Statement No.
75, and Technical Corrections, File Reference No. 190-A, dated
October 13, 1998 (``Exposure Draft'').
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Its reported profit or loss is 10 percent or more of the
greater of: (1) the combined reported profit of all operating segments
that did not report a loss or (2) the combined reported loss of all
operating segments that did report a loss; or
Its assets are 10 percent or more of the combined assets
of all operating segments.\17\
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\17\ SFAS No. 131, para. 18.
SFAS No. 131 not only changed how a business should identify its
segments, it also changed the types of information to be disclosed for
each segment. SFAS No. 14 required an issuer to report its revenues,
operating profit (loss),\18\ and identifiable assets \19\ if a
segment's revenues, operating profit, or identifiable assets were 10%
or more of all the industry segments' revenues, operating profits, or
assets, respectively. Issuers were to reconcile these three items to
the consolidated amounts in the financial statements. In addition, SFAS
No. 14 required issuers to report for each segment depreciation,
depletion and amortization, capital expenditures, equity in net income
of unconsolidated subsidiary or equity-method investee, and the effect
of a change in accounting principle on operating profit (loss).
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\18\ SFAS No. 14 specifically defined segment operating profit
to be revenues less all operating expenses, which included
depreciation and amortization. An issuer was to allocate operating
expenses that were not directly traceable to a particular segment on
a reasonable basis among the segments for whose benefit the expenses
were incurred. The standard required an explanation of the amount
and nature of any unusual or nonrecurring items added or deducted in
determining operating profit of a segment. In addition, the standard
defined any restructuring charges related to a specific segment as
operating expenses of that segment and issuers were to deduct these
charges in calculating that segment's operating profit or loss.
SFAS No. 14 excluded certain items in calculating segment
profit. They were: General corporate expenses; interest expense
(except included for financial institutions, insurance and leasing
operations); equity in income (loss) of unconsolidated subsidiaries
or equity investees; discontinued operations; extraordinary items;
and, the effects of changes in accounting.
\19\ Segment assets included all tangible and intangible assets
used by the segment, including goodwill, other intangibles, and
deferred income and expenses.
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By contrast, SFAS No. 131 requires that a company provide for each
reportable segment quantitative disclosure of two basic items--total
assets and a measure of profit or loss. The new standard defines
neither segment profit (loss) nor assets. Instead, management must
determine what they will report based on how they operate their
business. In addition, companies must disclose the following items for
each segment, but only if management includes them in measuring segment
profit or loss:
Revenues from external customers;
Revenues from other operating segments;
Interest income; \20\
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\20\ Certain enterprises may report segment interest revenue net
of interest expense. See SFAS No. 131, para. 27.
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Interest expense; \21\
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\21\ Id.
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Depreciation, depletion and amortization;
Unusual items;
Equity in net income of equity method investees;
Income taxes;
Extraordinary items; and
Significant non-cash items other than depreciation,
depletion, and amortization.
A company also must disclose for each segment the amount of investment
in equity-method investees and total expenditures for additions to
long-lived assets if it includes the amount in its determination of
segment assets.\22\
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\22\ In its Exposure Draft, the FASB has proposed to modify the
provisions of Paras. 27 and 28 of SFAS No. 131 to require companies
to disclose the designated items for each segment, if included in
the measure of profit or loss reviewed by or otherwise regularly
provided to the chief operating decision maker. See Paras. 7.t.(3)
and (4) of the Exposure Draft.
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The company must reconcile the totals of the reportable segments'
amounts for all of these listed items to consolidated amounts. The FASB
required more items to be disclosed per segment under the new standard
because analysts have long wanted more information and most of the
items required should be already available in management reports.
Today we are amending our narrative and financial reporting rules
to conform their segment reporting requirements to the FASB's revised
accounting standards. We retain, however, certain requirements relating
to disclosure of principal products or services and major customers
that traditionally have differed from the FASB standards.\23\ We
address below each of the rule changes.\24\
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\23\ See Sections II.A.1.a. and II.B.2.
\24\ We are alsol adopting several technical amendments to
update cross references to the new accounting standard. These
revisions are Rules 3-03(e) and 12-16 of Regulation S-X and Item
14(b)(2)(ii)(A)(3)(i) of Schedule 14A.
