Staff Accounting Bulletin No. 112, 27427-27432 [E9-13511]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 74, Number 110 (Wednesday, June 10, 2009)]
[Rules and Regulations]
[Pages 27427-27432]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-13511]



[[Page 27427]]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 211

[Release No. SAB 112]


Staff Accounting Bulletin No. 112

AGENCY: Securities and Exchange Commission.

ACTION: Publication of Staff Accounting Bulletin.

-----------------------------------------------------------------------

SUMMARY: This staff accounting bulletin amends or rescinds portions of 
the interpretive guidance included in the Staff Accounting Bulletin 
Series in order to make the relevant interpretive guidance consistent 
with current authoritative accounting and auditing guidance and 
Securities and Exchange Commission rules and regulations. Specifically, 
the staff is updating the Series in order to bring existing guidance 
into conformity with recent pronouncements by the Financial Accounting 
Standards Board, namely, Statement of Financial Accounting Standards 
No. 141 (revised 2007), Business Combinations, and Statement of 
Financial Accounting Standards No. 160, Noncontrolling Interests in 
Consolidated Financial Statements.

DATES: Effective Date: June 10, 2009.

FOR FURTHER INFORMATION CONTACT: Eric C. West, Associate Chief 
Accountant, Office of the Chief Accountant, at (202) 551-5314, or 
Steven C. Jacobs, Associate Chief Accountant, Division of Corporation 
Finance, at (202) 551-3403, Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The statements in staff accounting bulletins 
are not rules or interpretations of the Commission, nor are they 
published as bearing the Commission's official approval. They represent 
interpretations and practices followed by the Division of Corporation 
Finance and the Office of the Chief Accountant in administering the 
disclosure requirements of the Federal securities laws.

    June 4, 2009.
Elizabeth M. Murphy,
Secretary.

List of Subjects in 17 CFR Part 211

    Accounting, Reporting and recordkeeping requirements, Securities.

PART 211--[AMENDED]

0
Accordingly, Part 211 of Title 17 of the Code of Federal Regulations is 
amended by adding Staff Accounting Bulletin No. 112 to the table found 
in Subpart B.

Staff Accounting Bulletin No. 112

    This staff accounting bulletin amends or rescinds portions of the 
interpretive guidance included in the Staff Accounting Bulletin Series 
in order to make the relevant interpretive guidance consistent with 
current authoritative accounting and auditing guidance and Securities 
and Exchange Commission (``Commission'') rules and regulations. 
Specifically, the staff is updating the Series in order to bring 
existing guidance into conformity with recent pronouncements by the 
Financial Accounting Standards Board (``FASB''), namely, Statement of 
Financial Accounting Standards No. 141 (revised 2007), Business 
Combinations (``Statement 141(R)''), and Statement of Financial 
Accounting Standards No. 160, Noncontrolling Interests in Consolidated 
Financial Statements (``Statement 160'').
    The following describes the changes made to the Staff Accounting 
Bulletin Series that are presented at the end of this release:

1. Topic 2: Business Combinations

    a. Topic 2.A is retitled. It previously referred to the ``purchase 
method,'' which is a term rendered obsolete by Statement 141(R). That 
accounting method is now referred to as the ``Acquisition Method.''
    b. Topic 2.A.5 is removed. This topic provided guidance on 
assigning acquisition cost to loans receivable acquired in a business 
combination. In a business combination, Statement 141(R) requires an 
entity to measure acquired receivables, including loans, at their 
acquisition-date fair value. Paragraph A57 of Statement 141(R) provides 
new guidance that precludes an acquirer from recognizing a separate 
valuation allowance as of the acquisition date for assets acquired in a 
business combination that are measured at their acquisition-date fair 
values because the effects of uncertainty about future cash flows are 
included in the fair value measure.
    c. Topic 2.A.6 is amended to conform to the requirement in 
paragraph 59 of Statement 141(R) that acquisition-related costs be 
accounted for as expenses in the period in which the costs are incurred 
and services are received, except for costs incurred to issue debt or 
equity securities which are recognized in accordance with other 
applicable generally accepted accounting principles (``GAAP'').
    d. Topic 2.A.7 is removed. This topic provided guidance on how an 
acquirer should account for and disclose contingent liabilities that 
have been assumed in a business combination. Statement 141(R), as 
amended by FASB Staff Position 141(R)-1 (``FSP 141(R)-1''), provides 
guidance on the recognition, measurement and disclosure of assets and 
liabilities arising from contingencies.
    e. Topic 2.A.8 is amended to remove the reference to Emerging 
Issues Task Force (``EITF'') Issue No. 88-16, Basis in Leveraged Buyout 
Transactions, which was superseded by Statement 141(R).
    f. Topic 2.A.9 is removed. This topic provided guidance on cash 
flow estimates used to determine the fair value of a contingent 
liability assumed in a business combination and referenced the need for 
disclosures in Management's Discussion and Analysis (``MD&A'') for any 
adjustments made to the historical financial statements of the acquired 
entity. This guidance is no longer necessary because: Statement 141(R), 
as amended by FSP 141(R)-1, provides guidance on the recognition, 
measurement and disclosure of assets and liabilities arising from 
contingencies; Statement of Financial Accounting Standards No. 157, 
Fair Value Measurements (``Statement 157''), provides guidance on fair 
value measurements; Statement of Financial Accounting Standards No.154, 
Accounting Changes and Error Corrections, provides guidance on error 
correction and disclosure; and Item 303 of Regulation S-K provides 
guidance on MD&A disclosures.
    g. Topic 2.D is amended to remove the guidance on determining the 
basis of properties in ``exchange offers'' (also referred to as ``roll-
ups'' or ``put-togethers''). This guidance is no longer necessary since 
Statement 141(R) provides measurement guidance for business 
combinations.

2. Topic 5: Miscellaneous Accounting

    a. Topic 5.E is amended to reflect the issuance of FASB 
Interpretation No. 45, Guarantor's Accounting and Disclosure 
Requirements for Guarantees, Including Indirect Guarantees of 
Indebtedness of Others (``FIN 45''), Statement 157, and Statement 160. 
Topic 5.E (as modified) expresses the views of the staff regarding the 
accounting for the divestiture of a subsidiary or other business 
operation.
    b. Topic 5.H is removed. This topic provided guidance on the 
accounting for the direct sale of unissued shares by a consolidated 
subsidiary that resulted in a decrease in the parent's ownership 
percentage without resulting in deconsolidation of the subsidiary. 
Under this guidance, when an offering

[[Page 27428]]

takes the form of a subsidiary's direct sale of its unissued shares, 
the parent could adopt an accounting policy whereby the amount in 
excess of the parent's carrying value received may be reflected as a 
gain in the parent's consolidated financial statements. Paragraphs 32 
and 33 of Accounting Research Bulletin (``ARB'') 51, as amended by 
Statement 160, provide new guidance on the accounting for a change in a 
parent's ownership interest when the parent retains its controlling 
financial interest. That guidance requires that changes in a parent's 
ownership interest that do not result in deconsolidation shall be 
accounted for as equity transactions. Therefore, no gain or loss shall 
be recognized on the direct sale of unissued shares by a consolidated 
subsidiary if the parent does not deconsolidate the subsidiary.
    c. Topic 5.J is amended, in response to Statement 160, to clarify 
the basis of accounting for purchased assets and liabilities that 
should be used to establish a new accounting basis when a substantially 
wholly-owned subsidiary presents separate financial statements.
    d. Topic 5.U is removed. This topic provided guidance on the 
recognition of gains in certain exchanges in which the seller received 
non-cash proceeds, such as securities issued by the buyer, as 
consideration for the assets transferred. This guidance is no longer 
necessary due to the issuance of FIN 45, Statement 157, and Statement 
160.

