SUMMARY OF COMMENTS

Relating to Proposed
Disclosure in Management's Discussion and Analysis About Off-Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments

Release Nos. 33-8144; 34-46767

File No. S7-42-02

Prepared by:
Andrew D. Thorpe

January 2, 2003

TABLE OF CONTENTS

1. List of Commenters (48)

2. Overview

3. Proposed Disclosure of Off-Balance Sheet Arrangements

   1. Proposed Definition of "Off-balance Sheet Arrangement"

   2. Proposed Disclosure Threshold 10

   3. Proposed Disclosure Items 12

4. Proposed Disclosure of Contractual Obligations and Contingent Liabilities and Commitments

   1. Comments Applicable to Both Contractual Obligations and Contingent Liabilities and Commitments

   2. Proposed Table of Contractual Obligations

   3. Proposed Disclosure of Contingent Liabilities and Commitments

5. Other MD&A Disclosure

6. Application to Foreign Private Issuers

7. Proposed Safe Harbor for Forward-Looking Information

8. Disclosure Presentation 35

9. Transition 36

10. PRA and Cost-Benefit Analysis

11. Miscellaneous Comments

I. List of Commenters (48)

II. Overview

We received 48 responses to our request for comment. Generally, the major issues raised in the responses generally fell into one of four categories: (1) the scope of the proposed definition of "off-balance sheet arrangements;" (2) the proposed disclosure threshold; (3) the proposed disclosure requirements; and (4) the scope of the proposed disclosure of contractual obligations and contingent liabilities and commitments.

Comments on the Proposed Definition of "Off-Balance Sheet Arrangements"

While some commenters expressed general support for the proposed definition of "off-balance sheet arrangements," the majority expressed the view that the definition is too broad and needs further clarification. In particular, commenters questioned the types of arrangements, the types of unconsolidated entities and the types of derivatives that would fall within the scope of the proposed definition.

Comments on the Proposed Disclosure Threshold

Most commenters suggested that the final rule adopt the "reasonably likely" disclosure threshold that is currently found in MD&A rules. A few commenters supported the "more than remote" threshold. The commenters indicated that the "reasonably likely" threshold would be preferable because it would provide investors with the information that management considers to be important. The commenters thought that the proposed "more than remote" threshold would be difficult for management to apply, yield voluminous disclosures, attribute undue prominence to information that is not important to investors, confuse or mislead investors and would yield information that would not be comparable among firms. Moreover, commenters stated their belief that the "reasonably likely" threshold would be consistent with the Sarbanes-Oxley Act.

Comments on the Proposed Disclosure Items

While some commenters supported the proposed disclosure items, most of the commentary opposed the prescriptive, detail-oriented nature of the proposals. The commenters stated that the disclosure would be too voluminous and would amount to disclosure overload. In addition, some commenters commented on the practicability of implementing the disclosure. For example, some commenters believe that companies may be unable to monitor and evaluate the activities of unconsolidated entities conducting off-balance sheet activities. The commenters suggested that the final rule should utilize a more flexible, principles-based approach.

Comments on Proposed Tabular and Textual Disclosures

While only a few commenters were opposed to the adoption of these proposals, the majority of commenters suggested guidance and clarification on how to implement the disclosure requirements. The commenters opposed believe that the proposed disclosure would impose a large, new compliance burden on registrants by requiring them to aggregate and assess multiple contracts and commitments. The majority of comments related to the necessity to further limit and define the types of contractual obligations and contingent liabilities and commitments to be included in the table. For example, some commenters believed that the table should exclude contracts and commitments of the registrant that occur in the ordinary course of business, that it should focus on cash payments and that it be consistent with the measurement and disclosure requirements found in GAAP. Some commenters believed that the disclosure on contingent liabilities should cover only "commercial commitments," and should exclude loss contingencies such as litigation, arbitration or regulatory proceedings.

III. Proposed Disclosure of Off-Balance Sheet Arrangements

A. Proposed Definition of "Off-balance Sheet Arrangement"

Comments in Support of the Proposed Definition:

1. Four commenters express general support for the proposed definition.¹

2. Two commenters believe that the proposals have clearly and appropriately defined the term "off-balance sheet arrangement" and that it is sufficiently tailored to enable registrants to determine which arrangements need to be disclosed and which are unimportant to investors.²

3. Two commenters note that the proposed definition of "off-balance sheet arrangements" is defined in a more focused manner in the proposed rule than in the Sarbanes-Oxley Act, and will be more effective.³

4. Two respondents support the Commission's effort to limit the definition of off-balance arrangements, including restricting the definition to contractual obligations and requiring disclosure to the "extent necessary."⁴

5. One commenter believes that the proposed definition adequately would enable registrants to determine which derivative instruments are included within the scope of the proposals.⁵

6. One commenter concurs with the proposed exclusion of contingent liabilities arising out of litigation, arbitration or regulatory actions (not otherwise related to off-balance sheet arrangements) and suggests that the Commission provide examples of the types of contingent liabilities that would be excluded.⁶

Comments Opposed to the Proposed Definition:

7. Fifteen respondents believe that the definition of "off balance sheet arrangement" is either too broad, or requires further clarification.⁷

Related Comments:

Comments on types of arrangements:

• The proposed definition appears to include within its scope routine transactions that would not typically be considered to be "off-balance sheet arrangements" (e.g., executory contracts, employment, consulting, leases, licenses, royalty contracts, minimum purchase commitments, guarantees under customer contracts, guarantees of residual values under operating leases... etc).⁸

• The proposed definition could be interpreted to include a company's employee pension plan and postretirement benefit arrangements, which the Commission should exclude.⁹

• The definition appears to cover unconsolidated subsidiaries accounted for under the "equity method" of accounting, or counterparties to contracts that are substantive operating entities.¹⁰

• The rule should exclude ordinary course obligations and executory arrangements.¹¹

• Disclosure of contingencies should not be required for contingent liabilities that do not arise from binding and definitive agreements.¹²

• Clarify what is meant by an "indirect guarantee" (would an indirect guarantee include the debt of a 50-50% joint venture?).¹³

• The final rule should clarify that a parent's guarantee of a consolidated subsidiary's debt to a third party would not be included in the scope of the definition.¹⁴

• The definition should extend the exclusion for litigation, arbitration or regulatory actions to actions related to off-balance sheet arrangements.¹⁵

• The definition should include examples of arrangements subject to the rules.¹⁶

Comments on types of entities:

• The definition should focus on unconsolidated entities, such as structured finance entities and SPEs that may be in the form of corporations, partnerships, LLCs or trusts.¹⁷

• QSPEs should be excluded from the definition.¹⁸

• The definition should focus on off-balance sheet arrangements used as a financing, liquidity or risk sharing technique.¹⁹