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1. Description of Business--Item 101
In the past, Regulation S-K Item 101(b)\25\ required issuers to
disclose in the business description sections of documents that they
filed with the Commission financial information based on GAAP's old
``industry segment'' standard. Under revised Item 101, registrants will
report segment information in accordance with GAAP's
[[Page 1730]]
new operating segment standard.\26\ Other changes to Item 101 follow.
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\25\ 17 CFR 229.101(b).
\26\ We also retain the provisions allowing an issuer to refer
to other sections of the registration statement that include the
required information in order to avoid duplicative disclosure.
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a. Principal products or services. Item 101 historically has
required a discussion, by segment, of the principal products produced
and services rendered by the issuer, as well as the principal markets
for and methods of distribution of each segment's products and
services. On the other hand, GAAP required, and continues to require,
disclosure of the types of products and services from which each
segment derives its revenues, without reference to principal markets
and methods of distribution. We continue to believe that information
relating to principal markets and distribution methods is useful to
investors; consequently we are retaining this provision.
Item 101 further requires registrants to disclose the amounts of
revenues from each class of similar products and services based on
quantitative thresholds. Specifically, the issuer must state the amount
or percentage of total revenue contributed by any class of similar
products or services that accounted for 10 percent or more of
consolidated revenue in any of the last three fiscal years, or if total
revenue did not exceed $50,000,000 during any of those three fiscal
years, 15 percent or more of consolidated revenue.\27\ SFAS No. 131
requires disclosure of revenues from external customers for each
product and service or each group of similar products and services
unless it is impracticable to do so.
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\27\ 17 CFR 229.101(c)(1)(i).
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Because SFAS No. 131 requires disclosure regardless of amount,
unless impracticable, it appears that the new accounting standard may
require more disclosure than Item 101. Consequently, we sought public
comment as to whether we needed to maintain the quantitative thresholds
of Item 101(c)(1)(i). Several commenters advocated eliminating the
quantitative thresholds and simply relying on the GAAP standard, which
they said implied a materiality standard for minimum disclosure. We
believe that SFAS No. 131 will result in disclosure of a range of
amounts of products and services, depending upon how a company defines
a class of related products or services. In fact, SFAS No. 131 may
require disclosure of amounts below the existing 10% threshold of Item
101. We believe a clearly stated minimum threshold for disclosure is
desirable to eliminate any possible ambiguity that may result from
attempts to apply an unwritten materiality threshold to small amounts
of reportable revenues and is in keeping with the 10% threshold used to
report segments under SFAS No. 131. We therefore have retained these
Item 101 thresholds.
b. Retroactive restatement of information. Item 101 has required
issuers to restate retroactively previously reported financial
information when there has been a material change in the way they group
products or services into industry segments and that change affects the
reported segment information. By contrast, SFAS No. 131 provides that
if an issuer changes the structure of its internal organization in a
manner that causes the composition of its reportable segments to
change, the issuer must restate the corresponding information for
earlier periods unless it is impracticable to do so.\28\ In the final
rule we conform the language of Item 101 with the language of SFAS No.
131 regarding when a company must restate information.
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\28\ See SFAS No. 131, para.34.
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c. Appendix A. Item 101 has included an appendix illustrating how
to present the required industry segment information in tabular form.
As proposed, we are eliminating this appendix and will rely instead on
the SFAS No. 131 instructions governing how to present information
relating to operating segments.
2. Property--Item 102
Regulation S-K Item 102 requires descriptions of an issuer's
principal plants, mines, and other ``materially important'' physical
properties. Companies must identify the industry segment(s) that use
the described properties.\29\ We are updating the item to reflect the
new financial statement reporting requirements, as proposed.
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\29\ 17 CFR 229.102.
3. Management's Discussion & Analysis--Item 303
Regulation S-K Item 303, which requires management to include a
discussion and analysis of an issuer's financial condition and results
of operations, provides:
Where in the registrant's judgment a discussion of segment
information or other subdivisions of the registrant's business would
be appropriate to an understanding of such business, the discussion
shall focus on each relevant, reportable segment or other
subdivision of the business and on the registrant as a whole.\30\
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\30\ 17 CFR 229.303(a).
