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[Federal Register Volume 63, Number 126 (Wednesday, July 1, 1998)]
[Proposed Rules]
[Pages 35886-35893]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17432]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, 240 and 249

[Release Nos. 33-7549; 34-40126; File No. S7-17-98]
RIN 3235-AH43

Segment Reporting

AGENCY: Securities and Exchange Commission.

ACTION:Proposed Rules.

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SUMMARY: The Commission today proposes technical amendments to conform 
our reporting requirements with the Financial Accounting Standards 
Board's (``FASB'') recently adopted Statement of Financial Accounting 
Standards (``SFAS'') No. 131, governing disclosures relating to a 
business enterprise's operating segments.

DATES:We should receive comments by July 31, 1998.

ADDRESSES:Please send three copies of your comment letter to Jonathan 
G. Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Interested persons also may 
submit comments electronically at the following e-mail address: rule-[email protected]. All comment letters should refer to File No. S7-17-
98; please include this file number in the subject line if you use e-
mail. Anyone can inspect and copy the comment letters in our public 
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. We 
will post electronically submitted comment letters on the Commission's 
Internet Web Site (www.sec.gov).

FOR FURTHER INFORMATION CONTACT: James R. Budge, Special Counsel, 
Division of Corporation Finance, at (202) 942-2950, Louise M. Dorsey, 
Assistant Chief Accountant, Division of Corporation Finance, at (202) 
942-2960, or Robert F. Lavery, Assistant Chief Accountant, Office of 
the Chief Accountant, at (202) 942-4400, U.S. Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission today proposes technical 
amendments to Rules 3-03 \1\ and 12-16 \2\ of Regulation S-X,\3\ Items 
101 \4\ and 102 \5\ of Regulation S-K,\6\ and Schedule 14A \7\ in order 
to conform our reporting requirements with the FASB's recently adopted 
SFAS No. 131. We also propose to make consistent changes to Form 20-F 
\8\ and to Sections 501.06 and 503 of the Codification of Financial 
Reporting Policies (``CFRP'').
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    \1\ 17 CFR 210.3-03.
    \2\ 17 CFR 210.12-16.
    \3\ 17 CFR Part 210.
    \4\ 17 CFR 229.101.
    \5\ 17 CFR 229.102.
    \6\ 17 CFR Part 229.
    \7\ 17 CFR240.14a-101.
    \8\ 17 CFR249.220f.
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I. Background

    In 1976, the FASB issued SFAS No. 14, ``Financial Reporting for 
Segments of a Business Enterprise.'' SFAS No. 14 required corporations 
to disclose certain financial information by ``industry segment'' as 
defined in the statement and by geographic area. In December 1977, we 
adopted amendments to our rules to integrate the information to be 
furnished under SFAS No. 14 with the narrative and financial 
disclosures required in various disclosure forms.\9\
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    \9\ Release No. 33-5893 (December 23, 1977) [42 FR 65554].
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    After extensive deliberations, including solicitation of public 
comments, the FASB adopted a number of fundamental changes to its 
standards for segment reporting by publishing SFAS No. 131 in June of 
1997. SFAS No. 131 superseded SFAS No. 14 and established standards for 
reporting information about ``operating segments'' of an enterprise 
rather than following the ``industry segment'' standards that were in 
place previously. The Commission today proposes a number of technical 
changes to its reporting requirements to accommodate these recent 
modifications. This is in keeping with our long-standing position that 
we will look to the private sector for the promulgation of generally 
accepted accounting principles (``GAAP''),\10\ and furthers our goal of 
integrating existing accounting information into the narrative 
disclosure in documents mandated by the federal securities laws. This 
release explains in detail the proposed changes.
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    \10\ Section 101 of the Codification of Financial Reporting 
Policies. The Commission initially issued its administrative policy 
concerning financial statements in 1938 and updated it in 1973 to 
recognize the establishment of the FASB.
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II. Proposed Rule Changes

A. Operating Segment Disclosure

    SFAS No. 14 required, and the Commission's current rules and forms 
require, disclosure along ``industry segment'' lines. An ``industry 
segment,'' as defined by SFAS No. 14, was ``a component of an 
enterprise engaged in providing a product or service or a group of 
related products and services primarily to unaffiliated customers * * * 
for a profit.'' \11\ Recognizing that businesses often evaluate their 
operations using criteria not necessarily related to the products or 
services offered to the public, the FASB replaced the industry segment 
reporting standard with one that requires businesses to report 
financial information on the basis of ``operating segments.'' Under the 
new accounting standard, an operating segment is a component of a 
business, for which separate financial information is available, that 
management regularly evaluates in deciding how to allocate