• Instead of targeting all obligations and liabilities not fully reflected in the financial statements, the definition should target transactions involving SPEs or otherwise designed to alter a registrant's financial statements.²⁰

• The definition should be limited to arrangements with parties in which the registrant, or its officers or directors, have some financial interest.²¹

Comments on Reconciling Definition with GAAP:

• The Commission should reconcile the rule so that it is consistent with the terms and exclusions in recently adopted FIN 45 (e.g., the rule should specifically include or exclude the exclusions in FIN 45).²²

• The Commission should refer to the definitions and scope exclusions in the FASB project on SPE consolidation when considering the definition and the types of arrangements to exclude from a final definition.²³

• The definition should explicitly exclude SPEs that would be consolidated pursuant to the new FASB guidance.²⁴

• As presently drafted, the definition would incorporate all derivatives designated as normal purchases and sales and accounted for on the accrual basis under SFAS 133.²⁵

• SFAS No. 133 omits certain derivatives from its scope (e.g., insurance contracts) and the definition should clarify whether those derivatives excluded from SFAS No. 133 would be included.²⁶

• The contracts identified in paragraph 10 of SFAS 133 should be excluded.²⁷

• Equity derivatives and contingent liabilities that to do not involve SPEs should not be included within the scope of the rule.²⁸

• In light of the extensive disclosure under SFAS 133, further disclosure is not necessary.²⁹

• The final rule should clarify that only equity-linked or -indexed derivatives are included within the definition.³⁰

• The term "derivatives" should be consistent with Item 305 of Regulation S-K (e.g., "market risk sensitive instruments").³¹

• Employee stock options could be considered derivatives within the scope of the definition, and should not be included within the definition and the Commission should clarify the definition of derivatives as they relate to off-balance sheet arrangements covered under the proposals.³²

Miscellaneous comments on scope of definition:

• Specific guidance on the intended meaning of terms such as "derivatives" and "contingent obligation or liability" would be helpful.³³

• It is unclear how disclosure of the existence or amount of a loss for which it is not probable that a loss has been incurred, or the where the amount cannot be estimated, or for which the upper end of the range of loss is not the best estimate of the loss, would be useful to investors.³⁴

• Any retained interest in assets sold to an independent third party in an arm's-length transaction, including earn out provisions, milestone payments or the receipt of stock of a purchaser of assets could be viewed as a retained interest for purposes of the rule.³⁵

• It is not apparent why a retained interest should warrant disclosure as an off-balance sheet arrangement if the registrant has no commitment or contingent obligation arising out of the arrangement.³⁶

• Eliminate the phrase "whether or not a party to the arrangement" because it would be difficult to monitor the activities of third parties.³⁷

• The adopting release should resolve apparent inconsistencies between that which is covered under the definition that which is not.³⁸

8. One commenter request clarification of the definition of "obligations not classified as liabilities" and asks if the term "classified" means specifically identified on the balance sheet, or something not recorded at all.³⁹

9. Two commenters express confusion with regard to the application of the "not fully reflected in the financial statements" aspect of the definition⁴⁰ and two commenters offer suggestions.⁴¹

Related Comments:

• The definition implies that any liability recorded at an amount that differs from its fair value (e.g., debt and asset retirement obligations) is an off-balance sheet arrangement.⁴²

• The definition should be expanded to "include the footnotes thereto" when considering contingent liabilities not fully reflected in the financial statements.⁴³

• The disclosure should focus on the maximum potential exposures, and not distinguish between fair value and fully reflected liabilities.⁴⁴

• The final rule should exclude the fourth category of the definition (any obligation or liability, including a contingent liability, to the extent it is not "fully reflected"...).⁴⁵

10. One commenter believes that the definition exceeds the disclosure requirements under FAS 5.⁴⁶

11. One respondent believes that the proposed exclusion of contingent liabilities arising from litigation, arbitration, or regulatory actions is too narrow (e.g., termination penalties under distribution agreements would be required if there was more than a remote chance that the registrant may terminate a distribution agreement).⁴⁷

B. Proposed Disclosure Threshold

Comments Supporting Proposed Threshold:

12. Three commenters support the "more than remote" disclosure threshold.⁴⁸

Related Comments:

• The lower disclosure threshold is warranted in light of the aggressive accounting standards in place for off-balance sheet transactions.⁴⁹

• Unsophisticated investors deserve an explanation of the potential risks even if such risks appear remote.⁵⁰

• The "more than remote" standard is consistent with Sarbanes-Oxley.⁵¹

Comments Opposed to Proposed Threshold:

13. Twenty-four commenters believe it would be appropriate, or preferable, to adopt the existing "reasonably likely" threshold for requiring disclosure of off-balance sheet arrangements.⁵²

14. Sixteen commenters believe that the "reasonably likely" threshold would be an appropriate interpretation of the language of the Sarbanes-Oxley Act.⁵³

15. Thirteen commenters believe that it would be preferable to have consistency throughout MD&A by adopting the "reasonably likely standard."⁵⁴

Related Comments:

• Ten commenters would object to achieving consistency by adopting the "more than remote" threshold for all of MD&A.⁵⁵

• Utilizing the reasonably likely standard will result in comparable disclosures among registrants by maintaining consistency with well-established MD&A thresholds.⁵⁶

• It would be confusing for registrants to apply two disparate standards within MD&A.⁵⁷

• Because the proposed disclosure threshold that is inconsistent with the current MD&A standard, it could possibly misinform, confuse or mislead investors about the likelihood and effect of off-balance sheet arrangements.⁵⁸

16. Sixteen commenters note that the "more than remote" threshold would require management to speculate about the effects of events that may be unlikely to occur; which may involve substantial effort while producing voluminous disclosure with limited meaningful information to investors.⁵⁹

17. Seventeen commenters believe that the proposed disclosure threshold could lead to undue prominence of this information in relation to other significant MD&A disclosure.⁶⁰

18. Three commenters believe that the "reasonably likely" standard is important because it allows management to present to investors the items that it considers to be important.⁶¹

19. Three commenters request that the Commission provide guidance that would enable issuers to apply the "more than remote" standard, if it were adopted.⁶²

Related Comments:

• The "remoteness" of an arrangement needs to be classified in terms of numerical probability so as to avoid disparity between individual interpretations of "remote" or "outside the realm of possibility."⁶³

• In light of the potential extensive disclosures under the "more than remote" standard, the Commission should require a summary MD&A section that would require disclosure of the principal factors driving financial results, the principal trends on which management focuses and the principal risks to the business.⁶⁴

• The number of events that could be characterized as remote has dwindled as events have occurred that previously were considered to be remote.⁶⁵

20. Three commenters believe that the "more than remote" standard could lead to increased hindsight liability if an item initially determined to be remote actually occurred in the future.⁶⁶

21. Five commenters believe that the disclosure would be drafted more with a view towards liability minimization than to inform investors.⁶⁷