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The Commission historically has relied on the FASB's definition for
segment disclosure in Management's Discussion and Analysis (``MD&A'').
The Commission intends to continue to rely on the FASB's standards,
thereby allowing issuers to use the management approach under SFAS No.
131. No rule change is necessary. Under the language in Item 303, a
multi-segment registrant preparing a full fiscal year MD&A should
analyze revenues, profitability (or losses) and total assets of each
significant segment in formulating a judgment as to whether a
discussion of segment information is necessary to an understanding of
the business.
While we are not adopting changes to the language of Item 303, we
are amending CFRP 501.06.a, which provides informal guidance about
MD&A. The revisions conform the Codification's language with that of
SFAS No. 131, and adds a new footnote, that reads:
Where consistent with the registrant's internal management
reports, SFAS No. 131 permits measures of segment profitability that
differ from consolidated operating profit as defined by GAAP, or
that exclude items included in the determination of the registrant's
net income. Under SFAS No. 131, a registrant also must reconcile key
segment amounts to the corresponding items reported in the
consolidated financial statements in a note to the financial
statements. Similarly, the Commission expects that the discussion of
a segment whose profitability is determined on a basis that differs
from consolidated operating profit as defined by GAAP or that
excludes the effects of items attributable to the segment also will
address the applicable reconciling items in Management's Discussion
and Analysis. For example, if a material charge for restructuring or
impairment relates to a specific segment, but is not included in
management's measure of the segment's operating profit or loss,
registrants would be expected to discuss in Management's Discussion
and Analysis the applicable portion of the charge, the segment to
which it relates and the circumstances of its incurrence. Likewise,
the Commission expects that the effects of management's use of non-
GAAP measures, either on a consolidated or segment basis, will be
explained in a balanced and informative manner, and the disclosure
will include a discussion of how that segment's performance has
affected the registrant's GAAP financial statements.
Several commenters said that the footnote as proposed could be read
to require registrants to reconcile the internal measure of segment
profitability to pre-tax income from continuing operations by segment,
which partial reconciliation by segment would go significantly beyond
the requirements of SFAS No. 131. We have revised this language, as set
out above,
[[Page 1731]]
to clarify that we are not requiring any incremental reconciliation of
segment profit beyond what SFAS No. 131 requires. The note now makes it
clear that we expect a narrative discussion in MD&A of items that
affect the operating results of a segment but that are not included in
segment operating profit defined by management.
4. Form 20-F
Form 20-F is the registration statement and annual report for
foreign private issuers promulgated under the Securities Exchange Act
of 1934 (``Exchange Act'').\31\ Form 20-F has permitted a foreign
registrant that presents financial statements according to United
States GAAP to omit SFAS No. 14 disclosures if it provides the
information required by Item 1 of the form. As proposed, we are
replacing the reference to SFAS No. 14 with one to SFAS No. 131.\32\
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\31\ 15 U.S.C. 78a et seq.
\32\ See Instruction 3 to Item 17 of Form 20-F. One commenter
suggested also referencing International Accounting Standard 14 in
this instruction. In light of the technical nature of this
rulemaking, we believe that we should reexamine this suggestion in
connection with substantive rulemaking projects involving this form
that may arise in the future rather than adopt a provision that was
not introduced in the proposals.
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Item 1 of Form 20-F requires registrants to disclose sales and
revenues by categories of activity and geographical areas, as well as
to discuss each category of activities that provide a disproportionate
contribution to total ``operating profit'' of the registrant. We are
not changing these requirements.
B. Other Reporting Requirements
SFAS No. 14 also set standards for disclosure of certain
enterprise-wide information where the issuer did not provide the
information in the segment disclosure, and Regulation S-K reflected
those standards. As we proposed, we are updating our rules to conform
with the revised requirements of SFAS No., 131, as we explain below.
1. Geographic Areas
Regulation S-K Item 101(d) has required an issuer to disclose for
each of the issuer's last three fiscal years the amounts of revenue,
operating profit or loss, and identifiable assets attributable to each
of its geographic areas. It also required disclosure of the amount of
export sales in the aggregate or by appropriate geographic area to
which the issuer makes sales.