3. Topic 6: Interpretations of Accounting Series Releases and Financial 
Reporting Releases

    Topic 6.G.1.a and 2.a is amended to conform terminology to the 
Technical Amendments to Rules, Forms, Schedules and Codification of 
Financial Reporting Policies [Release Nos. 33-9026; 34-59775; FR-79 
(April 15, 2009)] that the Commission adopted to conform to Statement 
141(R) and Statement 160.
    Accordingly, the staff hereby amends the Staff Accounting Bulletin 
Series as follows:

    Note: The text of SAB 112 will not appear in the Code of Federal 
Regulations.

Topic 2: Business Combinations

A. Acquisition Method

* * * * *
5. Removed by SAB 112
6. Debt Issue Costs
    Facts: Company A is to acquire the net assets of Company B in a 
transaction to be accounted for as a business combination. In 
connection with the transaction, Company A has retained an investment 
banker to provide advisory services in structuring the acquisition and 
to provide the necessary financing. It is expected that the acquisition 
will be financed on an interim basis using ``bridge financing'' 
provided by the investment banker. Permanent financing will be arranged 
at a later date through a debt offering, which will be underwritten by 
the investment banker. Fees will be paid to the investment banker for 
the advisory services, the bridge financing, and the underwriting of 
the permanent financing. These services may be billed separately or as 
a single amount.
    Question 1: Should total fees paid to the investment banker for 
acquisition-related services and the issuance of debt securities be 
allocated between the services received?
     Interpretive Response: Yes. Fees paid to an investment banker in 
connection with a business combination or asset acquisition, when the 
investment banker is also providing interim financing or underwriting 
services, must be allocated between acquisition related services and 
debt issue costs.
    When an investment banker provides services in connection with a 
business combination or asset acquisition and also provides 
underwriting services associated with the issuance of debt or equity 
securities, the total fees incurred by an entity should be allocated 
between the services received on a relative fair value basis. The 
objective of the allocation is to ascribe the total fees incurred to 
the actual services provided by the investment banker.
    Statement 141(R) provides guidance for the portion of the costs 
that represent acquisition-related services. The portion of the costs 
pertaining to the issuance of debt or equity securities should be 
accounted for in accordance with other applicable GAAP.
     Question 2: May the debt issue costs of the interim ``bridge 
financing'' be amortized over the anticipated combined life of the 
bridge and permanent financings?
    Interpretive Response: No. Debt issue costs should be amortized by 
the interest method over the life of the debt to which they relate. 
Debt issue costs related to the bridge financing should be recognized 
as interest cost during the estimated interim period preceding the 
placement of the permanent financing with any unamortized amounts 
charged to expense if the bridge loan is repaid prior to the expiration 
of the estimated period. Where the bridged financing consists of 
increasing rate debt, the consensus reached in EITF Issue 86-15, 
Increasing Rate Debt, should be followed.\1\
---------------------------------------------------------------------------

    \1\ As noted in the ``Status'' section of the Abstract to Issue 
86-15, the term-extending provisions of the debt instrument should 
be analyzed to determine whether they constitute an embedded 
derivative requiring separate accounting in accordance with 
Statement 133 (as amended).
---------------------------------------------------------------------------

7. Removed by SAB 112
8. Business Combinations Prior to an Initial Public Offering
    Facts: Two or more businesses combine in a single combination just 
prior to or contemporaneously with an initial public offering.
    Question: Does the guidance in SAB Topic 5.G apply to business 
combinations entered into just prior to or contemporaneously with an 
initial public offering?
    Interpretive Response: No. The guidance in SAB Topic 5.G is 
intended to address the transfer, just prior to or contemporaneously 
with an initial public offering, of nonmonetary assets in exchange for 
a company's stock. The guidance in SAB Topic 5.G is not intended to 
modify the requirements of Statement 141(R). Accordingly, the staff 
believes that the combination of two or more businesses should be 
accounted for in accordance with Statement 141(R).
9. Removed by SAB 112
* * * * *