22. One commenter states that the proposed threshold is troublesome because it would apply not only to contingent losses, but also to contingent gains arising from off-balance sheet arrangements.⁶⁸

23. Two commenters believe that the proposal alters the concept of materiality.⁶⁹

24. Two commenters believe that the proposal would require registrants to make more materiality determinations, which would impose a substantial burden.⁷⁰

25. Three commenters believe that the "more than remote" threshold is different or possibly inconsistent with the standards found in GAAP.⁷¹

C. Proposed Disclosure Items

Comments in Support of Proposed Disclosure Items:

26. Five commenters generally support the proposed disclosure requirements.⁷²

27. One commenter believes that the proposed rules are appropriately tailored; that current MD&A requirements often resulted in boilerplate language; that the proposed rules would promote more consistency, comparability and transparency in registrant's filings.⁷³

28. One commenter believes that the proposed disclosure of the nature and business purpose of off-balance sheet arrangements will be particularly helpful.⁷⁴

29. One commenter believes that the proposals provide enough flexibility to companies to fully and clearly describe their off-balance sheet arrangements and to yield comparable disclosures among registrants.⁷⁵

30. One commenter supports reasonable disclosure of off-balance sheet arrangements and contingencies, but states that the SEC needs to be concerned with the cumulative effect, including amount and sensitivity, of all of the new and proposed rules.⁷⁶

31. Four commenters support the proposal to cover only contractual obligations where a definitive agreement that is unconditional or subject only to customary closing conditions exists or, if there is no such agreement, when settlement of the transaction occurs.⁷⁷

32. Eight commenters state that the final rule should exclude preliminary negotiations, as proposed.⁷⁸

Comments Opposed to Proposed Disclosure Items:

33. One commenter is fundamentally opposed to further disclosure requirements regarding off-balance sheet arrangements.⁷⁹

34. Three commenters note that much of the disclosure would not be useful to investors and could be confusing because it could be based on information that is highly subjective and speculative.⁸⁰

35. Three commenters express concerns about the sensitivity and potential competitive harm of the required disclosures.⁸¹

Related Comments:

• The disclosure of the significant terms and conditions should not be required beyond general terms.⁸²

• The SEC should permit a company to appeal for specific exemptions for disclosure should the need arise.⁸³

36. Five commenters oppose to the detail-oriented, prescriptive nature of the proposals.⁸⁴

Related Comments:

• The proposed rules would result in voluminous disclosures.⁸⁵

• The Commission should adopt a more flexible principles-based approach to the MD&A disclosures.⁸⁶

• Companies should discuss in general qualitative terms the level and significance of off-balance sheet arrangements, the reasons for pursuing such arrangements and specific disclosure according to current standards of MD&A.⁸⁷

• The disclosures should focus on the reasonably likely potential impact on the company's financial condition and business risk.⁸⁸

• The final rules should explain that it is acceptable to disclose historical patterns as an appropriate measure of the expected ultimate obligation.⁸⁹

• The final rule should limit the disclosure so that it is required to the extent available and relevant.⁹⁰

37. One commenter believes that proposed Item 303 (a)(4)(ii) of Item 303 of Regulation S-K is not essential and may result in disclosure overload.⁹¹

Comments on Practicability:

38. One commenter seeks clarification of whether registrants would be required to disclose the assets and liabilities of entities conducting off-balance sheet activities that are unrelated (non-SPE) to the registrant.⁹² One respondent notes that it may be impossible to obtain the amount of assets and liabilities of unrelated (non-SPE) entities that conduct off-balance sheet activities on behalf of the registrant.⁹³

39. Two commenters believe that the proposals would require disclosure of entities in which a registrant has invested, but which carries out off-balance sheet activities of third parties (e.g., financing vehicles, multi-party conduit...).⁹⁴

Related Comments:

• It would be overly burdensome for registrants that invest in entities used by third parties for off-balance sheet arrangements to know whether the entity is used to conduct off-balance sheet arrangements, and to know the total assets and liabilities of the entity.⁹⁵

• The scope of disclosure should be limited to include only those entities through which the registrant conducts its own off-balance sheet activities.⁹⁶

40. Six commenters object to disclosure of arrangements between an unconsolidated entity and third parties because it would be onerous to collect and disclose information about arrangements over which the registrant may have no control.⁹⁷

Related Comments:

• The scope of the disclosure should be limited to include only those arrangements conducted between the registrant and the unconsolidated entity.⁹⁸

• It is unclear how a registrant becomes obligated without being a party to an arrangement.⁹⁹

• Depending on the structure and ownership interests of SPEs, management may neither be able to obtain information about the unconsolidated entity that conducts its off-balance sheet activities nor evaluate the potential effects.¹⁰⁰

41. One commenter believes that, in most cases the registrant would have adequate reporting from the third party to comply with the proposed disclosure requirements.¹⁰¹

Related Comments:

• If the registrant is unable to provide such disclosure, then a statement to that effect should be required and investors would be able to assess whether the registrant has adequate processes in place to monitor the risks associated with its contingent liabilities.¹⁰²

42. One commenter states that registrants may not have access to the amount and nature of assets in its SPEs.¹⁰³

43. One commenter requests the Commission to clarify the date at which the assets and liabilities of an SPE should be presented (because some SPEs have different reporting periods than the registrant).¹⁰⁴

44. One commenter suggests a disclosure requirement for exposures that individually or, related exposures in the aggregate, exceed a defined significance level. The disclosure would be limited to information that management is able to obtain and, if not available, management would disclose that it has an exposure for which no risk monitoring or evaluation is available.¹⁰⁵

Requests for Guidance or Clarification:

45. Two commenters request guidance on the proposed aggregation of off-balance sheet arrangements (e.g., arrangements that are immaterial on an individual basis may become material on an aggregate basis).¹⁰⁶

Related Comments:

• It is unclear whether the determination of current or future materiality is to be done in the aggregate, or on an arrangement-by-arrangement basis.¹⁰⁷

46. One commenter requests guidance of the periods for which the disclosures should be provided (e.g. revenues, expenses, cash flows) and suggests disclosure should be required as of the latest balance sheet date and corresponding latest fiscal year.¹⁰⁸

47. One commenter recommends that the Commission should specify that registrants would not have to repeat disclosure about off-balance sheet arrangements in quarterly reports if no material changes occur.¹⁰⁹

48. One commenter requests clarification of the meaning of the word "degree" in proposed Item 303(a)(4)(i)(D), which requires disclosure of the "degree to which the registrant relies on off-balance sheet transactions...."¹¹⁰

49. One commenter believes that, in proposed Item 303(a)(4)(ii), is unclear whether the proposed disclosure is required when an event is reasonably likely or merely above remote.¹¹¹

Additional Suggestions:

50. One commenter suggests that the historical financial impact of off-balance sheet arrangements (revenues, expenses, gains/losses, etc.), aggregated by type of transaction, be included in a tabular format.¹¹²