Under SFAS No. 131, issuers must disclose revenues from external
customers deriving from:
The issuer's country of domicile;
All foreign countries in total from which the issuer
derives revenues; and
An individual foreign country, if material.
An issuer also must disclose the basis for attributing revenues from
external customers to individual countries.
The new accounting standard also requires an issuer to disclose
long-lived assets other than financial instruments, long-term customer
relationships of a financial institution, mortgage and other servicing
rights, deferred policy acquisition costs, as well as deferred tax
assets located in its country of domicile and in all foreign countries,
in total, in which the enterprise holds assets. If assets in an
individual foreign country are material, an issuer must disclose those
assets separately.\33\
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\33\See SFRAS No. 131, para.38.
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We are revising our disclosure requirements to conform entirely
with the new accounting standard. Consequently, issuers, even those
whose segments are defined by geography, will continue to report
designated information based on geographic areas, unless the
information is already provided as part of the reportable operating
segment information required by the accounting standards.\34\
Consistent with SFAS No. 131, the rules no longer will require
companies to disclose geographic information relating to profitability,
unless their segments are defined by geographic areas, or export sales.
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\34\ See SFAS No. 121 para.36. We are eliminating Appendix B of
Regulation S-K Item 101. We also revise Instruction 2 to Item 101,
which provides guidance about materiality analyses based on
``interperiod comparability,'' to reflect the elimination of the
requirements to disclose the quantitative geographic information
once required by SFAS No. 14.
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2. Major Customers
Since the adoption of SFAS No. 14, GAAP has required disclosure of
revenues from major customers.\35\ SFAS No. 131 now requires issuers to
disclose the amount of revenues from each external customer that
amounts to 10 percent or more of an enterprise's revenue as well as the
identity of the segment(s) reporting the revenues. The accounting
standards, however, have never required issuers to identify major
customers. On the other hand, Regulation S-K Item 101 historically has
required naming a major customer if sales to that customer equal 10
percent or more of the issuer's consolidated revenues and if the loss
of the customer would have a material adverse effect on the issuer and
its subsidiaries.\36\ We continue to believe that the identity of major
customers is material information to investors. This disclosure allows
a reader to better assess risks associated with a particular customer,
as well as material concentrations of revenues related to that
customer. Consequently, we retain this Regulation S-K requirement, as
we proposed.
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\35\ SFAS No. 30 amended SFAS No. 14 and retained this provision
to disclose revenue from major customers.
\36\ 17 CFR 229.101(a)(l)(vii).
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C. Segment Information Added to Interim Reports
GAAP historically has not required segment reporting in interim
financial statements. In SFAS No. 131, the FASB changed its position.
Under the new accounting standards, issuers must include in condensed
financial statements for interim periods the following information
about each reportable segment:
Revenues from external customers;
Intersegment revenues;
A measure of segment profit or loss;
Total assets for which there has been a material change
from the amount disclosed in the last annual report;
A description of differences from the last annual
report in the basis of segmentation or in the basis of measurement
of segment profit or loss; and
A reconciliation of the total of the reportable
segments' measures of profit or loss to the enterprise's
consolidated income before income taxes, extraordinary items,
discontinued operations, and the cumulative effect of changes in
accounting principles.\37\
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\37\ The FASB also amended Accounting Principles Board Opinion
No. 28 (``APB No. 28''), governing interim financial reporting, to
reflect this change. The stated purpose of APB No. 28 is ``to
clarify the application of accounting principles and reporting
practices to interim financial information, including interim
financial statements and summarized interim financial data of
publicly traded companies issued for external reporting purposes.''
APB No. 28para.1.
Thus, for the first time, issuers must disclose in their interim
financial statements, including those filed with the Commission,
condensed financial information about the segments they have chosen as
reportable segments for purposes of their annual reports.\38\
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\38\ SFAS No. 131, para.33 currently states that segment
information must be included in ``condensed financial statements of
interim periods issued to shareholders.'' Since this language has
caused some confusion relating to when segment information is
required, the FASB has proposed, as a technical amendment,
eliminating the words ``issued to shareholders'' to make it clear
that the information is to be provided in all interim financial
statements, regardless of whether delivered to shareholders. See
Exosure Draft para.7.t.(5). We understood this to be the FASB's
interpretation of this requirement before we issued the proposals
and we will expect to see segment information in all interim
financial statements filed with the Commission.