[[Page 35887]]

resources and assess performance.\12\ Specifically, SFAS No. 131 states 
that an operating segment is a component of a business:
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    \11\ SFAS No. 14, para. 10.a.
    \12\ We refer to this below as the ``management approach.''
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     That engages in activities from which it may earn revenues 
and incur expenses (including revenues and expenses relating to 
transactions with other components of the same business);
     Whose operating results are regularly reviewed by the 
enterprise's ``chief operating decision maker'' \13\ to make decisions 
about resources to be allocated to the segment and assess its 
performance; and
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    \13\ The term ``chief operating decision maker'' identifies a 
function, not a person with that title. This person's function is to 
allocate resources to and assess the performance of the company's 
segments. A chief operating decision maker frequently might be a 
company's chief executive officer or chief operating officer, but it 
also could be a group of decision makers, for example, the company's 
president, executive vice presidents and others.
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     For which discrete financial information is available.
    Under SFAS No. 131, a company generally must report separately 
information about an operating segment that meets any of the following 
thresholds:
     Its reported revenue, including both sales to external 
customers and intersegment sales and transfers, is 10 percent or more 
of the combined revenue of all reported operating segments, whether 
generated inside or outside of the company;
     Its reported profit or loss is 10 percent or more of the 
greater of: (1) the combined reported profit of all operating segments 
that did not report a loss or (2) the combined reported loss of all 
operating segments that did report a loss; or
     Its assets are 10 percent or more of the combined assets 
of all operating segments.\14\
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    \14\ SFAS No. 131, para. 18.
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    SFAS No. 131 not only changed how a business should identify its 
segments, it also changed the types of information to be disclosed for 
each segment. SFAS No. 14 required an issuer to report its revenues, 
operating profit (loss),\15\ and identifiable assets \16\ if a 
segment's revenues, operating profit, or identifiable assets were 10% 
or more of all the industry segments' revenues, operating profits, or 
assets, respectively. Issuers were to reconcile these three items to 
the consolidated amounts in the financial statements. In addition, SFAS 
No. 14 required issuers to report for each segment depreciation, 
depletion and amortization, capital expenditures, equity in net income 
of unconsolidated subsidiary or equity-method investee, and the effect 
of a change in accounting principle on operating profit (loss).
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    \15\ SFAS No. 14 specifically defined segment operating profit 
to be revenues less all operating expenses, which included 
depreciation and amortization. An issuer was to allocate operating 
expenses that were not directly traceable to a particular segment on 
a reasonable basis among the segments for whose benefit the expenses 
were incurred. The standard required an explanation of the amount 
and nature of any unusual or nonrecurring items added or deducted in 
determining operating profit of a segment. In addition, the standard 
defined any restructuring charges related to a specific segment as 
operating expenses of that segment and issuers were to deduct these 
charges in calculating that segment's operating profit or loss.
    SFAS No. 14 excluded certain items in calculating segment 
profit. They were: general corporate expenses; interest expense 
(except included for financial institutions, insurance and leasing 
operations); equity in income (loss) of unconsolidated subsidiaries 
or equity investees; discontinued operations; extraordinary items; 
and, the effects of changes in accounting.
    \16\ Segment assets included all tangible and intangible assets 
used by the segment, including goodwill, other intangibles, and 
deferred income and expenses.
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    By contrast, SFAS No. 131 requires that a company provide for each 
reportable segment quantitative disclosure of two basic items--total 
assets and a measure of profit or loss. The new standard defines 
neither segment profit (loss) nor assets. Instead, management must 
determine what they will report based on how they operate their 
business. In addition, companies must disclose the following items for 
each segment, but only if management includes them in measuring segment 
profit or loss:
     Revenues from external customers;
     Revenues from other operating segments;
     Interest income; \17\
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    \17\ Certain enterprises may report segment interest revenue net 
of its interest expense. See SFAS 131, para. 27.
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     Interest expense; \18\
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    \18\ Id.
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     Depreciation, depletion and amortization;
     Unusual items;
     Equity in net income of equity method investees;
     Income taxes;
     Extraordinary items; and
     Significant non-cash items other than depreciation, 
depletion, and amortization.
    A company also must disclose for each segment the amount of 
investment in equity-method investees and total expenditures for 
additions to long-lived assets if it includes the amount in its 
determination of segment assets.
    The company must reconcile the totals of the reportable segments' 
amounts for all of these listed items to consolidated amounts. The FASB 
required more items to be disclosed per segment under the new standard 
because analysts have long wanted more information and most of the 
items required should be already available in management reports.
    We propose to amend our narrative and financial reporting rules to 
conform current segment reporting requirements to the FASB's revised 
accounting standards. The proposals would, however, retain certain 
requirements relating to disclosure of principal products or services 
and major customers that traditionally have differed from the FASB 
standards.\19\ We will address below each of the proposals.\20\
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    \19\ See Sections II.A.1a. and II.B.2.
    \20\ The Commission also is proposing several technical 
amendments to update cross references to the new accounting 
standard. These revisions would be made to Rules 3-03(e) and 12-16 
of Regulation S-X and Item 14(b)(2)(ii)(A)(3)(i) of Schedule 14A.
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1. Description of Business--Item 101
    Regulation S-K Item 101(b) \21\ currently requires an issuer to 
disclose financial information with respect to its ``industry 
segments'' in the business description sections of documents that it 
files with the Commission. The proposals would amend Item 101 to 
conform its disclosure requirements to current GAAP as defined in SFAS 
No. 131, thereby requiring disclosure about an issuer's ``operating 
segments'' rather than its ``industry segments.'' \22\ Other proposals 
specific to Item 101 follow.
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    \21\ 17 CFR 229.101(b).
    \22\ We also propose to retain the current provisions allowing 
an issuer to refer to other sections of the registration statement 
that include the required information in order to avoid duplicative 
disclosure.
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a. Principal Products or Services
    Item 101 historically has required a discussion, by segment, of the 
principal products produced and services rendered by the issuer, as 
well as the principal markets for and methods of distribution of each 
segment's products and services. On the other hand, GAAP required, and 
continues to require, disclosure of principal products and services on 
an enterprise-wide basis, without reference to principal markets and 
methods of distribution. We continue to believe that the segment 
information relating to principal products or services, principal 
markets and distribution methods is useful to investors and propose not 
to change this provision.
    Item 101 further requires registrants to disclose the amounts of 
revenues from each class of similar products and services based on 
quantitative

