Comments on loss and valuation accrual accounts and supplementary financial information.

April 19, 2000

The following letter, which was filed with the Securities and Exchange Commission on April 19, 2000, was prepared under the aegis of TEI's Federal Tax Committee, whose chair is Philip G. Cohen of Unilever United States Inc. Contributing to the development of TEI's comments were Fred Lesser of Lucent Technologies and Daniel P. Bork of Lexmark International, Inc.

On January 21, 2000, the United States Securities and Exchange Commission issued proposed rules that would amend the Code of Federal Regulations to specify certain disclosures required of SEC registrants. On behalf of Tax Executives Institute, I am writing to express TEI's serious reservations about one aspect of the proposed rules. Specifically, we are very concerned about the requirement to disclose, pursuant to Item 302(c), additional confidential company information relating to accruals for contingent income and franchise tax liabilities. Because of TEI's focus on business tax issues, we shall limit our comments on the proposed rules to Item 302(c) and the issues surrounding disclosure of such accruals. We will not address other loss or valuation accruals nor will we address the proposed rule adding Item 302(d), relating to property, plant, and equipment and related accumulated depreciation, depletion, and amortization.

Background

Tax Executives Institute is the preeminent association of corporate tax executives in North America. Our nearly 5,000 members are employed by approximately 2,700 companies in the United States, Canada, and Europe. TEI represents a cross-section of the business community, and is dedicated to the development and implementation of sound tax policy and to promoting the uniform and equitable enforcement of the tax laws. The Institute is proud of its record of working with congressional committees, government agencies, and other policy-making bodies (including the Financial Accounting Standards Board) to minimize the cost and burden of tax administration and compliance to the mutual benefit of the government, business, and ultimately the public. Most TEI members' companies are SEC registrants that must comply with the Commission's accounting and disclosure rules as well as with the statements of generally accepted accounting principles (GAAP) prescribed by the FASB. In addition, TEI members' companies are subject to frequent -- often continual -- examinations by the Internal Revenue Service and other tax administrators, including those in state, local, and foreign jurisdictions. Hence, we believe that the diversity, background, and professional training of our members provide us with a uniquely qualified position from which to comment on the Commission's proposed rules insofar as they affect the reporting and disclosure of contingent tax liabilities.

Summary of Proposed Rules and TEI's Position

The Commission proposes to reposition certain supplementary schedule information currently required under Rule 12-09 of Regulation S-X within a new Item 302(c) of Regulation S-K. Item 302(c) would both clarify and expand the scope of disclosure of information relating to valuation and loss accrual amounts, including but not limited to 12 enumerated categories of loss accruals. Among the categories of detailed schedules are valuation allowances for deferred tax assets and contingent income and franchise tax liabilities recorded pursuant to FASB Statement No. 5. In addition, the proposed rules would add a new Item 302(d) to provide additional information concerning tangible and intangible long-lived assets and related accumulated depreciation and amortization.

The proposed rule adding Item 302(c) would require companies to disclose in schedular format the reserves for each significant element comprising a particular category of contingent liability. The information reported for each period for which an income statement is presented would include the opening balance, additions charged to expense, deductions, other increases (or decreases) not charged (credited) to expense (with explanations), and the closing balance of the account. Any changes in assumptions having a material effect on the account would also have to be disclosed. Hence, the amount of tax accrued as a contingency for each...