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SFAS No. 131 is effective for fiscal years beginning after December
15,
[[Page 1732]]
1997.\39\ The FASB specified, however, that issuers need not apply the
new provisions to interim financial statements in the initial year of
application, but they must report comparative information for interim
periods in that initial year in financial statements for interim
periods in the second year of application.\40\ Consequently, through
the Rules of General Application of Regulation S-X, which state that
financial statements not prepared in accordance with GAAP will be
presumed to be misleading or inaccurate,\41\ we expect to begin to see
comparative segment information reported in filings made by companies
whose fiscal years ended after December 15, 1998 in their filings
relating to their first quarter ending after March 15, 1999. A calendar
year end company would provide comparative interim segment information
beginning in its March 31, 1999 interim financial statements. No
changes to our rules are necessary to implement the FASB's changes in
this regard.
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\39\ SFAS No. 131 para.40.
\40\ Id.
\41\ See 17 CFR 210.4-01(a)(1).
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III. Certain Findings
We requested comment on whether the proposed revisions, if adopted,
would have an adverse effect on competition or would impose a burden on
competition that is neither necessary nor appropriate in furthering the
purposes of the Securities Act and the Exchange Act. No commenter
addressed this issue. In complying with our responsibilities under
section 23(a)(2) of the Exchange Act, we have determined that there
will be no adverse effect on competition and that the rule changes will
not impose any unnecessary burden on competition that is not
appropriate in furthering the purposes of the federal securities
laws.\42\
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\42\ 15 U.S.C. 78w(a)(2).
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We also find that our action will promote efficiency, competition
and capital formation by making our disclosure standards uniform with
the accounting standards. This is in keeping with our responsibilities
under section 2(b) of the Securities Act \43\ and section 3(f) of the
Exchange Act.\44\
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\43\ 15 U.S.C. 77b(b).
\44\ 15 U.S.C. 78c(f).
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IV. Cost-Benefit Analysis
We anticipate that these rule changes will not impose any new
regulatory costs on registrants, since the changes simply conform our
disclosure requirements with current accounting principles, to which
registrants are already subject. To the contrary, registrants will
benefit from the obligation to follow uniform standards rather than
potentially conflicting ones.
V. Regulatory Flexibility Act Certification
Pursuant to section 605(b) of the Regulatory Flexibility Act,\45\
Arthur Levitt, Chairman of the Commission, certified that the
amendments proposed in this release would not, if adopted, have
significant impact on a substantial number of small entities. The
reason for this certification is that the amendments conform rules and
forms to GAAP, as amended, to which registrants are already subject. We
included the certification in the proposing release as Attachment A.
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\45\ 5 U.S.C. 605(b).
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VI. Paperwork Reduction Act \46\
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\46\ 44 U.S.C. 3501 et seq.
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We determined that information collection burden hours will not
change as a result of the technical amendments adopted today.
VII. Codification Update
The ``Codification of Financial Report Policies'' announced in
Financial Reporting Release No. 1 (April 15, 1982) (47 FR 21028) is
updated to:
1. Modify Section 501 by revising Section 501.06.a. to read as
follows:
.a. Segment Analysis
In formulating a judgment as to whether a discussion of segment
information is necessary to an understanding of the business, a multi-
segment registrant preparing a full fiscal year MD&A should analyze
revenues, profitability, and the cash needs of its significant
segments.\47\ To the extent any segment contributes in a materially
disproportionate way to those items, or where discussion on a
consolidated basis would present an incomplete and misleading picture
of the enterprise, segment discussion should be included. This may
occur, for example, when there are legal or other restrictions upon the
free flow of funds from one segment, subsidiary, or division of the
registrant to others; when known trends, demands, commitments, event,
or uncertainties within a segment are reasonably likely to have a
material effect on the business as a whole; when the ability to dispose
of identified assets of a segment may be relevant to the financial
flexibility of the registrant; and in other circumstances in which the
registrant concludes that segment analysis is appropriate to an
understanding of its business.