[[Page 35888]]

thresholds. Specifically, the issuer must state the amount or 
percentage of total revenue contributed by any class of similar 
products or services that accounted for 10 percent or more of 
consolidated revenue in any of the last three fiscal years, or if total 
revenue did not exceed $50,000,000 during any of those three fiscal 
years, 15 percent or more of consolidated revenue.\23\ SFAS No. 131 
requires disclosure of revenues from external customers for each 
product and service or each group of similar products and services 
unless it is impracticable to do so. Because SFAS No. 131 requires 
disclosure regardless of amount, unless impracticable, it appears that 
the new accounting standard may require more disclosure than Item 101. 
In light of this, we seek comment as to whether we need to maintain the 
quantitative thresholds of Item 101(c)(1)(i). If so, should they be 
raised or lowered, or should we simply follow the standard set out in 
paragraph 37 of SFAS No. 131, which provides for no quantitative 
threshold?
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    \23\ 17 CFR 229.101(c)(1)(i).
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b. Retroactive Restatement of Information
    Item 101 requires issuers to restate retroactively previously 
reported financial information when there has been a material change in 
the way they group products or services into industry segments and that 
change affects the reported segment information.\24\ By contrast, SFAS 
No. 131 provides that if an issuer changes the structure of its 
internal organization in a manner that causes the composition of its 
reportable segments to change, the issuer must restate the 
corresponding information for earlier periods unless it is 
impracticable to do so.\25\ We propose to conform the language of Item 
101 with the language of SFAS No. 131 regarding when a company must 
restate information.
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    \24\ 17 CFR 229.101(b)(1)(ii).
    \25\ See SFAS No. 131, para. 34.
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c. Appendix A
    Item 101 includes an appendix that illustrates how to present the 
required industry segment information in tabular form. The Commission 
proposes to eliminate this appendix and rely instead on the SFAS No. 
131 instructions governing how to present information relating to 
operating segments.
2. Property--Item 102
    Regulation S-K Item 102 requires descriptions of an issuer's 
principal plants, mines, and other ``materially important'' physical 
properties. Companies must identify the industry segment(s) that use 
the described properties.\26\ We propose to update the item by 
substituting the term ``segment'' for ``industry segment.''
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    \26\ f17 CFR 229.102.
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3. Management's Discussion and Analysis--Item 303
    Regulation S-K Item 303, which requires management to include a 
discussion and analysis of an issuer's financial condition and results 
of operations, provides:

    Where in the registrant's judgment a discussion of segment 
information or other subdivisions of the registrant's business would 
be appropriate to an understanding of such business, the discussion 
shall focus on each relevant, reportable segment or other 
subdivision of the business and on the registrant as a whole.\27\

    \2\ 17 CFR 229.303(a).
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    The Commission historically has relied on the FASB's definition for 
segment disclosure in Management's Discussion and Analysis (``MD&A''). 
The Commission intends to continue to rely on the FASB's standards, 
thereby allowing issuers to use the management approach under SFAS No. 
131. No rule change is necessary. Under the language in Item 303, a 
multi-segment registrant preparing a full fiscal year MD&A should 
analyze revenues, profitability (or losses) and total assets of each 
significant segment in formulating a judgment as to whether a 
discussion of segment information is necessary to an understanding of 
the business.
    While we propose no changes to the language of Item 303, we do 
propose to amend CFRP 501.06.a, which provides informal guidance about 
MD&A. The proposed revisions would accord the Codification's language 
with that of SFAS No. 131, and would add a new footnote, that would 
read:

    Where consistent with the registrant's internal management 
reports, SFAS No. 131 permits measures of segment profitability that 
differ from GAAP measures of profit on a consolidated basis, or that 
exclude items included in the determination of the registrant's net 
income. In a note to the financial statements, however, the 
registrant must reconcile key segment amounts to the corresponding 
items reported in the consolidated financial statements. Similarly, 
the Commission expects that the discussion of a segment whose 
profitability is determined on a basis that differs from GAAP on a 
consolidated basis or that excludes the effects of items 
attributable to the segment also will address the applicable 
reconciling items. For example, if a material charge for 
restructuring or asset impairment relates to a specific segment, but 
is not included in management's measure of the segment's operating 
profit or loss, registrants would be expected to disclose the 
applicable portion of the charge and the circumstances of its 
incurrence. Likewise, the Commission expects that the effects of 
management's use of non-GAAP measures will be explained in a 
balanced and informative manner, and the disclosure will include a 
discussion of how that segment's performance has affected the 
registrant's GAAP financial statements.
4. Form 20-F
    Form 20-F is the registration statement and annual report for 
foreign private issuers promulgated under the Securities Exchange Act 
of 1934 (``Exchange Act'').\28\ Form 20-F currently permits a foreign 
registrant that presents financial statements according to United 
States GAAP to omit SFAS No. 14 disclosures if it provides the 
information required by Item 1 of the form. We propose replacing the 
reference to SFAS No. 14 with one to SFAS No. 131.\29\
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    \28\ 15 U.S.C. 78a et seq.
    \29\ See proposed Instruction 3 to Item 17 of Form 20-F.
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    Item 1 of Form 20-F requires registrants to disclose sales and 
revenues by categories of activity and geographical areas, as well as 
to discuss each category of activities that provide a disproportionate 
contribution to total ``operating profit'' of the registrant. We 
contemplate no change to these requirements.

B. Other Reporting Requirements

    SFAS No. 14 also set standards for disclosure of certain 
enterprise-wide information where the issuer did not provide the 
information in the segment disclosure, and Regulation S-K currently 
reflects those standards. We propose to update our rules to conform 
with the revised requirements of SFAS No. 131, as we explain below.
1. Geographic Areas
    Regulation S-K Item 101(d) currently requires an issuer to disclose 
for each of the issuer's last three fiscal years the amounts of 
revenue, operating profit or loss, and identifiable assets attributable 
to each of its geographic areas. It also requires disclosure of the 
amount of export sales in the aggregate or by appropriate geographic 
area to which the issuer makes sales.
    Under SFAS No. 131, issuers must disclose revenues from external 
customers deriving from:
     The issuer's country of domicile;
     All foreign countries in total from which the issuer 
derives revenues; and
     An individual foreign country, if material.
    An issuer also must disclose the basis for attributing revenues 
from external customers to individual countries.

[[Page 35889]]

    The new accounting standard also requires an issuer to disclose 
long-lived assets other than financial instruments, long-term customer 
relationships of a financial institution, mortgage and other servicing 
rights, deferred policy acquisition costs, as well as deferred tax 
assets located in its country of domicile and in all foreign countries, 
in total, in which the enterprise holds assets. If assets in an 
individual foreign country are material, an issuer must disclose those 
assets separately.\30\
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    \30\ See SFAS No. 131, para. 38.
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    We propose to revise our disclosure requirements to conform 
entirely with the new accounting standard. Consequently, we would no 
longer require issuers to disclose geographic information relating to: 
individual geographic areas (except where information relating to an 
individual country is material); profitability; or export sales.\31\
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    \31\ The proposed changes would include eliminating Appendix B 
of Regulation S-K Item 101, which illustrates how to present the 
currently-required information. We also would revise Instruction 2 
to Item 101, which provides guidance about materiality analyses 
based on ``interperiod comparability,'' to reflect the elimination 
of the requirements to disclose the quantitative geographic 
information once required by SFAS No. 14.
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2. Major Customers
    Since the adoption of SFAS No. 14, GAAP has required disclosure of 
revenues from major customers.\32\ SFAS No. 131 now requires issuers to 
disclose the amount of revenues from each external customer that 
amounts to 10 percent or more of its revenue as well as the identity of 
the segment(s) reporting the revenues. The accounting standards, 
however, have never required issuers to identify major customers. On 
the other hand, Regulation S-K Item 101 historically requires naming a 
major customer if sales to that customer equal 10 percent or more of 
the issuer's consolidated revenues and if the loss of the customer 
would have a material adverse effect on the issuer and its 
subsidiaries.\33\ Since we continue to believe that the identity of 
major customers is material information to investors, we propose to 
retain this Regulation S-K requirement.
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    \32\ SFAS No. 30 amended SFAS No. 14 and retained this provision 
to disclose revenues from major customers.
    \33\ 17 CFR 229.101(c)(1)(vii).
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C. Segment Information Added to Interim Reports

    GAAP historically has not required segment reporting in interim 
financial statements. In SFAS No. 131, the FASB changed its position. 
Under the new accounting standards, issuers must include in condensed 
financial statements of interim periods issued to shareholders the 
following information about each reportable segment:
     Revenues from external customers;
     Intersegment revenues;
     A measure of segment profit or loss;
     Total assets for which there has been a material change 
from the amount disclosed in the last annual report;
     A description of differences from the last annual report 
in the basis of segmentation or in the basis of measurement of segment 
profit or loss; and
     A reconciliation of the total of the reportable segments' 
measures of profit or loss to the enterprise's consolidated income 
before income taxes, extraordinary items, discontinued operations, and 
the cumulative effect of changes in accounting principles.\34\
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    \34\ See SFAS No. 131para. 33. The FASB also amended Accounting 
Principles Board Opinion No. 28 (``APB No. 28''), governing interim 
financial reporting, to reflect this change. The stated purpose of 
APB No. 28 is ``to clarify the application of accounting principles 
and reporting practices to interim financial information, including 
interim financial statements and summarized interim financial data 
of publicly traded companies issued for external reporting 
purposes.'' APB No. 28 para. 1.
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    Thus, for the first time, issuers must disclose in their interim 
financial statements, including those filed with the Commission, 
condensed financial information about the segments they have chosen as 
reportable segments for purposes of their annual reports. In making 
this change, the FASB explained:

    This statement [SFAS No. 131] requires disclosure of limited 
segment information in condensed financial statements that are 
included in quarterly reports to shareholders. * * * Statement 14 
did not apply to those condensed financial statements because of the 
expense and the time required for producing segment information 
under Statement 14. A few respondents to the Exposure Draft said 
that reporting segment information in interim financial statements 
would be unnecessarily burdensome. However, users contended that, to 
be timely, segment information is needed more often than annually 
and that the difficulties of preparing it on an interim basis could 
be overcome by an approach like the one in this Statement. Managers 
of many enterprises agree and have voluntarily provided segment 
information for interim periods.
    The Board decided that the condensed financial statements in 
interim reports issued to shareholders should include disclosure of 
segment revenues from external customers, intersegment revenues, a 
measure of segment profit or loss, material changes in segment 
assets, differences in the basis of segmentation or the way segment 
profit or loss was measured in the previous annual period, and a 
reconciliation to the enterprise's total profit or loss. That 
decision is a compromise between the needs of users who want the 
same segment information for interim periods as that required in 
annual financial statements and the costs to preparers who must 
report the information. Users will have some key information on a 
timely basis. Enterprises should not incur significant incremental 
costs to provide the information because it is based on information 
that is used internally and therefore already available.\35\

    \35\ SFAS No. 131 para. 98 and para. 99.
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    SFAS No. 131 is effective for fiscal years beginning after December 
15, 1997.\36\ The FASB specified, however, that issuers need not apply 
the new provisions to interim financial statements in the initial year 
of application, but they must report comparative information for 
interim periods in that initial year in financial statements for 
interim periods in the second year of application.\37\ Consequently, 
through the Rules of General Application of Regulation S-X, which state 
that financial statements not prepared in accordance with GAAP will be 
presumed to be misleading or inaccurate,\38\ we expect to see 
comparative segment information reported in filings containing interim 
financial statements for periods ending on or after March 15, 1999. No 
changes to our rules are necessary to implement the FASB's changes in 
this regard.
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    \36\ SFAS No. 131 para. 40.
    \37\ Id.
    \38\ See 17 CFR 210.4-01(a)(1).
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III. General Request for Comment

    The Commission is proposing these amendments to conform its 
disclosure requirements to GAAP, as modified by SFAS No. 131. Today we 
solicit public comments specifically addressing whether these proposed 
changes adequately address the new accounting standards. We also seek 
comment about whether other amendments are appropriate for that 
purpose.
    We request comment on whether the proposed revisions, if adopted, 
would have an adverse effect on competition or would impose a burden on 
competition that is neither necessary nor appropriate in furthering the 
purposes of the Securities Act and the Exchange Act. We will consider 
these comments in complying with our responsibilities under Section 
23(a)(2) of the Exchange Act.\39\
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    \39\ 15 U.S.C. 78w(a)(2).
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    Section 2(b) of the Securities Act \40\ and Section 3(f) of the 
Exchange Act \41\ require the Commission, when engaged in rulemaking 
that requires a public interest finding, to consider, in addition to 
the protection of investors, whether

[[Page 35890]]

the action will promote efficiency, competition and capital formation. 
Therefore, we solicit comment on what effect the proposed changes, if 
adopted, may have on efficiency, competition and capital formation.
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    \40\ 15 U.S.C. 77b(b).
    \41\ 15 U.S.C. 78c(f).
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    Please send three copies of your comment letter to Jonathan G. 
Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Interested persons also may 
submit comments electronically at the following e-mail address: rule-[email protected]. All comment letters should refer to File No. S7-17-
98; please include this file number in the subject line if you use e-
mail. Anyone can inspect and copy the comment letters in our public 
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. We 
will post electronically submitted comment letters on our Internet Web 
Site (www.sec.gov).

IV. Cost-Benefit Analysis

    We anticipate that these proposals, if adopted, would not impose 
any new regulatory costs on registrants, since the changes would simply 
conform our disclosure requirements with current accounting principles, 
to which registrants are already subject. To the contrary, if we do not 
act to conform our rules to the revised accounting standards, costs 
will rise because of the confusion registrants might experience in 
determining which set of standards to apply to their disclosure 
documents, the standards under SFAS No. 14, as currently codified in 
Commission rules, or the revised standards of SFAS No. 131. Some 
registrants may determine to resolve the conflict by producing and 
providing both sets of information. This duplicative disclosure would 
be a wasteful expenditure of business resources that we could avoid by 
the adopting the changes proposed today. Commenters should address the 
costs and benefits of the proposals, and provide supporting empirical 
data for any positions advanced.