D. Financial Statements of Oil and Gas Exchange Offers

    Facts: The oil and gas industry has experienced periods of time 
where there have been a significant number of ``exchange offers'' (also 
referred to as ``roll-ups'' or ``put-togethers'') to form a publicly 
held company, take an existing private company public, or increase the 
size of an existing publicly held company. An exchange offer 
transaction involves a swap of shares in a corporation for interests in 
properties, typically limited partnership interests. Such interests 
could include direct interests such as working interests and royalties 
related to developed or undeveloped properties and indirect interests 
such as limited partnership interests or shares of existing oil and gas 
companies. Generally, such transactions are structured to be tax-free 
to the individual or entity trading the property interest for shares of 
the corporation. Under certain circumstances, however, part or all of 
the transaction may be taxable. For purposes of the discussion in this 
Topic, in each of these situations, the entity (or entities) or 
property (or properties) are deemed to constitute a business.

[[Page 27429]]

    One financial reporting issue in exchange transactions involves 
deciding which prior financial results of the entities should be 
reported.
    Question 1: In Form 10-K filings with the Commission, the staff has 
permitted limited partnerships to omit certain of the oil and gas 
reserve value information and the supplemental summary of oil and gas 
activities disclosures required by Statement 69 in some circumstances. 
Is it permissible to omit these disclosures from the financial 
statements included in an exchange offering?
    Interpretive Response: No. Normally full disclosures of reserve 
data and related information are required. The exemptions previously 
allowed relate only to partnerships where value-oriented data are 
otherwise available to the limited partners pursuant to the partnership 
agreement. The staff has previously stated that it will require all of 
the required disclosures for partnerships which are the subject of 
exchange offers.\13\ These disclosures may, however, be presented on a 
combined basis if the entities are under common control.
---------------------------------------------------------------------------

    \13\ See SAB 40, Topic 12.A.3.c.
---------------------------------------------------------------------------

    The staff believes that the financial statements in an exchange 
offer registration statement should provide sufficient historical 
reserve quantity and value-based disclosures to enable offerees and 
secondary market public investors to evaluate the effect of the 
exchange proposal. Accordingly, in all cases, it will be necessary to 
present information as of the latest year-end on reserve quantities and 
the future net revenues associated with such quantities. In certain 
circumstances, where the exchange is accounted for using the 
acquisition method of accounting, the staff will consider, on a case-
by-case basis, granting exemptions from (i) the disclosure requirements 
for year-to-year reconciliations of reserve quantities, and (ii) the 
requirements for a summary of oil and gas producing activities and a 
summary of changes in the net present value of reserves. For instance, 
the staff may consider requests for exemptions in cases where the 
properties acquired in the exchange transaction are fully explored and 
developed, particularly if the management of the emerging company has 
not been involved in the exploration and development of such 
properties.
    Question 2: If the exchange company will use the full cost method 
of accounting, does the full cost ceiling limitation apply as of the 
date of the financial statements reflecting the exchange?
    Interpretive Response: Yes. The full cost ceiling limitation on 
costs capitalized does apply. However, as discussed under Topic 12.D.3, 
the Commission has stated that in unusual circumstances, registrants 
may request an exemption if as a result of a major purchase, a write-
down would be required even though it can be demonstrated that the fair 
value of the properties clearly exceeds the unamortized costs.
    Question 3: How should ``common control accounting'' be applied to 
the specific assets and liabilities of the new exchange company?
    Interpretive Response: Consistent with SAB Topic 12.C.2, under 
``common control accounting'' the various accounting methods followed 
by the offeree entities should be conformed to the methods adopted by 
the new exchange company. It is not appropriate to combine assets and 
liabilities accounted for on different bases. Accordingly, all of the 
oil and gas properties of the new entity must be accounted for on the 
same basis (either full cost or successful efforts) applied 
retrospectively.
    Question 4: What pro forma financial information is required in an 
exchange offer filing?
    Interpretive Response: The requirements for pro forma financial 
information in exchange offer filings are the same as in any other 
filings with the Commission and are detailed in Article 11 of 
Regulation S-X.\14\ Rule 11-02(b) specifies the presentation 
requirements, including periods presented and types of adjustments to 
be made. The general criteria of Rule 11-02(b)(6) are that pro forma 
adjustments should give effect to events that are (i) directly 
attributable to the transaction, (ii) expected to have a continuing 
impact on the registrant, and (iii) factually supportable. In the case 
of an exchange offer, such adjustments typically are made to:
---------------------------------------------------------------------------