The following example illustrates segment disclosure for a
manufacturer with two segments. The two segments contributed to segment
profit amounts that were disproportionate to their respective revenues.
The registrant discusses sales and segment profit trends, factors
explaining such trends, and where applicable, known events that will
impact future results of operations of the segment.
---------------------------------------------------------------------------
\47\ Where consistent with the registrant's internal management
reports, SFAS No. 131 permits measures of segment profitability that
differ from consolidated operating profit as defined by GAAP, or
that exclude items included in the determination of the registrant's
net income. Under SFAS No. 131, a registrant also must reconcile key
segment amounts to the corresponding items reported in the
consolidated financial statements in a note to the financial
statements. Similarly, the Commission expects that the discussion of
a segment whose profitability is determined on a basis that differs
from consolidated operating profit as defined by GAAP or that
excludes the effects of items attributable to the segment also will
address the applicable reconciling items in Management's Discussion
and Analysis. For example, if a material charge for restructuring or
impairment relates to a specific segment, but is not included in
management's measure of the segment's operating profit or loss,
registrants would be expected to discuss in Management's Discussion
and Analysis the applicable portion of the charge, the segment to
which it relates and the circumstances of its incurrence. Likewise,
the Commission expects that the effects of management's use of non-
GAAP measures, either on a consolidated or segment basis, will be
explained in a balanced and informative manner, and the disclosure
will include a discussion of how that segment's performance has
affected the registrant's GAAP financial statements.
[[Page 1733]]
Net Sales by Segment
----------------------------------------------------------------------------------------------------------------
Year 3 Year 2 Year 1
----------------------------------------------------------------
Segments ($ million) Percent of Percent of Percent of
total ($ million) total ($ million) total
----------------------------------------------------------------------------------------------------------------
Segment I......................... 585 55 479 53 420 48
Segment II........................ 472 45 433 47 457 52
-----------------------------------------------------------------------------
Total Sales................. 1057 100 912 100 877 100
----------------------------------------------------------------------------------------------------------------
Year 3 vs. Year 2
Segment I sales increased 22% in Year 3 over the Year 2 period. The
increase included the effect of the acquisition of Corporation T.
Excluding this acquisition, sales would have increased by 16% over Year
2. Product Line A sales increased by 18% due to a 24% increase in
selling prices, partially offset by lower shipments. Product Line B
sales increased by 35% due to a 17% increase in selling prices and a
15% increase in shipment volume.
Segment II sales increased 9% due to a 12% increase in selling
prices partly offset by a 3% reduction in shipment volume.
Year 2 vs. Year 1
Segment I sales increased 14% in Year 2. Product Line A sales
increased 22%, in spite of a slight reduction in shipments, because of
a 23% increase in selling prices.
Product Line B sales declined 5% due mainly to a 7% decrease in
selling prices, partially offset by higher shipments.
The 5% decline in Segment II sales reflected a 3% reduction in
selling prices and a 2% decline in shipments.
The substantial increases in selling prices of Product Line A
during Year 3 and Year 2 occurred primarily because of heightened
worldwide demand which exceeded the industry's production capacity. The
Company expects these conditions to continue for the next several
years. The Company anticipates that shipment volumes of Product Line A
will increase as its new production facility reaches commercial
production levels in Year 4.
Segment II shipment volumes have declined during the past two years
primarily because of the discontinuation of certain products that were
marginally profitable and did not have significant growth potential.
Profit by Segment
----------------------------------------------------------------------------------------------------------------
Year 3 Year 2 Year 1
----------------------------------------------------------------
Segments ($ million) Percent of Percent of Percent of
total ($ million) total ($ million) total
----------------------------------------------------------------------------------------------------------------
Segment I......................... 126 75 108 68 67 55
Segment II........................ 42 25 51 32 54 45
Segment Profit.................... 168 100 159 100 121 100
----------------------------------------------------------------------------------------------------------------
Year 3 vs. Year 2
Segment I profit was $18 million (17%) higher in Year 3 than in
Year 2. This increase includes the effects of higher sales prices and
slightly improved margins on Product Line A, higher shipments of
Product Line B and the acquisition of Corporation T. Excluding this
acquisition, Segment I profit would have been 11% higher than in Year
2. Partially offsetting these increases are costs and expenses of $11
million related to new plant start-up, slightly reduced margins on
Product Line B and a $9 million increase in research and development
expenses.
