Staff Accounting Bulletin No. 98 — SEC — US

SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 211 [Release No. SAB 98] Staff Accounting Bulletin No. 98 AGENCY: Securities and Exchange Commission. ACTION: Publication of Staff Accounting Bulletin. SUMMARY: This staff accounting bulletin revises the views of the staff contained in certain topics of the staff accounting bulletin series to be consistent with the provisions of certain accounting standards recently adopted by the Financial Accounting Standards Board. Topics include: Topic 1.B—Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity; Topic 3.A—Convertible Securities; Topic 4.D—Earnings Per Share Computations in an Initial Public Offering; Topic 6.B.1—Income or Loss Applicable to Common Stock; and Topic 6.G.1— Selected Quarterly Financial Data (Item 302(a) of Regulation S–K). EFFECTIVE DATE: February 3, 1998. FOR FURTHER INFORMATION CONTACT:
Cody L. Smith, Office of the Chief Accountant (202–942–4400), Kenneth T. Marceron, Division of Corporation Finance (202–942–2960), Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 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. Dated: February 3, 1998. Margaret H. McFarland, Deputy Secretary.
PART 211—[AMENDED]
Accordingly, Part 211 of Title 17 of the Code of Federal Regulations is amended by adding Staff Accounting Bulletin No. 98 to the table found in Subpart B. Staff Accounting Bulletin No. 98 The staff hereby amends the following in the Staff Accounting Bulletin Series:
(a) Topics 1.B.2 and 1.B.3, regarding the allocation of expenses and related

Federal Register / Vol. 63, No. 26 / Monday, February 9, 1998 /Rules and Regulations 6475 1Whether a security was issued for nominal consideration should be determined based on facts and circumstances. The consideration the entity receives for the issuance should be compared to the security’s fair value to determine whether the consideration is nominal. 2The stock and warrants encompassed by the prior guidance were those issuances of common stock at prices below the IPO price and options or warrants with exercise prices below the IPO price that were issued within a one-year period prior to the initial filing of the registration statement relating to the IPO through the registration statement’s effective date. 3SFAS 128 defines potential common stock as ‘‘a security or other contract that may entitle its holder to obtain common stock during the reporting period or after the end of the reporting period.’’ disclosure in financial statements of subsidiaries, divisions or lesser business components of another entity to eliminate instructions to delete historical EPS in the entity’s financial statements; (b) Topic 3.A, regarding the presentation of supplemental earnings per share in a convertible security registration to remove the reference to APB Opinion No. 15, Earnings Per Share, and remind registrants of the pro forma requirements of Regulation S–X; (c) Topic 4.D, regarding the computation of earnings per share in an initial public offering (IPO) to revise instructions regarding the dilutive effects of stock issued for consideration below the IPO price or options and warrants to purchase common stock with exercise prices below the IPO price. New guidance highlights the treatment that should be given to the dilutive effect of common stock or options and warrants to purchase common stock issued for nominal consideration (referred to as nominal issuances); (d) Topic 6.B.1, regarding the presentation of income or loss applicable to common stock to clarify the Topic’s continuing applicability to all registrants and to suggest a presentation format for registrants that elect to present a single statement of income and comprehensive income; and (e) Topic 6.G.1, regarding selected quarterly financial data to replace the terms ‘‘primary’’ and ‘‘fully diluted’’ with ‘‘basic’’ and ‘‘diluted.’’ TOPIC 1: FINANCIAL STATEMENTS

B. Allocation of expenses and related disclosure in financial statements of subsidiaries, divisions or lesser business components of another entity

Pro forma financial statements and
earnings per share
Question: What disclosure should be made if the registrant’s historical financial statements are not indicative of the ongoing entity (e.g., tax or other cost sharing agreements will be terminated or revised)? Interpretive Response: The registration statement should include pro forma financial information that is in accordance with Article 11 of Regulation S–X and reflects the impact of terminated or revised cost sharing agreements and other significant changes.
Other matters
Question: What is the staff’s position with respect to dividends declared by the subsidiary subsequent to the balance sheet date? Interpretive Response: The staff believes that such dividends either be given retroactive effect in the balance sheet with appropriate footnote disclosure, or reflected in a pro forma balance sheet. In addition, when the dividends are to be paid from the proceeds of the offering, the staff believes it is appropriate to include pro forma per share data (for the latest year and interim period only) giving effect to the number of shares whose proceeds will be used to pay the dividend. A similar presentation is appropriate when dividends exceed earnings in the current year, even though the stated use of proceeds is other than for the payment of dividends. In these situations, pro forma per share data should give effect to the increase in the number of shares which, when multiplied by the offering price, would be sufficient to replace the capital in excess of earnings being withdrawn. TOPIC 3: SENIOR SECURITIES

A. Convertible Securities Facts: Company B proposes to file a registration statement covering convertible securities. Question: In registration, what consideration should be given to the dilutive effects of convertible securities? Interpretive Response: In a registration statement of convertible preferred stock or debentures, the staff believes that disclosure of pro forma earnings per share (EPS) is important to investors when the proceeds will be used to extinguish existing preferred stock or debt and such extinguishments will have a material effect on EPS. That disclosure is required by Article 11, Rule 11–01(a)(8) and Rule 11–02(a)(7) of Regulation S–X, if material. TOPIC 4: EQUITY ACCOUNTS