    \14\ As announced in Financial Reporting Release No. 2 (July 9, 
1982).
---------------------------------------------------------------------------

    (1) Show varying levels of acceptance of the offer.
    (2) Conform the accounting methods used in the historical financial 
statements to those to be applied by the new entity.
    (3) Recompute the depreciation, depletion and amortization charges, 
in cases where the new entity will use full-cost accounting, on a 
combined basis. If this computation is not practicable, and the 
exchange offer is accounted for as a transaction among entities under 
common control, historical depreciation, depletion and amortization 
provisions may be aggregated, with appropriate disclosure.
    (4) Reflect the acquisition in the pro forma statements where the 
exchange offer is accounted for using the acquisition method of 
accounting, including depreciation, depletion and amortization based on 
the measurement guidance in Statement 141(R).
    (5) Provide pro forma reserve information comparable to the 
disclosures required by paragraphs 10 through 17 and 30 through 34 of 
SFAS 69.
    (6) Reflect significant changes, if any, in levels of operations 
(revenues or costs), or in income tax status and to reflect debt 
incurred in connection with the transaction.
    In addition, the depreciation, depletion and amortization rate 
which will apply for the initial period subsequent to consummation of 
the exchange offer should be disclosed.
    Question 5: Are there conditions under which the presentation of 
other than full historical financial statements would be acceptable?
    Interpretive Response: Generally, full historical financial 
statements as specified in Rules 3-01 and 3-02 of Regulation S-X are 
considered necessary to enable offerees and secondary market investors 
to evaluate the transaction. Where securities are being registered to 
offer to the security holders (including limited partners and other 
ownership interests) of the businesses to be acquired, such financial 
statements are normally required pursuant to Rule 3-05 of Regulation S-
X, either individually for each entity or, where appropriate, 
separately for the offeror and on a combined basis for other entities, 
generally excluding corporations. However, certain exceptions may apply 
as explained in the outline below:

A. Acquisition Method Accounting

    1. If the registrant can demonstrate that full historical financial 
statements of the offeree businesses are not reasonably available, the 
staff may permit presentation of audited Statements of Combined Gross 
Revenues and Direct Lease Operating Expenses for all years for which an 
income statement would otherwise be required. In these circumstances, 
the registrant should also disclose in an unaudited footnote the 
amounts of total exploration and development costs, and general and 
administrative expenses along with the reasons why presentation of full 
historical financial statements is not practicable.
    2. The staff will consider requests to waive the requirement for 
prior year

[[Page 27430]]

financial statements of the offerees and instead allow presentation of 
only the latest fiscal year and interim period, if the registrant can 
demonstrate that the prior years' data would not be meaningful because 
the offerees had no material quantity of production.

B. Common Control Accounting

    The staff would expect that the full historical financial 
statements as specified in Rules 3-01 and 3-02 of Regulation S-X would 
be included in the registration statement for exchange offers accounted 
for as transactions among entities under common control, including all 
required supplemental reserve information. The presentation of 
individual or combined financial statements would depend on the 
circumstances of the particular exchange offer.
    Registrants are also reminded that wherever historical results are 
presented, it may be appropriate to explain the reasons why historical 
costs are not necessarily indicative of future expenditures.
* * * * *