V. Summary of Regulatory Flexibility Act Certification

    Pursuant to section 605(b) of the Regulatory Flexibility Act,\42\ 
Arthur Levitt, Chairman of the Commission, certified that the 
amendments proposed in this release would not, if adopted, have 
significant impact on a substantial number of small entities. The 
reason for this certification is that the proposed amendments are 
intended to conform rules and forms to GAAP, as recently amended, to 
which registrants are already subject. We include the Certification in 
this release as Attachment A and encourage written comments relating to 
it. Commenters should describe the nature of any impact on small 
entities and provide empirical data to support the extent of the 
impact.
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    \42\ 5 U.S.C. 605(b).
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VI. Paperwork Reduction Act \43\

    We anticipate that information collection burden hours would not 
change as a result of the technical amendments we propose today.
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    \43\ 44 U.S.C. 3501 et seq.
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VII. Codification Update

    The ``Codification of Financial Report Policies'' announced in 
Financial Reporting Release No. 1 (April 15, 1982) [47 FR 21028] is 
proposed to be updated to:
    1. Modify Section 501 by revising Section 501.06.a. to read as 
follows:

a. Segment Analysis

    In formulating a judgment as to whether a discussion of segment 
information is necessary to an understanding of the business, a multi-
segment registrant preparing a full fiscal year MD&A should analyze 
revenues, profitability, and the cash needs of its significant 
segments.\44\ To the extent any segment contributes in a materially 
disproportionate way to those items, or where discussion on a 
consolidated basis would present an incomplete and misleading picture 
of the enterprise, segment discussion should be included. This may 
occur, for example, when there are legal or other restrictions upon the 
free flow of funds from one segment, subsidiary, or division of the 
registrant to others; when known trends, demands, commitments, event, 
or uncertainties within a segment are reasonably likely to have a 
material effect on the business as a whole; when the ability to dispose 
of identified assets of a segment may be relevant to the financial 
flexibility of the registrant; and in other circumstances in which the 
registrant concludes that segment analysis is appropriate to an 
understanding of its business.
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    \44\ Where consistent with the registrant's internal management 
reports, SFAS No. 131 permits measures of segment profitability that 
differ from GAAP measures of profit on a consolidated basis, or that 
exclude items included in the determination of the registrant's net 
income. In a note to the financial statements, however, the 
registrant must reconcile key segment amounts to the corresponding 
items reported in the consolidated financial statements. Similarly, 
the Commission expects that the discussion of a segment whose 
profitability is determined on a basis that differs from GAAP on a 
consolidated basis or that excludes the effects of items 
attributable to the segment also will address the applicable 
reconciling items. For example, if a material charge for 
restructuring or asset impairment relates to a specific segment, but 
is not included in management's measure of the segment's operating 
profit or loss, registrants would be expected to disclose the 
applicable portion of the charge and the circumstances of its 
incurrence. Likewise, the Commission expects that the effects of 
management's use of non-GAAP measures will be explained in a 
balanced and informative manner, and the disclosure will include a 
discussion of how that segment's performance has affected the 
registrant's GAAP financial statements.
---------------------------------------------------------------------------

    The following example illustrates segment disclosure for a 
manufacturer with two segments. The two segments contributed to segment 
profit amounts that were disproportionate to their respective revenues. 
The registrant discusses sales and segment profit trends, factors 
explaining such trends, and where applicable, known events that will 
impact future results of operations of the segment.

                                                                  Net Sales by Segment                                                                  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Year 3                                  Year 2                  Year 1    
                                                         -----------------------------------------------------------------------------------------------
                        Segments                                            Percent of                      Percent of                      Percent of  
                                                            ($ million)        total        ($ million)        total        ($ million)        total    
--------------------------------------------------------------------------------------------------------------------------------------------------------
Segment I...............................................             585              55             479              53             420              48
Segment II..............................................             472              45             433              47             457              52
                                                         -----------------------------------------------------------------------------------------------
Total Sales.............................................            1057             100             912             100             877             100
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 35891]]

Year 3 vs. Year 2

    Segment I sales increased 22% in Year 3 over the Year 2 period. The 
increase included the effect of the acquisition of Corporation T. 
Excluding this acquisition, sales would have increased by 16% over Year 
2. Product Line A sales increased by 18% due to a 24% increase in 
selling prices, partially offset by lower shipments. Product Line B 
sales increased by 35% due to a 17% increase in selling prices and a 
15% increase in shipment volume.
    Segment II sales increased 9% due to a 12% increase in selling 
prices partly offset by a 3% reduction in shipment volume.

Year 2 vs. Year 1

    Segment I sales increased 14% in Year 2. Product Line A sales 
increased 22%, in spite of a slight reduction in shipments, because of 
a 23% increase in selling prices.
    Product Line B sales declined 5% due mainly to a 7% decrease in 
selling prices, partially offset by higher shipments.
    The 5% decline in Segment II sales reflected a 3% reduction in 
selling prices and a 2% decline in shipments.
    The substantial increases in selling prices of Product Line A 
during Year 3 and Year 2 occurred primarily because of heightened 
worldwide demand which exceeded the industry's production capacity. The 
Company expects these conditions to continue for the next several 
years. The Company anticipates that shipment volumes of Product Line A 
will increase as its new production facility reaches commercial 
production levels in Year 4.
    Segment II shipment volumes have declined during the past two years 
primarily because of the discontinuation of certain products that were 
marginally profitable and did not have significant growth potential.