D. Earnings Per Share Computations in an Initial Public Offering Facts: A registration statement is filed in connection with an initial public offering (IPO) of common stock. During the periods covered by income statements that are included in the registration statement or in the subsequent period prior to the effective date of the IPO, the registrant issued for nominal consideration 1 common stock, options or warrants to purchase common stock or other potentially dilutive instruments (collectively, referred to hereafter as ‘‘nominal issuances’’). Prior to the effective date of Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share, the staff believed that certain stock and warrants 2 should be treated as outstanding for all reporting periods in the same manner as shares issued in a stock split or a recapitalization effected contemporaneously with the IPO. The dilutive effect of such stock and warrants could be measured using the treasury stock method. Question 1: Does the staff continue to believe that such treatment for stock and warrants would be appropriate upon adoption of SFAS 128? Interpretive Response: Generally, no. Historical EPS should be prepared and presented in conformity with SFAS 128. In applying the requirements of SFAS 128, the staff believes that nominal issuances are recapitalizations in substance. In computing basic EPS for the periods covered by income statements included in the registration statement and in subsequent filings with the SEC, nominal issuances of common stock should be reflected in a manner similar to a stock split or stock dividend for which retroactive treatment is required by paragraph 54 of SFAS 128. In computing diluted EPS for such periods, nominal issuances of common stock and potential common stock 3 should be reflected in a manner similar to a stock split or stock dividend. Registrants are reminded that disclosure about materially dilutive issuances is required outside the financial statements. Item 506 of Regulation S–K requires tabular presentation of the dilutive effects of those issuances on net tangible book value. The effects of dilutive issuances on the registrant’s liquidity, capital resources and results of operations should be addressed in Management’s Discussion and Analysis. Question 2: Does reflecting nominal issuances as outstanding for all historical periods in the computation of earnings per share alter the registrant’s responsibility to determine whether compensation expense must be recognized for such issuances to employees?

6476 Federal Register / Vol. 63, No. 26 / Monday, February 9, 1998 /Rules and Regulations 4As prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, and related interpretations. 1 If a registrant elects to follow the encouraged disclosure discussed in paragraph 23 of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, and displays the components of other comprehensive income and the total for comprehensive income using a onestatement approach, the registrant must continue to follow the guidance set forth in Topic 6.B.1. One approach may be to provide a separate reconciliation of net income to income available to common stock below comprehensive income reported on a statement of income and comprehensive income. 2The assessment of materiality is the responsibility of each registrant. However, absent concerns about trends or other qualitative considerations, the staff generally will not insist on the reporting of income or loss applicable to common stock if the amount differs from net income or loss by less than ten percent. Interpretive Response: No. Registrants must follow generally accepted accounting principles in determining whether the recognition of compensation expense for any issuances of equity instruments to employees is necessary.4 Reflecting nominal issuances as outstanding for all historical periods in the computation of earnings per share does not alter that existing responsibility under GAAP. TOPIC 6: INTERPRETATIONS OF ACCOUNTING SERIES RELEASES

B. Accounting Series Release No. 280—General Revision of Regulation S–X
1. INCOME OR LOSS APPLICABLE
TO COMMON STOCK
Facts: A registrant has various classes of preferred stock. Dividends on those preferred stocks and accretions of their carrying amounts cause income applicable to common stock to be less than reported net income. Question: In ASR No. 280, the Commission stated that although it had determined not to mandate presentation of income or loss applicable to common stock in all cases, it believes that disclosure of that amount is of value in certain situations. In what situations should the amount be reported, where should it be reported, and how should it be computed? Interpretive Response: Income or loss applicable to common stock should be reported on the face of the income statement 1 when it is materially different in quantitative terms from reported net income or loss 2 or when it is indicative of significant trends or other qualitative considerations. The amount to be reported should be computed for each period as net income or loss less: (a) dividends on preferred stock, including undeclared or unpaid dividends if cumulative; and (b) periodic increases in the carrying amounts of instruments reported as redeemable preferred stock (as discussed in Topic 3.C) or increasing rate preferred stock (as discussed in Topic 5.Q). TOPIC 6: INTERPRETATION OF ACCOUNTING SERIES RELEASES

G. ACCOUNTING SERIES RELEASE Nos. 177 and 286—Relating to Amendments to Form 10–Q, Regulation S–K, and Regulation 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

Question 4: What is meant by ‘‘pershare data based upon such income’’ as used in Item 302(a)(1)? Interpretive Response: Item 302(a)(1) only requires disclosure of per share amounts for income before extraordinary items and cumulative effect of a change in accounting. It is expected that when per share data is calculated for each full quarter based upon such income, the per share amounts would be both basic and diluted. Although it is not required by the rule, there are many instances where it would be desirable to disclose other per share figures such as net earnings per share and the per share effect of extraordinary items also. Where such disclosure is made, per share data should be both basic and diluted. [FR Doc. 98–3121 Filed 2–6–98; 8:45 am] BILLING CODE 8010–01–P