July 24, 2002

Via U.S. Mail and Electronic Filing

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Proposed Disclosure Requirements in Management's Discussion and Analysis about the Application of Critical Accounting Policies, Release No. 33-8098; 34-45907; File No. S7-16-02

Dear Mr. Katz:

The Investment Counsel Association of America¹ appreciates the opportunity to submit comments related to the Commission's proposed disclosure about critical accounting estimates and the initial adoption of accounting policies that have a material impact on an issuer's financial presentation.²

ICAA members manage trillions of dollars in assets for institutional and individual investors, and require clear and complete accounting information from issuers to make appropriate investment decisions on behalf of their clients. The accounting information provided in an issuer's Management's Discussion and Analysis ("MD&A") is an important focus of our members in terms of evaluating and assessing that issuer as an investment prospect. We believe that the proposals will provide an improved understanding of an issuer's financial condition through the eyes of management, and will arm investment managers and others with better information to assess an issuer's accounting practices. The ICAA strongly supports the Commission's aim of making higher quality and more insightful financial information available to investors and the securities markets.

A. Critical Accounting Estimates

The proposal would require, in a new section in the MD&A, detailed information about critical accounting estimates. The proposals generally require three types of detailed disclosure for each critical accounting estimate: (i) disclosure that provides the reader with sufficient information to understand the estimate, including the methodology used, the assumptions underlying the estimate, and trends that may affect the estimate; (ii) information related to the impact of changes in the estimates, including quantitative discussion of the impact of the use of either different material assumptions or of high or low ends of an estimated range, and a quantitative and qualitative discussion of management's history of changing its critical accounting; and (iii) a statement as to whether senior management discussed the development, selection and disclosure of the estimates with the issuer's audit committee.

1. Definition of Critical Accounting Estimate

The ICAA generally supports the definition of "critical accounting estimate" as proposed. An accounting estimate would be considered critical under the proposals if: (i) it is based on assumptions about matters that are highly uncertain, requiring the exercise of significant judgment by management; and (ii) the reasonable use of a different estimate in the current period or reasonably likely changes in the estimate from period to period would have a material impact on the issuer's financial presentation. The ICAA agrees that this definition is designed appropriately to identify accounting estimates that have a reasonably high potential to materially affect an issuer's financial presentation.

• We recommend expanding the definition to include disclosure of volatile accounting estimates that entail complex methodologies not commonly used, even if such estimates do not involve significant management judgment.

• We agree with the Commission's desire to strike a balance between providing and overwhelming the markets with information. Nevertheless, in lieu of, or perhaps in addition to the Commission's suggestion of a maximum limit on the number of accounting estimates, we recommend that each issuer be required to prioritize its accounting estimates. Such prioritization would allow investors and the securities markets greater access to management's perception of the relative importance of these estimates to the issuer's financial condition.

• We understand the definition of "critical accounting estimate" to include situations where management must make subjective judgments regarding assets that do not have publicly available, transparent market prices. Our members require better disclosure from issuers regarding fair market value accounting of such assets (e.g., venture capital investments or derivative contracts).

2. Description of Accounting Estimates

The proposals would require issuers to "identify and describe the accounting estimate in such a way that it gives the appropriate context for investors reading that section and reflects management's view of the importance of the critical accounting estimate."³ We support this proposal and further recommend that the Commission clearly require issuers to provide enough context to allow analysts to compare accounting estimates and policies regarding these estimates across industry sectors. For example, it would be very helpful for an issuer to discuss what input variables or estimates are typical or standard in the issuer's sector and how the issuer's input estimates compare with those of other issuers in the industry.

3. Quantitative Disclosures

The proposals require a presentation of quantitative information: (i) to demonstrate the sensitivity of financial results to changes made in connection with each critical accounting estimate; and (ii) relating to historical changes in an issuer's critical accounting estimates in the past three years. The proposal includes two choices of changes an issuer may assume for purposes of the sensitivity analysis: (a) it may assume that it changed the most material assumptions underlying the critical accounting estimate and discuss the results of these changes; or (b) it could choose to assume that the critical accounting estimate itself changes. The issuer is permitted to determine the amount of the change that it assumes for purposes of this analysis.

• The ICAA encourages the adoption of standardized disclosures that foster straightforward comparison by investors and the securities markets.

4. Management Discussion with the Audit Committee

The proposals would require senior management to discuss the critical accounting estimates with the audit committee of the issuer's board of directors. We strongly support this proposal and agree that this type of safeguard has great potential to improve the quality and the transparency of disclosure by acting as a catalyst for discussion between audit committees and senior management.

• We support additional disclosure of any unresolved concerns of the audit committee related to MD&A disclosure that has, or may have, a material impact on the financial condition of the issuer.

• We support the coordination of the proposed disclosure with amendments to Item 306 of Regulation S-K and Regulation S-B to promote consistency and reduce redundancy.