51. One commenter suggests requiring disclosure of the nature of subordination of a subordinated interest and any historical material financial impact that the registrant may have incurred as a result of such subordination (e.g., a loss on accounts receivable that were subordinate to accounts receivable sold to an SPE).¹¹³

52. One commenter suggest that if there are cross-default provisions, the registrant should disclose that defaults under existing obligations would trigger a default under the securitization, and the consequences of those defaults (e.g., termination of the securitization, loss of extra collateral pledged, impairment of subordinated assets).¹¹⁴

53. One commenter suggests that the rule be changed to include the following: "Disclose the following items to the extent necessary to an understanding of the effect of the off-balance sheet arrangements that currently have, or may in the future, a material effect...."¹¹⁵

54. One commenter recommends that proposed Item 303(a)(4)(i)(D) of Regulation S-K be deleted and the second sentence of that paragraph should be moved to paragraph (a)(4)(i).¹¹⁶

IV. Proposed Disclosure of Contractual Obligations and Contingent Liabilities and Commitments

A. Comments Applicable to Both Contractual Obligations and Contingent Liabilities and Commitments

Comments Supporting Proposals:

55. Six commenters generally support the proposed tabular or textual disclosure of contractual obligations and contingent liabilities and commitments.¹¹⁷

56. One commenter agrees that contractual obligations and contingent liabilities and commitments related to off-balance sheet arrangements should be included in the aggregate disclosure, and suggests that the Commission add an instruction to more formally communicate that point.¹¹⁸

57. One commenter states that, notwithstanding the disclosure requirements under GAAP and other SEC rules, investors would benefit from the proposed disclosure of aggregated information.¹¹⁹

58. One commenter agrees with the proposed approach to the interim updating of the proposed disclosure.¹²⁰

Comments Opposed to Proposals:

59. Four commenters oppose adoption of the disclosure of contractual obligations and contingent liabilities and commitments.¹²¹

60. One commenter believes that presenting this information outside of the financial statements detracts from the significance of the resources available to satisfy the obligations or from the importance of the totality of the financial statements.¹²²

61. Five commenters state that it would impose a large compliance burden.¹²³

Related Comments:

• Registrants would be required to assemble data not otherwise required for the preparation of financial statements (e.g., payments due by period under ordinary supply agreements, employment agreements, collective bargaining agreements and ordinary financing agreements), which they do not routinely collect today.¹²⁴

• If the Commission determines that the disclosure is required, it should focus only on off-balance sheet arrangements.¹²⁵

62. Four commenters believe that the proposal would not improve transparency.¹²⁶

Related Comments:

• Some of the proposed disclosure is already disclosed pursuant to GAAP in a manner that is easy to locate, provides sufficient detail and is well understood by the investment community.¹²⁷

• The disclosure would require discussion of data not comparable to line items in financial statements and may involve estimates of future amounts that cannot be known at the reporting date.¹²⁸

• The disclosures would combine a wide variety of different contractual obligations, many of which are executory and depend upon numerous, different future conditions or future performance by third parties in order to create enforceable obligations against the registrant.¹²⁹

• The table only presents cash outflows and not cash inflows.¹³⁰

• The enormous gap between the information proposed to be provided and the total picture of a company's financial circumstances is so broad that the information that is to be provided will be of minimum use.¹³¹

63. One commenter notes that, because some of the data would be from sources other than the registrant's financial records, auditor might be precluded by SAS 72 from providing comfort to financial intermediaries.¹³²

64. One commenter believes that MD&A disclosure of contractual obligations and contingent liabilities and commitments should be left to management's judgment of qualitative and quantitative factors.¹³³

Requests for Guidance or Clarification:

65. Two commenters request the Commission to provide instructions for completing the proposed disclosures of contractual obligations and contingent liabilities and commitments.¹³⁴

66. One commenter believes that the Commission should provide guidance regarding disclosure of short-term obligations.¹³⁵

67. One commenter believes that the proposed rule need not provide any additional instruction for preparing the table since the language currently included is clear and flexible enough to adapt to the many different registrants' capital structures.¹³⁶

68. One commenter states that the proposals do not include a disclosure threshold for contractual obligations and contingent liabilities and commitments.¹³⁷

69. Four commenters recommend that the Commission clarify and limit the scope of the items to be included in the table or text. ¹³⁸

Related Comments:

Comments on definitions:

• The Commission should adopt definitions for "contractual obligations" and "contingent liabilities."¹³⁹

• The Commission should not adopt definitions for "contractual obligations" and "contingent liabilities."¹⁴⁰

• The definitions should be derived from, if not identical to, the definitions outlined in SFAS 5.¹⁴¹

• The final rule should provide definitions of the line items in the table to enhance comparability among registrants.¹⁴²

Comments on exclusions:

• The disclosure should include a materiality threshold to avoid the burden of having to identify and evaluate insignificant contracts, contingencies or commitments.¹⁴³

• The disclosure should exclude ordinary course purchase orders and contracts for goods and services (particularly contracts for less than one year), as well as items for which U.S. GAAP would not require any disclosure in the financial statements and footnotes.¹⁴⁴

• The disclosure of contingent liabilities should exclude litigation, arbitration and regulatory actions.¹⁴⁵

• The final rules should exclude product warranties and guarantees, performance guarantees and contractual indemnifications.¹⁴⁶

• The disclosure of contractual obligations and commitments should be limited to contracts that require the payment of cash.¹⁴⁷

• In addition to cash payments, contracts or other commitments that involve the issuance of debt or equity securities that expose the registrant to risk of loss should be discussed through narrative, qualitative disclosure.¹⁴⁸

• The disclosure should be expanded to include legal obligations (e.g., asset retirement obligations) in addition to contractual obligations.¹⁴⁹

Additional Suggestions:

70. One commenter suggests that in addition to the proposals, registrants also should discuss those items effect the registrant's liquidity and capital resources.¹⁵⁰

71. Two commenters believe that the disclosure would be more appropriate in the footnotes to the financial statements.¹⁵¹

72. One commenter suggests that the final rule should include specific language referencing environmental liabilities with specific guidelines for estimating and disclosing those liabilities.¹⁵²

73. One commenter suggests that, where the amount of the obligation is not known, the instructions should allow disclosure of a range reflecting a reasonable estimate of the minimum and maximum amounts of the obligation.¹⁵³

74. One commenter suggests that the footnotes should be limited to provisions that create, increase or accelerate material obligations.¹⁵⁴

75. Two commenters suggest that the tabular or textual disclosure should be limited to contractual obligations and contingent liabilities that are otherwise required to be presented in the financial statements, footnotes, and elsewhere in quarterly and annual reports.¹⁵⁵