                                                                    Profit by Segment                                                                   
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Year 3                                  Year 2                  Year 1    
                                                         -----------------------------------------------------------------------------------------------
                        Segments                                            Percent of                      Percent of                      Percent of  
                                                            ($ million)        total        ($ million)        total        ($ million)        total    
--------------------------------------------------------------------------------------------------------------------------------------------------------
Segment I...............................................             126              75             108              68              67              55
Segment II..............................................              42              25              51              32              54              45
                                                         -----------------------------------------------------------------------------------------------
Segment Profit..........................................             168             100             159             100             121             100
--------------------------------------------------------------------------------------------------------------------------------------------------------

Year 3 vs. Year 2

    Segment I profit was $18 million (17%) higher in Year 3 than in 
Year 2. This increase includes the effects of higher sales prices and 
slightly improved margins on Product Line A, higher shipments of 
Product Line B and the acquisition of Corporation T. Excluding this 
acquisition, Segment I profit would have been 11% higher than in Year 
2. Partially offsetting these increases are costs and expenses of $11 
million related to new plant start-up, slightly reduced margins on 
Product Line B and a $9 million increase in research and development 
expenses.
    Segment II profit declined $9 million (18%) due mainly to 
substantially higher costs in Year 3 resulting from a 23% increase in 
average raw material costs which could not be fully recovered through 
sales prices increases. The Company expects that Segment II margins 
will continue to decline, although at a lesser rate than in Year 3 as 
competitive factors limit the Company's ability to recover cost 
increases.

Year 2 vs. Year 1

    Segment I profit was $41 million (61%) higher in Year 2 than in 
Year 1. After excluding the effect of the $34 million non-recurring 
charge for the early retirement program in Year 1, Segment I profit in 
Year 2 was $18 million (27%) higher than in Year 1. This increase 
reflected higher prices and a corresponding 21% increase in margins on 
Product Line A, and a 17% increase in margins on Product Line B due 
primarily to costs reductions resulting from the early retirement 
program.
    Segment II profit declined about $3 million (6%) due mainly to 
lower selling prices and slightly reduced margins in Year 2.
    2. Replace paragraphs .01, .02 and .03 of Section 503 with new 
paragraph .01, to include the text of Section I of this release 
captioned ``Background'' and with new paragraph .02 to include the text 
of Section II.B.2 of this release captioned ``Major Customers.''
    The Codification is a separate publication of the Commission. It 
will not be published in the Code of Federal Regulations.

VIII. Statutory Basis

    The Commission proposes the rule changes explained in this release 
pursuant to Sections 6, 7, 8, 10 and 19(a) of the Securities Act and 
Sections 3, 12, 13, 14, 15(d) and 23(a) of the Exchange Act.

List of Subjects in 17 CFR Parts 210, 229, 240 and 249

    Accounting, Registration requirements, Reporting and recordkeeping 
requirements, Securities.

Text of the Proposals

    Accordingly, the Commission proposes to amend Title 17, Chapter II 
of the Code of Federal Regulations as follows:

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL 
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 
1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT 
COMPANY ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

    1. The authority citation for part 210 continues to read as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77aa(25), 
77aa(26), 78j-1, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 
79e(b), 79j(a), 79n, 79t(a), 80a-8, 80a-20, 80a-29, 80a-30, 80a-
37(a), unless otherwise noted.

    2. By amending Section 210.3-03 by revising the first sentence of 
paragraph (e) to read as follows:

Sec. 210.3-03  Instructions to income statement requirements.

* * * * *
    (e) Disclosures regarding segments required by generally accepted 
accounting principles shall be provided for each year for which an 
audited statement of income is provided. * * *
    3. By amending Sec. 210.12-16 by revising footnote one to the table 
to read as follows:

Sec. 210.12-16  Supplementary insurance information.

* * * * *

[[Page 35892]]

    \1\ Segments shown should be the same as those presented in the 
footnote disclosures called for by generally accepted accounting 
principles.
* * * * *

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

    4. The authority citation for part 229 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 
77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll(d), 79e, 
79n, 79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise 
noted.
* * * * *
    5. By amending Sec. 229.101 (Item 101 of Regulation S-K) by 
revising the introductory text of paragraph (b), paragraph (b)(1) and 
paragraph (d); in paragraphs (c)(1) introductory text, (c)(1)(i), 
(c)(1)(ii), (c)(1)(iv), and (c)(1)(v), by revising the term ``industry 
segment'' to read ``segment''; in paragraph (c)(1) introductory text 
and in Instruction 1 in the Instructions to Item 101, by revising the 
term ``industry segments'' to read ``segments''; by revising 
Instruction 2 to Item 101, and by removing Appendix A--Industry 
Segments, and Appendix B--Foreign and Domestic Operations and Export 
Sales.

Sec. 229.101 (Item 101)  Description of business.