Segment II profit declined $9 million (18%) due mainly to
substantially higher costs in Year 3 resulting from a 23% increase in
average raw material costs which could not be fully recovered through
sales prices increases. The Company expects that Segment II margins
will continue to decline, although at a lesser rate than in Year 3 as
competitive factors limit the Company's ability to recover cost
increases.
Year 2 vs. Year 1
Segment I profit was $41 million (61%) higher in Year 2 than in
Year 1. After excluding the effect of the $34 million non-recurring
charge for the early retirement program in Year 1, Segment I profit in
Year 2 was $18 million (27%) higher than in Year 1. This increase
reflected higher prices and a corresponding 21% increase in margins on
Product Line A, and a 17% increase in margins on Product Line B due
primarily to costs reductions resulting from the early retirement
program.
Segment II profit declined about $3 million (6%) due mainly to
lower selling prices and slightly reduced margins in Year 2.
2. Replace paragraphs .01, .02 and .03 of Section 503 with new
paragraph .01, to include the text of Section I of this release
captioned ``Background'' and with new paragraph .02 to include the text
of Section II.B.2 of this release captioned ``Major Customers.''
The Codification is a separate publication of the Commission. It
will not be published in the Code of Federal Regulations.
VIII. Statutory Basis
The Commission proposes the rule changes explained in this release
pursuant to sections 6, 7, 8, 10 and 19(a) of the Securities Act and
Sections 3, 12, 13, 14, 15(d) and 23(a) of the Exchange Act.
List of Subjects in 17 CFR Parts 210, 229, 240 and 249
Accounting, Registration requirements, Reporting and recordkeeping
requirements, Securities.
Text of the Rules
Accordingly, the Commission amends Title 17, Chapter II of the Code
of Federal Regulations as follows:
[[Page 1734]]
PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT
COMPANY ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975
1. The authority citation for part 210 continues to read as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77aa(25),
77aa(26), 78j-1, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d),
79e(b), 79j(a), 79n, 79t(a), 80a-8, 80a-20, 80a-29, 80a-30, 80a-
37(a), unless otherwise noted.
2. By amending Sec. 210.3-03 by revising the first sentence of
paragraph (e) to read as follows:
Sec. 210.3-03 Instructions to income statement requirements.
* * * * *
(e) Disclosures regarding segments required by generally accepted
accounting principles shall be provided for each year for which an
audited statement of income is provided. * * *
3. By amending Sec. 210.12-16 by revising footnote one to the table
to read as follows:
Sec. 210.12-16 Supplementary insurance information.
* * * * *
\1\ Segments shown should be the same as those presented in the
footnote disclosures called for by generally accepted accounting
principles.
* * * * *
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
4. The authority citation for Part 229 continues to read in part as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn,
77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll(d), 79e,
79n, 79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise
noted.
* * * * *
5. By amending Sec. 229.101 (Item 101 of Regulation S-K) by
revising the introductory text of paragraph (b), paragraph (b)(1) and
paragraph (d); in paragraphs (c)(1) the introductory text, (c)(1)(i),
(c)(1)(ii), (c)(1)(iv), and (c)(1)(v), by revising the term ``industry
segment'' to read ``segment''; in paragraph (c)(1) the introductory
text and in Instruction 1 in the Instructions to Item 101, by revising
the term ``industry segments'' to read ``segments''; by revising
Instruction 2 to Item 101, and by removing Appendix A--Industry
Segments, and Appendix B--Foreign and Domestic Operations and Export
Sales.
Sec. 229.101 (Item 101) Description of business.
* * * * *
(b) Financial information about segments. Report for each segment,
as defined by generally accepted accounting principles, revenues from
external customers, a measure of profit or loss and total assets. A
registrant must report this information for each of the last three
fiscal years or for as long as it has been in business, whichever
period is shorter. If the information provided in response to this
paragraph (b) conforms with generally accepted accounting principles, a
registrant may include in its financial statements a cross reference to
this data in lieu of presenting duplicative information in the
financial statements; conversely, a registrant may cross reference to
the financial statements.