76. Five commenters believe that the rule should exclude notes, drafts, acceptances, bills of exchange or other commercial instruments with a maturity of one year or less issued in the ordinary course of business.¹⁵⁶

77. One commenter believes that the rule should include notes, drafts, acceptances, bills of exchange or other commercial instruments with a maturity of one year or less issued in the ordinary course of business because these items could have a very significant effect on short term liquidity.¹⁵⁷

78. One commenter suggests adding an instruction that no disclosure is required until a definitive agreement that is unconditional or subject only to customary closing conditions exists or, if there is no such agreement, when settlement of the transaction occurs.¹⁵⁸

B. Proposed Table of Contractual Obligations

Comments in Support of Proposal:

79. Three commenters support the proposed table of contractual obligations.¹⁵⁹

Comments in Opposition to Proposals:

80. One commenter notes that the proposed requirement to include footnotes to the table to describe provisions that create, increase or accelerate obligations or other pertinent provisions could, if read literally, require elaborate disclosure of financial and other covenants.¹⁶⁰

81. One commenter believes that certain obligations cannot be pigeon-holed into prescribed time frames, readily quantified and grouped into meaningful categories (e.g., 30-day termination provisions, renewal rights, variable production and price provisions).¹⁶¹

Requests for Guidance or Clarification:

82. Two commenters believe that it is not clear whether the list of items in the proposed tables is exclusive, or whether other contractual obligations must be disclosed which are not listed in the proposed table.¹⁶²

83. Two commenters request the adopting release provide examples of best practices for disclosure, such as an explanation of the types of contractual obligations and commitments required to be disclosed.¹⁶³

84. One commenter is unsure about whether disclosure of "unconditional purchase obligations" would only include instances where the product or service has already been delivered, because most purchase obligations are conditional upon delivery.¹⁶⁴

85. One commenter notes that "other long term obligations" would cover hundreds of categories of expenditures and it is not clear how a reporting company could meaningfully separate them to have a meaningful presentation in the table.¹⁶⁵

86. One commenter states that it is unclear whether "total contractual obligations" is supposed to be the sum of the rows in the table, or whether it should include other contractual obligations not reflected in the rows.¹⁶⁶

87. One commenter asks the Commission to clarify the meaning of "other pertinent data."¹⁶⁷

88. Three commenters request clarification on the relationship between contractual obligations and commercial commitments (e.g., contingent liabilities may stem from a contractual obligation).¹⁶⁸

Related Comments:

• Provisions that create or increase obligations are contingent liabilities, which are covered by proposed Item 303(a)(5)(ii).¹⁶⁹

• Because of the contingent nature of contractual obligations, it is difficult to estimate an ultimate dollar amount for inclusion in the table.¹⁷⁰

• Because of these contingencies, it is unclear whether tabular amounts should reflect minimum amounts, maximum amounts or an expected value calculation.¹⁷¹

89. Two commenters are unsure whether the table is meant to include not only obligations to pay money, but also obligations to provide products or services.¹⁷²

Related Comments:

• Inclusion of non-payment obligations, such as construction contracts, would require significant effort and introduce substantial uncertainty to the numbers provided.¹⁷³

• On the other hand, if only payment obligations are included, companies' ultimate contractual liability will be substantially understated.¹⁷⁴

90. One commenter requests clarification on whether the contractual obligations need to be divided by segment.¹⁷⁵

Additional Suggestions:

91. Two commenters recommend that the final rule clarify that the amounts to be reported in the table are consistent with GAAP measurement and disclosure requirements for contractual obligations, and would not include the disclosure of certain unconditional purchase obligations that are currently not required to be disclosed (or recognized) under GAAP (e.g., open purchase orders).¹⁷⁶

92. One commenter recommends that the final rule clarify that the obligations in the table are those where the cash flows are fixed or reliably determinable; and should exclude contractual arrangements where the amount and timing of cash flows are subject to market risk, which would already be included pursuant to Item 305 of Regulation S-K.¹⁷⁷

93. One commenter suggests that a contractual obligation could be defined as an obligation to pay cash or to provide goods, services or other assets to specified or determinable entities on demand, at specified or determinable dates, or on the occurrence of specified events, that is based on a legally binding, enforceable written or oral agreement. As an alternative, contractual obligations subject to the disclosure rules could be limited to legally binding, enforceable obligations under which the registrant would be required to pay cash upon settlement (that is, cash obligations).¹⁷⁸

94. One commenter suggests allowing registrants to include supplemental line items to the table for contractual cash inflows.¹⁷⁹

95. One commenter suggests providing issuers with the flexibility to supplement the information in the table with narrative information.¹⁸⁰

96. Three commenters suggest allowing flexibility to tailor the table to the registrant's particular circumstances.¹⁸¹

97. Three commenters believe that the table should not be accompanied by additional narrative disclosure regarding liquidity and capital resources beyond that which already exists in MD&A.¹⁸²

C. Proposed Disclosure of Contingent Liabilities and Commitments

Comments Supporting Proposals:

98. One commenter believes that improved contingent liability disclosure is definitely needed, but questions the utility of the proposed approach.¹⁸³

Comments in Opposition to Proposals:

99. Two respondents believe that loss contingencies would not lend themselves to the type of summarized disclosures contemplated by the proposals because they do not have an objectively determinable maturity or expiration.¹⁸⁴

100. Three respondents note that current MD&A requirements for known uncertainties would already require a discussion of loss contingencies or other contingent liabilities.¹⁸⁵

101. One commenter believes that the disclosure of possible ranges of exposures that are not derived from a contractual obligation could be highly misleading and is not consistent with a company's application of FIN 14 to its financial statements.¹⁸⁶

102. One commenter notes that disclosures of probability, which it views as the most important factor with respect to contingent liabilities, is not required.¹⁸⁷

103. One commenter states that, if the "higher than remote" standard is applicable to the tabular or textual disclosure of contingent liabilities and commitments, and disclosure is limited to contingent liabilities arising from contractual obligations, then the information would not be useful to investors because that information would already appear in the balance sheet or in response to the proposed off-balance sheet disclosure.¹⁸⁸

104. One respondent notes that in some cases, a range or the maximum liability would be meaningful, but the "expected" amount would not (e.g., any amount within a range has an equal chance of being incurred).¹⁸⁹

Requests for Clarification:

105. Seven commenters object to, or express confusion over, whether the proposals require including disclosure of proprietary loss contingencies (litigation, arbitration or regulatory matters).¹⁹⁰

106. Five commenters suggest that the Commission clarify the disclosure threshold for contingent liabilities.¹⁹¹

Related Comments:

• The rule should be revised to exclude those contingent liabilities that are remote or not reasonably estimable.¹⁹²

• The rule should have a materiality threshold to avoid extensive disclosure.¹⁹³

• The disclosure threshold should be "more than remote" so that the disclosures would be consistent with the off-balance sheet disclosure and FAS 5.¹⁹⁴