* * * * *
    (b) Financial information about segments. Report for each segment, 
as defined by generally accepted accounting principles, revenues from 
external customers, a measure of profit or loss and total assets. A 
registrant must report this information for each of the last three 
fiscal years or for as long as it has been in business, whichever 
period is shorter. If the information provided in response to this 
paragraph (b) conforms with generally accepted accounting principles, a 
registrant may include in its financial statements a cross reference to 
this data in lieu of presenting duplicative information in the 
financial statements; conversely, a registrant may cross reference to 
the financial statements.
    (1) If a registrant changes the structure of its internal 
organization in a manner that causes the composition of its reportable 
segments to change, the registrant must restate the corresponding 
information for earlier periods, including interim periods, unless it 
is impracticable to do so. Following a change in the composition of its 
reportable segments, a registrant shall disclose whether it has 
restated the corresponding items of segment information for earlier 
periods. If it has not restated the items from earlier periods, the 
registrant shall disclose in the year in which the change occurs 
segment information for the current period under both the old basis and 
the new basis of segmentation, unless it is impracticable to do so.
* * * * *
    (d) Financial information about geographic areas. (1) State for 
each of the registrant's last three fiscal years, or for each fiscal 
year the registrant has been engaged in business, whichever period is 
shorter:
    (i) Revenues from external customers attributed to:
    (A) The registrant's country of domicile;
    (B) All foreign countries, in total, from which the registrant 
derives revenues; and
    (C) Any individual foreign country, if material. Disclose the basis 
for attributing revenues from external customers to individual 
countries.
    (ii) Long-lived assets, other than financial instruments, long-term 
customer relationships of a financial institution, mortgage and other 
servicing rights, deferred policy acquisition costs, and deferred tax 
assets, located in:
    (A) The registrant's country of domicile;
    (B) All foreign countries, in total, in which the registrant holds 
assets; and
    (C) Any individual foreign country, if material.
    (2) A registrant shall report the amounts based on the financial 
information that it uses to produce the general-purpose financial 
statements. If providing the geographic information is impracticable, 
the registrant shall disclose that fact. A registrant may wish to 
provide, in addition to the information required by paragraph (d)(1) of 
this section, subtotals of geographic information about groups of 
countries. To the extent that the disclosed information conforms with 
generally accepted accounting principles, the registrant may include in 
its financial statements a cross reference to this data in lieu of 
presenting duplicative data in its financial statements; conversely, a 
registrant may cross-reference to the financial statements.
    (3) A registrant shall describe any risks attendant to the foreign 
operations and any dependence on one or more of the registrant's 
segments upon such foreign operations, unless it would be more 
appropriate to discuss this information in connection with the 
description of one or more of the registrant's segments under paragraph 
(c) of this section.
    (4) If the registrant includes, or is required by Article 3 of 
Regulation S-X (17 CFR 210), to include, interim financial statements, 
discuss any facts relating to the information furnished under this 
paragraph (d) that, in the opinion of management, indicate that the 
three year financial data for geographic areas may not be indicative of 
current or future operations. To the extent necessary to the 
discussion, include comparative information.

Instructions to Item 101

* * * * *
    2. Base the determination of whether information about segments 
is required for a particular year upon an evaluation of interperiod 
comparability. For instance, interperiod comparability would require 
a registrant to report segment information in the current period 
even if not material under the criteria for reportability of SFAS 
No. 131 if a segment has been significant in the immediately 
preceding period and the registrant expects it to be significant in 
the future.
* * * * *
    6. By amending Sec. 229.102 by revising the term ``industry 
segment(s)'' in the introductory paragraph to read ``segment(s)''.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    7. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 
80b-11, unless otherwise noted.
* * * * *

Sec. 240.14a-101  [Amended]

    8. By amending Sec. 240.14a-101(Schedule 14A) in Item 
14(b)(2)(ii)(A)(3)(i) by revising the phrase ``industry segments'' to 
read ``segments''.

PART 249--FORM, SECURITIES EXCHANGE ACT OF 1934

    9. The authority citation for part 249 continues to read in part as 
follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted:

* * * * *
    10. By amending Form 20-F (referenced in Sec. 249.220f) by removing

[[Page 35893]]

the term ``SFAS 14'' from Instruction 3 to Item 17 and inserting the 
term ``SFAS No. 131'' in its place.

[Note: The text of Form 20-F does not, and the amendment will not, 
appear in the Code of Federal Regulations]

    Dated: June 25, 1998.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.

Attachment A--Regulatory Flexibility Act Certification

(Note: Attachment A to the Preamble will not appear in the Code of 
Federal Regulations)
    I, Arthur Levitt, Chairman of the Securities and Exchange 
Commission, hereby certify pursuant to 5 U.S.C. 605(b) that the 
proposed amendments to certain rules, forms and policies contained 
in Securities Act Release No. 33-7549, if adopted, will not have a 
significant economic impact on a substantial number of small 
entities. The amendments will conform Commission rules with 
accounting standards recently adopted by the Financial Accounting 
Standards Board. Since registrants are already subject to these 
standards, the proposed amendments would not impose any new burden 
on them.

    June 24, 1998
Arthur Levitt,
Chairman.
[FR Doc. 98-17432 Filed 6-30-98; 8:45 am]
BILLING CODE 8010-01-P
```