Topic 5: Miscellaneous Accounting

* * * * *

E. Accounting for Divestiture of a Subsidiary or Other Business 
Operation

    Facts: Company X transferred certain operations (including several 
subsidiaries) to a group of former employees who had been responsible 
for managing those operations. Assets and liabilities with a net book 
value of approximately $8 million were transferred to a newly formed 
entity--Company Y--wholly owned by the former employees. The 
consideration received consisted of $1,000 in cash and interest bearing 
promissory notes for $10 million, payable in equal annual installments 
of $1 million each, plus interest, beginning two years from the date of 
the transaction. The former employees possessed insufficient assets to 
pay the notes and Company X expected the funds for payments to come 
exclusively from future operations of the transferred business. Company 
X remained contingently liable for performance on existing contracts 
transferred and agreed to guarantee, at its discretion, performance on 
future contracts entered into by the newly formed entity. Company X 
also acted as guarantor under a line of credit established by Company 
Y.
    The nature of Company Y's business was such that Company X's 
guarantees were considered a necessary predicate to obtaining future 
contracts until such time as Company Y achieved profitable operations 
and substantial financial independence from Company X.
    Question: If deconsolidation of the subsidiaries and business 
operations is appropriate, can Company X recognize a gain?
    Interpretive Response: Before recognizing any gain, Company X 
should identify all of the elements of the divesture arrangement and 
allocate the consideration exchanged to each of those elements. In this 
regard, we believe that Company X would recognize the guarantees at 
fair value in accordance with FIN 45, Guarantor's Accounting and 
Disclosure Requirements for Guarantees, Including Indirect Guarantees 
of the Indebtedness of Others; the contingent liability for performance 
on existing contracts in accordance with Statement 5, Accounting for 
Contingencies; and the promissory notes in accordance with APB 21, 
Interest on Receivables and Payables, and Statements 114, Accounting by 
Creditors for Impairment of a Loan, and 118, Accounting by Creditors 
for Impairment of a Loan--Income Recognition and Disclosures.
* * * * *

H. Removed by SAB 112

* * * * *

J. New Basis of Accounting Required in Certain Circumstances

    Facts: Company A (or Company A and related persons) acquired 
substantially all of the common stock of Company B in one or a series 
of purchase transactions.
    Question 1: Must Company B's financial statements presented in 
either its own or Company A's subsequent filings with the Commission 
reflect the new basis of accounting arising from Company A's 
acquisition of Company B when Company B's separate corporate entity is 
retained?
    Interpretive Response: Yes. The staff believes that purchase 
transactions that result in an entity becoming substantially wholly 
owned (as defined in Rule 1-02(aa) of Regulation S-X) establish a new 
basis of accounting for the purchased assets and liabilities.
    When the form of ownership is within the control of the parent, the 
basis of accounting for purchased assets and liabilities should be the 
same regardless of whether the entity continues to exist or is merged 
into the parent's operations. Therefore, Company B's separate financial 
statements should reflect the new basis of accounting recorded by 
Company A upon acquisition (i.e., ``pushed down'' basis).
    Question 2: What is the staff's position if Company A acquired less 
than substantially all of the common stock of Company B or Company B 
had publicly held debt or preferred stock at the time Company B became 
wholly owned?
    Interpretive Response: The staff recognizes that the existence of 
outstanding public debt, preferred stock or a significant 
noncontrolling interest in a subsidiary might impact the parent's 
ability to control the form of ownership. Although encouraging its use, 
the staff generally does not insist on the application of push down 
accounting in these circumstances.
    Question 3: Company A borrows funds to acquire substantially all of 
the common stock of Company B. Company B subsequently files a 
registration statement in connection with a public offering of its 
stock or debt.\6\ Should Company B's new basis (``push down'') 
financial statements include Company A's debt related to its purchase 
of Company B?
---------------------------------------------------------------------------

    \6\ The guidance in this SAB should also be considered for 
Company B's separate financial statements included in its public 
offering following Company B's spin-off or carve-out from Company A.
---------------------------------------------------------------------------