• The disclosure should be limited to transactions that management believes are (or is unable to determine are not) reasonably likely to have future material effects on the registrant's financial condition or results of operations.¹⁹⁵

Additional Suggestions:

107. Five respondents recommend that the Commission use and define the term "commercial commitments" instead of "contingent liabilities."¹⁹⁶

Related Comments:

• "Commercial commitments" should be defined as "potential cash outflows resulting from a contingent event that requires registrant performance pursuant to a funding commitment, such as lines of credit, standby letters of credit, guarantees and standby repurchase obligations."¹⁹⁷

• The adopting release should include a more comprehensive list of commercial commitments that should be included within the scope of the disclosure.¹⁹⁸

• The final rules should specify that disclosure is only required for obligations and commitments that are non-cancelable or irrevocable, or that are subject to significant penalties for cancellation or modification.¹⁹⁹

108. Four commenters suggest that the rule should limit the disclosure to contingent liabilities arising out of contractual arrangements, or that are financial in nature, and exclude loss contingencies (litigation, arbitration... etc.), product warranties, pension fund contributions, 401(k) matching contributions and other known but uncertain payment obligations.²⁰⁰

109. One commenter states that the disclosure would be more useful if it produced standardized values that would provide a basis for meaningful comparison among companies (similar to Item 305).²⁰¹

110. One commenter suggests that narrative descriptions of the circumstances that could change the registrant's ultimate obligation should also be included.²⁰²

111. One commenter states that the disclosure requirements should be clearly reconciled with current footnote disclosure of commitments and contingencies.²⁰³

112. Two commenters request clarification or revision to the term "expected amount."²⁰⁴

Related Comments:

• The adopting release should provide guidance as to how registrants should calculate "expected" amounts of contingent liabilities.²⁰⁵

• In addition to the "expected amount," the rule should allow registrants to disclose reasonably possible additional amounts (consistent with SFAS 5).²⁰⁶

113. One commenter suggests that the high end of the "range" should represent the highest amount that has a more than remote chance of being paid.²⁰⁷

114. One respondent requests clarification of the updating requirements for contingent liabilities and commitments.²⁰⁸

115. One commenter recommends that the Commission consider whether the additional disclosure about guarantees required for FASB Financial Interpretation No. 45 would obviate the need for some of the proposed disclosures about guarantees.²⁰⁹

V. Other MD&A Disclosure

Codification of FR-61:

116. Three commenters note that the proposals are generally consistent with the recommendations in the petition for interpretive guidance submitted by the Big 5 and endorsed by the AICPA as well as FR-61.²¹⁰

117. One commenter believes that the proposals include additional requirements than FR-61, such as residual value guarantees in leasing arrangements, equity derivatives, and many other loss contingencies.²¹¹

118. One commenter believes that the various requirements of FR-61 that were not required by the Sarbanes-Oxley Act should have been incorporated in the rulemaking.²¹²

119. Five commenters believe that current disclosure requirements for related party transactions are sufficient to elicit meaningful disclosure, and that codification of FR-61 is not necessary.²¹³

120. Three commenters suggest that the Commission should not require more specific disclosure about liquidity and capital resources.²¹⁴

121. Two commenters believe that the Commission should codify the factors identified in FR-61 regarding management's identification of trends, demands, commitments, events and uncertainties that require disclosures with respect to liquidity and capital resources.²¹⁵ One commenter believes that the Commission should not.²¹⁶

122. One commenter suggests that, while codification may not be necessary, the adopting release should reiterate registrant's disclosure obligations for related party transactions as articulated in FR-61.²¹⁷

123. One commenter suggest that, if the Commission wishes to codify the remainder of FR-61, then it should issue a proposing release and provide an opportunity for comment.²¹⁸

124. One commenter recommends that the SEC rescind any superseded portions of FR-61 in order to avoid potential confusion from duplicative or inconsistent guidance.²¹⁹

Additional Suggestions:

125. One commenter recommends a disclosure requirement (e.g., continued availability of access to off-balance sheet markets, interest rate risks, credit quality risks) if there is material reliance on off-balance sheet arrangements for either the liquidity or profitability, or both.²²⁰

126. One commenter believes that companies should provide a pro forma capital structure showing the full effects of all off-balance sheet financing entities and the effects of major special purpose entities should be shown separately and not netted together. In addition, the commenter suggests that companies should discuss the effects of off-balance sheet arrangements on new financing agreements²²¹

127. One commenter believes that the MD&A should show the potential effects that imputed debt service from the special purpose entity may have on the covenants in the various financing agreements for the company.²²²

128. One commenter believes that the MD&A should clearly state that the effects on earnings per share from all special purpose entities are non-core earnings. Earnings per share should be shown on an actual basis, and then shown adjusted for the effects of the non-core earnings from the special purpose entities.²²³

129. One commenter believes that the MD&A should include a description of all interests or owners in the special purpose entities and a discussion of counter party credit risk for each of the major counter parties.²²⁴

130. One commenter would support additional MD&A rulemaking initiatives for: (1) enhanced discussion of line items of the financial statements; (2) more detailed discussions of recurring extraordinary charges; and (3) greater disclosure about the trends that management evaluates in making decisions about its business.²²⁵

VI. Application to Foreign Private Issuers

131. Three commenters believe that the proposals should be equally applicable to foreign private issuers other than MJDS filers.²²⁶

132. Two commenters believe that the proposals should not apply to MJDS filers.²²⁷

133. Four commenters believe that the Sarbanes-Oxley Act does not, and should not, require the proposals to be applied to foreign private issuers and MJDS filers.²²⁸

Related Comments:

• Congress should not be presumed to have taken away the Commission's rulemaking authority simply because foreign private issuers were not identified in the Sarbanes-Oxley Act.²²⁹

• The inclusion of foreign private issuers is inconsistent with the Commission and the Exchange's policies on encouraging foreign private issuers to participate in U.S. capital markets.²³⁰

• The Commission should, by rule, exempt foreign private issuers despite the fact that the Sarbanes-Oxley Act did not distinguish between foreign private issuers and U.S. companies.²³¹

• Amending Form 20-F will undermine the achievement represented by the IOSCO Standards and the 1999 amendments to Form 20-F.²³²

• Amending Form 40-F is inconsistent with the principles underlying MJDS.²³³

• Amending Form 40-F would undermine the recent disclosure and enforcement initiatives of the Ontario Securities Commission and the Ontario Legislative Assembly.²³⁴

• There is nothing in the legislative history of the Sarbanes-Oxley Act that indicates that Congress intended to abrogate the understandings reached by the Commission with IOSCO and the Canadian Securities Administrators.²³⁵

• The Commission should first have substantive consultations with IOSCO and the Canadian Securities Administrators before amending Forms 20-F and 40-F.²³⁶