(1) If a registrant changes the structure of its internal
organization in a manner that causes the composition of its reportable
segments to change, the registrant must restate the corresponding
information for earlier periods, including interim periods, unless it
is impracticable to do so. Following a change in the composition of its
reportable segments, a registrant shall disclose whether it has
restated the corresponding items of segment information for earlier
periods. If it has not restated the items from earlier periods, the
registrant shall disclose in the year in which the change occurs
segment information for the current period under both the old basis and
the new basis of segmentation, unless it is impracticable to do so.
* * * * *
(d) Financial information about geographic areas. (1) State for
each of the registrant's last three fiscal years, or for each fiscal
year the registrant has been engaged in business, whichever period is
shorter:
(i) Revenues from external customers attributed to:
(A) The registrant's country of domicile;
(B) All foreign countries, in total, from which the registrant
derives revenues; and
(C) Any individual foreign country, if material. Disclose the basis
for attributing revenues from external customers to individual
countries.
(ii) Long-lived assets, other than financial instruments, long-term
customer relationships of a financial institution, mortgage and other
servicing rights, deferred policy acquisition costs, and deferred tax
assets, located in:
(A) The registrant's country of domicile;
(B) All foreign countries, in total, in which the registrant holds
assets; and
(C) Any individual foreign country, if material.
(2) A registrant shall report the amounts based on the financial
information that it uses to produce the general-purpose financial
statements. If providing the geographic information is impracticable,
the registrant shall disclose that fact. A registrant may wish to
provide, in addition to the information required by paragraph (d)(1) of
this section, subtotals of geographic information about groups of
countries. To the extent that the disclosed information conforms with
generally accepted accounting principles, the registrant may include in
its financial statements a cross reference to this data in lieu of
presenting duplicative data in its financial statements; conversely, a
registrant may cross-reference to the financial statements.
(3) A registrant shall describe any risks attendant to the foreign
operations and any dependence on one or more of the registrant's
segments upon such foreign operations, unless it would be more
appropriate to discuss this information in connection with the
description of one or more of the registrant's segments under paragraph
(c) of this item.
(4) If the registrant includes, or is required by Article 3 of
Regulation S-X (17 CFR 210), to include, interim financial statements,
discuss any facts relating to the information furnished under this
paragraph (d) that, in the opinion of management, indicate that the
three year financial data for geographic areas may not be indicative of
current or future operations. To the extent necessary to the
discussion, include comparative information.
Instructions to Item 101
* * * * *
2. Base the determination of whether information about segments
is required for a particular year upon an evaluation of interperiod
comparability. For instance, interperiod comparability would require
a registrant to report segment information in the current period
even if not material under the criteria for reportability of SFAS
No. 131 if a segment has been significant in the immediately
preceding period and the registrant expects it to be significant in
the future.
* * * * *
[[Page 1735]]
Appendix A and B [Removed]
6. By amending Sec. 229.102 by revising the term ``industry
segment(s)'' in the introductory paragraph to read ``segment(s), as
reported in the financial statements,''.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
7. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d),
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and
80b-11, unless otherwise noted.
Sec. 240.14a-101 [Amended]
8. By amending Sec. 240.14a-101(Schedule 14A) in Item
14(b)(2)(ii)(A)(3)(i) by revising the phrase ``industry segments'' to
read ``segments''.
PART 249--FORM, SECURITIES EXCHANGE ACT OF 1934
9. The authority citation for part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted:
* * * * *
Sec. 249.220f (Form 20-F) [Amended]
10. By amending Form 20-F (referenced in Sec. 249.220f) by removing
the term ``SFAS 14'' from Instruction 3 to Item 17 and inserting the
term ``SFAS No. 131'' in its place.
Note: The text of Form 20-F does not, and the amendment will
not, appear in the Code of Federal Regulations.
By the Commission.
Dated: January 5, 1999.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-589 Filed 1-11-99; 8:45 am]
BILLING CODE 8010-01-P