    Interpretive Response: The staff believes that Company A's debt,\7\ 
related interest expense, and allocable debt issue costs should be 
reflected in Company B's financial statements included in the public 
offering (or an initial registration under the Exchange Act) if: (1) 
Company B is to assume the debt of Company A, either presently or in a 
planned transaction in the future; (2) the proceeds of a debt or equity 
offering of Company B will be used to retire all or a part of Company 
A's debt; or (3) Company B guarantees or pledges its assets as 
collateral for Company A's debt. Other relationships may exist between 
Company A and Company B, such as the pledge of Company B's stock as 
collateral for Company A's debt.\8\ While in this latter situation, it 
may be clear that Company B's cash flows will service all or part of 
Company A's debt, the staff does not insist that the debt be reflected 
in Company B's financial statements providing there is full and 
prominent disclosure of the relationship between Companies A and B and 
the actual or potential cash flow commitment. In this regard, the staff

[[Page 27431]]

believes that Statements 5 and 57 as well as Interpretation 45 require 
sufficient disclosure to allow users of Company B's financial 
statements to fully understand the impact of the relationship on 
Company B's present and future cash flows. Rule 4-08(e) of Regulation 
S-X also requires disclosure of restrictions which limit the payment of 
dividends.
---------------------------------------------------------------------------

    \7\ The guidance in this SAB should also be considered where 
Company A has financed the acquisition of Company B through the 
issuance of mandatory redeemable preferred stock.
    \8\ The staff does not believe Company B's financial statements 
must reflect the debt in this situation because in the event of 
default on the debt by Company A, the debt holder(s) would only be 
entitled to Company B's stock held by Company A. Other equity or 
debt holders of Company B would retain their priority with respect 
to the net assets of Company B.
---------------------------------------------------------------------------

    Therefore, the staff believes that the equity section of Company 
B's balance sheet and any pro forma financial information and 
capitalization tables should clearly disclose that this arrangement 
exists.\9\ Regardless of whether the debt is reflected in Company B's 
financial statements, the notes to Company B's financial statements 
should generally disclose, at a minimum: (1) The relationship between 
Company A and Company B; (2) a description of any arrangements that 
result in Company B's guarantee, pledge of assets \10\ or stock, etc. 
that provides security for Company A's debt; (3) the extent (in the 
aggregate and for each of the five years subsequent to the date of the 
latest balance sheet presented) to which Company A is dependent on 
Company B's cash flows to service its debt and the method by which this 
will occur; and (4) the impact of such cash flows on Company B's 
ability to pay dividends or other amounts to holders of its securities. 
Additionally, the staff believes Company B's Management's Discussion 
and Analysis of Financial Condition and Results of Operations should 
discuss any material impact of its servicing of Company A's debt on its 
own liquidity pursuant to Item 303(a)(1) of Regulation S-K.
---------------------------------------------------------------------------

    \9\ For example, the staff has noted that certain registrants 
have indicated on the face of such financial statements (as part of 
the stockholder's equity section) the actual or potential financing 
arrangement and the registrant's intent to pay dividends to satisfy 
its parent's debt service requirements. The staff believes such 
disclosures are useful to highlight the existence of arrangements 
that could result in the use of Company B's cash to service Company 
A's debt.
    \10\ A material asset pledge should be clearly indicated on the 
face of the balance sheet. For example, if all or substantially all 
of the assets are pledged, the ``assets'' and ``total assets'' 
captions should include parenthetically: ``pledged for parent 
company debt--See Note X.''
---------------------------------------------------------------------------

* * * * *

U. Removed by SAB 112

* * * * *

Topic 6: Interpretations of Accounting Series Releases and Financial 
Reporting Releases

* * * * *

G. Accounting Series Releases 177 and 286--Relating to Amendments to 
Form 10-Q, Regulation S-K, and Regulations S-X Regarding Interim 
Financial Reporting.