• When an issuer's accounting policies diverge from the policies predominately applied by those in the industry, we would support disclosure by the issuer as to whether senior management has discussed such policies with the audit committee. Similarly, we would support the disclosure of any unresolved concerns of the audit committee related to the divergent policies, to the extent such concerns relate to a material aspect of the issuer's financial condition. As indicated above in Section A.2 of this letter, we support disclosure when an issuer's accounting estimates or policies diverge from industry standard.

5. Disclosure Relating to Segments

Assessing the relative strengths and weaknesses of an issuer's business segments may be extremely important in weighing an investment decision. The proposals require disclosure regarding the impact of critical accounting estimates on segments of an issuer's business. The ICAA agrees such disclosure would be beneficial, as it would allow investors to determine which reported segments' results are dependent on management's subjective estimates.

• We recommend that the Commission provide further guidance on the definition of "segment" and the circumstances that warrant segment disclosure.

B. Quarterly Updates

We support the requirement that issuers evaluate and update necessary critical accounting estimates on a quarterly basis. This requirement will allow investors and financial analysts to evaluate these important indicators on a more current basis.

C. Adoption of Accounting Policies

The proposals generally require each public company issuer to disclose information about its initial adoption of an accounting policy that has a material impact on its financial presentation, unless such adoption was required by a new accounting standard or other generally accepted accounting guidance. The proposals require disclosure related to: (i) the events or transactions that gave rise to the adoption; (ii) the accounting principle adopted; and (iii) the impact on the issuer's financial presentation.

• The ICAA supports the disclosure of the effects of a change by an issuer from one accounting policy to another acceptable accounting policy under GAAP. We believe that disclosure of changes in accounting policies should be provided regardless of whether or not numbers in the financial statements materially change. For example, a change in revenue recognition, return policy, or recognition of losses on receivables that cause revenue or expenses to be rolled forward or back in reporting periods should be discussed in the MD&A, regardless of whether there is a material impact on the issuer's financial condition at the time of the policy change.

• We support disclosure, beyond an issuer's initial adoption of accounting policies, of the effects of applying accounting policies used for unusual or innovative transactions or in emerging areas which have or are anticipated to have a material impact on the financial condition of the issuer.

• The ICAA further supports disclosure regarding an issuer's choice of accounting methods under GAAP, when such method is not generally used by other companies in the industry.

• We would not recommend that issuers be required to provide disclosure related to the effects of acceptable alternative policies that were not chosen, because such disclosure may be overly burdensome and may detract from the more important goal of improving material disclosure about the issuer's actual accounting practices.

D. Disclosure Presentation

We strongly support the Commission's proposal that the information be presented in a separate section of the MD&A, with appropriate cross-references to applicable sections, rather than integrating the material throughout the existing structure.

E. Further MD&A Proposals

We applaud the Commission's commitment to continue to improve MD&A disclosures, and we appreciate an opportunity to express our specific views in this respect.

• We are concerned that the line items of financial statements in sections such as "Other Assets and Other Liabilities" may be used to hide leverage and other material arrangements that can have an impact on liquidity. Therefore, we support an enhanced plain-English discussion of these line items in the MD&A.

• We are concerned about the use of recurring extraordinary charges to conceal operating expenses that should be expensed as a cost of doing business. We understand that inventory writedowns, large loans, and the closings of business operations are common sources of inappropriate extraordinary charges. Therefore, we encourage the Commission to require more detailed discussion of recurring extraordinary charges in the MD&A, including the nature of the charges, the reason for the writedown, and the future consequences to the issuer. This disclosure would aid investors in determining whether these are truly extraordinary or just normal operating expenses.

• We recommend revising the cover pages of filings to facilitate simple identification of important information by investors and the securities markets, including larger print in general and more prominent display of the date.

• We support the addition of a plain-English summary in which management describes the trends and risks on which it focuses, and identifies the most important factors in determining the financial results and condition of the company.

• We support greater and more complete plain-English disclosure of material items, and disclosure regarding liquidity, off-balance-sheet arrangements, contractual obligations and commercial commitments, trading activities involving commodity contracts, and the effects of transactions with related parties.

• We also support improved plain-English disclosure related to the trends that management evaluates in making decisions about its business.

The ICAA strongly supports the Commission's efforts to rebuild investor confidence in the securities markets through improvements to the financial reporting system for publicly traded companies. The Commission's proposed enhancements to the quality and content of MD&A disclosure is a significant step toward improving the ability of investors to understand issuer financial statements. We appreciate the opportunity to comment on this important proposal and would be pleased to provide any additional information.

Sincerely,

KAREN L. BARR
General Counsel

cc: Harvey L. Pitt, Chairman
Isaac C. Hunt, Jr., Commissioner
Cynthia A. Glassman, Commissioner
Paul F. Roye, Director, Division of Investment Management

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1	The ICAA is a not-for-profit association that consists exclusively of SEC-registered investment adviser firms. Founded in 1937, our current membership is comprised of approximately 300 firms that collectively manage more than $3 trillion in assets for a wide variety of institutional and individual clients. For more information please visit www.icaa.org.
2	Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies, Release Nos 33-8098; 34-45907 (May 10, 2002) ("Proposal").
3	Proposal at 16.