• If the Commission wishes to apply the proposed rules to foreign private issuers without consultation, then the Commission should amend the proposals so that Forms 20-F and 40-F do not require disclosure in MD&A of matters that are not required to be disclosed under IOSCO standards or Canadian standards.²³⁷

• Foreign private issuers are concerned about making different disclosures in different markets.²³⁸

• Foreign private issuers are sometimes resentful of Commission rules that substitute new U.S. disclosure rules for the established home country disclosure practice.²³⁹

• The Commission should be sensitive to driving foreign private issuers out of the U.S. markets or to exclude U.S. investors from participating in global offerings.²⁴⁰

134. Four commenters believe that the final rule should not include updates to the proposed disclosure in foreign interim financial reports submitted under cover of Form 6-K.²⁴¹

135. One commenter suggests that the Commission clarify that if an entity is unconsolidated under non-U.S. GAAP, but consolidated in the reconciliation, then the entity would be deemed consolidated for the purposes of the off-balance sheet disclosures.²⁴²

136. One commenter requests that the final rule neither require the disclosure of contractual obligations and contingent liabilities and commitments for Form 40-F, nor require any of the proposed disclosures for initial Exchange Act registration on Form 40-F.²⁴³

137. Two commenters express confusion as to whether the definition of off-balance sheet arrangements would apply to the primary financial statements of a foreign private issuer, or on the basis of a U.S. GAAP treatment.²⁴⁴

Related Comments:

• The final rule should clarify that foreign private issuers need only provide the off-balance sheet disclosures with respect to their non-U.S. GAAP primary financial statements and not the U.S. GAAP reconciliation.²⁴⁵

• Clarification is necessary where the financial statements are prepared in accordance with IFRS/IAS.²⁴⁶

VII. Proposed Safe Harbor for Forward-Looking Information

138. Six commenters believe that there is a need for the proposed safe harbor for forward-looking information.²⁴⁷

Related Comments:

• There is a need for a safe harbor because the proposed rules require, not encourage, forward-looking information and it is therefore important to remove any doubt about the applicability of the safe harbor.²⁴⁸

• The proposed safe harbor is necessary to reinforce the statutory safe harbors and close any loopholes for potential private litigation.²⁴⁹

• The risk associated with providing forward-looking information is significant and additional safe harbor provisions could encourage greater disclosure.²⁵⁰

• The safe harbor should be modeled after Securities Act Rule 175 and Exchange Act Rule 3b-6 and the appropriate safe harbor would be that the statement be made in good faith and with a reasonable basis.²⁵¹

139. One commenter notes that if the "more than remote" standard were adopted, the cautionary language required by the safe harbors would become expansive, boilerplate and obfuscating.²⁵²

140. Two commenters believe that the safe harbor should cover the information required by proposed Item 303(a)(5)(i) and (ii).²⁵³

141. One commenter believe that the safe harbor should cover the information required by proposed Item 303(a)(4) and (5).²⁵⁴

142. Nine commenters believe that the safe harbor for forward-looking information should be expanded to cover all MD&A.²⁵⁵

143. One commenter suggests that the Commission should provide that a registrant providing the required information would be deemed to have provided adequate cautionary language.²⁵⁶

144. One commenter believes that the proposed safe harbor should affirmatively state that the exclusions from the statutory safe harbor for IPOs, tender offers, direct participation offerings and other exclusions should not apply to the proposed disclosure.²⁵⁷

145. One commenter suggests that the Commission should consider whether separate relief under Rules 175 and 3b-6 is appropriate.²⁵⁸

146. One commenter suggested that the Commission explicitly apply the safe harbor to business development companies.²⁵⁹

147. One commenter believes that there is no need to expand the proposed safe harbor to apply to all MD&A.²⁶⁰

148. One commenter states that an unintended consequence of the proposed safe harbor is the negative implication that the other safe harbors are not available for the remaining parts of MD&A and that this implication should be corrected.²⁶¹

149. One commenter believes that the statutory safe harbors are sufficient to encourage the type of information and analysis necessary for investors to understand the impact of off-balance sheet arrangements.²⁶²

VIII. Disclosure Presentation

150. Five commenters believe that the issuer should be able to determine the placement of the off-balance sheet disclosures within the MD&A.²⁶³

151. Two commenters are in favor of a separate disclosure section for off-balance sheet disclosures because it would either mitigate any confusion created by the different disclosure thresholds within MD&A, or enable investors to easily obtain the information.²⁶⁴

152. One commenter states that a separate section may not be necessary, but off-balance sheet arrangements should be properly labeled.²⁶⁵

153. One commenter believes that registrants should not be required to repeat analysis in both the general MD&A and in a separate "off-balance sheet" section.²⁶⁶

154. Two commenters suggests that the MD&A rules should be amended to require separate captions or subsections of Results of Operations and Capital Resources and Liquidity to incorporate the changes of the proposed rule.²⁶⁷

155. One commenter opposes a requirement of separate captions of Results of Operations and Capital Resources and Liquidity.²⁶⁸

156. One commenter suggest that some of the proposed disclosure would be more appropriate in the footnotes to the financial statements.²⁶⁹

IX. Transition

157. One commenter believes that a relatively short transition time would be appropriate.²⁷⁰

Related Comments:

• The rules should apply for year-end and interim reports for periods ending on or after December 15, 2002) since the proposed disclosure requirements are generally consistent with FR-61.²⁷¹

• The rules should be effective for fiscal years beginning no sooner than December 15, 2002.²⁷²

158. Three commenters urge the Commission to provide a long transition period to allow registrants ample time to comply with the rule.²⁷³

Related Comments:

• It will take considerable effort and resources to identify and calculate contractual obligations and to assess the expected amount of contingent liabilities and commercial commitments.²⁷⁴

• The rules should not apply to annual reports on Form 10-K for calendar years ending on December 31, 2002.²⁷⁵

• The rules should first apply to fiscal years ending on or after September 15, 2003.²⁷⁶

• The disclosure should be required for the third quarter 2003 Form 10-Qs.²⁷⁷

• The rules should first apply to fiscal years ending on or after December 15, 2003.²⁷⁸

• The rules should be effective for interim periods beginning after than March 15, 2003.²⁷⁹

• The rules should first apply to fiscal years ending on or after September 15, 2004 for foreign private issuers (consistent with implementation of S-Ox Section 404).²⁸⁰

• The rules should not become effective for foreign private issuers except for fiscal years commencing on or after January 1, 2003.²⁸¹'

• The rules as proposed should only be applied to fiscal years ending on or after December 15, 2003.²⁸²

• If narrowed, the rules should apply to fiscal years ending on or after September 15, 2003.²⁸³