* * * * *
1. Selected Quarterly Financial Data (Item 302(a) of Regulation S-K)
a. Disclosure of Selected Quarterly Financial Data
    Facts: Item 302(a)(1) of Regulation S-K requires disclosure of net 
sales, gross profit, income before extraordinary items and cumulative 
effect of a change in accounting, per share data based upon such income 
(loss), net income (loss), and net income (loss) attributable to the 
registrant for each full quarter within the two most recent fiscal 
years and any subsequent interim period for which financial statements 
are included. Item 302(a)(3) requires the registrant to describe the 
effect of any disposals of components of an entity \11\ and 
extraordinary, unusual or infrequently occurring items recognized in 
each quarter, as well as the aggregate effect and the nature of year-
end or other adjustments which are material to the results of that 
quarter. Furthermore, Item 302(a)(2) requires a reconciliation of 
amounts previously reported on Form 10-Q to the quarterly data 
presented if the amounts differ.
---------------------------------------------------------------------------

    \11\ See question 5 for a discussion of the meaning of 
components of an entity as used in Item 302(a)(2).
---------------------------------------------------------------------------

* * * * *
2. Amendments to Form 10-Q
a. Form of Condensed Financial Statements
    Facts: Rules 10-01(a)(2) and (3) of Regulation S-X provide that 
interim balance sheets and statements of income shall include only 
major captions (i.e., numbered captions) set forth in Regulation S-X, 
with the exception of inventories where data as to raw materials, work 
in process and finished goods shall be included, if applicable, either 
on the face of the balance sheet or in notes thereto. Where any major 
balance sheet caption is less than 10% of total assets and the amount 
in the caption has not increased or decreased by more than 25% since 
the end of the preceding fiscal year, the caption may be combined with 
others. When any major income statement caption is less than 15% of 
average net income attributable to the registrant for the most recent 
three fiscal years and the amount in the caption has not increased or 
decreased by more than 20% as compared to the corresponding interim 
period of the preceding fiscal year, the caption may be combined with 
others. Similarly, the statement of cash flows may be abbreviated, 
starting with a single figure of cash flows provided by operations and 
showing other changes individually only when they exceed 10% of the 
average of cash flows provided by operations for the most recent three 
years.
    Question 1: If a company previously combined captions in a Form 10-
Q but is required to present such captions separately in the Form 10-Q 
for the current quarter, must it retroactively reclassify amounts 
included in the prior-year financial statements presented for 
comparative purposes to conform with the captions presented for the 
current-year quarter?
    Interpretive Response: Yes.
    Question 2: If a company uses the gross profit method or some other 
method to determine cost of goods sold for interim periods, will it be 
acceptable to state only that it is not practicable to determine 
components of inventory at interim periods?
    Interpretive Response: The staff believes disclosure of inventory 
components is important to investors. In reaching this decision, the 
staff recognizes that registrants may not take inventories during 
interim periods and that managements, therefore, will have to estimate 
the inventory components. However, the staff believes that management 
will be able to make reasonable estimates of inventory components based 
upon their knowledge of the company's production cycle, the costs 
(labor and overhead) associated with this cycle as well as the relative 
sales and purchasing volume of the company.
    Question 3: If a company has years during which operations resulted 
in a net outflow of cash and cash equivalents, should it exclude such 
years from the computation of cash and cash equivalents provided by 
operations for the three most recent years in determining what sources 
and applications must be shown separately?
    Interpretive Response: Yes. Similar to the determination of average 
net income, if operations resulted in a net outflow of cash and cash 
equivalents during any year, such amount should be excluded in making 
the computation of cash flow provided by operations for the three most 
recent years unless operations resulted in a net outflow of cash and 
cash equivalents in all three years, in which case the average of the

[[Page 27432]]

net outflow of cash and cash equivalents should be used for the test.
* * * * *

[FR Doc. E9-13511 Filed 6-9-09; 8:45 am]
BILLING CODE 8010-01-P