159. One commenter suggests that the SEC establish a pilot program to implement the rule.²⁸⁴

160. One commenter suggests that, if a periodic report that does not contain the proposed disclosure is filed before the final rule becomes effective, then an amendment should not be required when that report is incorporated by reference into a '33 Act registration statement (instead, any additional disclosures should be required either in the registration statement, or the next periodic report).²⁸⁵

X. PRA and Cost-Benefit Analysis

161. Two commenters believe that the average estimate of 37 hours per registrant seriously underestimates the compliance burden.²⁸⁶

162. One commenter provided a summary of their burden to implement the rule:

• Dissemination of new disclosure requirements to all business group leaders - 18 hours;

• System modifications necessary to produce and properly test "aged" required reports - 120-160 hours;

• Gathering of information - 40 hours

• Drafting - 12 hours

• Cross-referencing disclosures to footnote disclosure requirements to ensure consistency - 4 hours.²⁸⁷

163. One commenter notes that, in view of the limited number of public companies that may have failed to provide disclosures, it has significant reservations about whether the additional cost of regulation is justified.²⁸⁸

164. One commenter states that compliance with the proposed requirement to include a tabular or textual disclosure of contractual obligations and contingent liabilities and commitments would require most companies to implement tracking and monitoring systems for contractual obligations and commitments (which would cost approximately $75,000 to $125,000 for software, with annual personnel costs of $90,000 to $125,000, plus an additional $25,000 for other costs).²⁸⁹

165. One commenter, commenting on the types of expenses, believes that significant legal, accounting and internal costs (including collection and monitoring systems) will be incurred in order to comply with the proposed disclosure.²⁹⁰

166. One commenter estimates the cost for a large multinational company to be about $2 million.²⁹¹

XI. Miscellaneous Comments

General Comments About the Proposals:

167. Five commenters express support for the proposals.²⁹²

168. Eighteen respondents support the SEC's goals to enhance disclosures of off-balance sheet arrangements, contractual obligations and contingent liabilities and commitments.²⁹³

169. Six respondents state that they agree with the general approach of the proposals.²⁹⁴

170. Four commenters believe that the proposals are more expansive than the congressional mandate of Section 401(a) of the Sarbanes-Oxley Act.²⁹⁵

Related Comments:

• There is nothing in the legislative history to support the expansive approach of the Commission.²⁹⁶

• The language of the S-Ox Act is expressed in general terms, clearly leaving the details to the discretion of the Commission.²⁹⁷

• Proper application of existing MD&A standards, combined with guidelines from the Commission regarding off-balance sheet arrangements, would be an appropriate response to the concern identified by the S-Ox Act.²⁹⁸

171. One commenter expressed concern about the increased potential for liability in connection with registered offerings. In particular, the requirement of financial statement-type information in the MD&A without the benefit of auditor expertisation would add to an underwriter's burden when conducting due diligence.²⁹⁹

172. Two commenters note that the public may not have had sufficient time to fully consider and comment on the proposals and that the Commission should be sensitive to modifying the rules if unintended consequences become evident.³⁰⁰

173. One commenter suggests that the SEC should rethink the long-term role of MD&A and consider bifurcating it into an operationally focused section and a financially focused section.³⁰¹

174. Two commenters believe that the disclosure of off-balance sheet arrangements would be more appropriately addressed by changes in GAAP than by SEC rulemaking.³⁰²

175. One commenter requests that the Commission encourage FASB to address off-balance sheet arrangements (which could be addressed as part of the joint FASB/IASB convergence project).³⁰³

176. One commenter suggests that the SEC and PCAOB form a joint task force to address the issues regarding public disclosure and determine an overall strategy for the best presentation.³⁰⁴

177. One commenter suggests that the Commission undertake a formal review of MD&A and provide the marketplace with examples of good and bad disclosure.³⁰⁵

178. One commenter believes that the Commission is confusing the purpose of the MD&A (contextual information) with the purpose of the financial statement footnotes (information essential to fair presentation of the financial statements).³⁰⁶

179. One commenter believes that the disclosure concerns addressed by the Sarbanes-Oxley Act represent flagrant violations of current disclosure rules; that new rules will not remedy the concerns; and that only enforcement action will remedy the concerns.³⁰⁷

180. One commenter cautions against taking a piecemeal codification of MD&A and suggests that the Commission adopt a rule for summary MD&A.³⁰⁸

181. One commenter believes that the rule proposals were being rushed through to satisfy Congress.³⁰⁹

Additional Suggestions or Clarifications:

182. Two commenters note that there is an apparent overlap between the two aspects of the proposals (off-balance sheet arrangements vs. aggregate contractual obligations, contingent liabilities and commitments).³¹⁰

Related Comments:

• It is not clear how the definitions, exclusions, disclosure thresholds and other instructions (particularly contingent liabilities) apply to the off-balance sheet arrangements aspect and the tabular/textual aspect of the proposals.³¹¹

• The SEC should adopt consistent definitions and disclosure requirements for both aspects of the final rule.³¹²

• The two aspects of the proposals should be merged to avoid duplication.³¹³

183. Seven commenters note that some of the proposed disclosures appear to be redundant with existing MD&A, Regulation S-K, current and future GAAP requirements (e.g., FAS 140, FIN 45 and the FASB's proposed SPE consolidation interpretation) or regulatory requirements (e.g., banks).³¹⁴

Related Comments:

• MD&A disclosure should be required only to the extent not already provided in the financial statements.³¹⁵

• The final rule should be coordinated with other rulemakings, standard setting initiatives or existing disclosure requirements to be less repetitive or not conflicting.³¹⁶

• Registrants should be allowed to incorporate repetitive information by reference.³¹⁷

• Disclosure about derivatives provided pursuant to Item 305 of regulation S-K should be excluded from the disclosure about off-balance sheet arrangements, or that the Commission add disclosure requirements to Item 305 and delete the derivatives component of the proposal.³¹⁸

184. One commenter suggests that the Commission should satisfy the legislative mandate in Sarbanes-Oxley by adopting a rule stipulating that compliance with the new FASB rules on off-balance sheet arrangements (FIN 45 and SPE Consolidation) would satisfy the disclosure obligations mandated by Sarbanes-Oxley.³¹⁹

185. Two commenters believe that the Commission should clarify the interim updating requirements of the proposed disclosure.³²⁰

Related Comments:

• The Commission should change the reference in Instruction 7 to paragraph (b) of Item 303 from "quarterly report on Form 10-Q" to a broader reference to interim MD&A in general.³²¹

• The instruction should indicate that registrants are not required in quarterly reports to repeat the tabular or textual disclosure that may be provided for contingent liabilities and commercial commitments.³²²

• The final rule should clarify that disclosure in quarterly reports about off-balance sheet arrangements should be limited to a discussion of material changes.³²³

186. Three commenters request that the adopting release contain guidance or examples of disclosures that would illustrate alternate approaches to complying with the disclosure objectives and disclosure expectations for different industries (e.g., financial companies).³²⁴