35886 Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Proposed Rules

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.

9Release No. 33–5893 (December 23, 1977) [42

FR 65554].

10Section 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.

11SFAS No. 14, ¶ 10.a.

regardless of whether it has been modified,

altered, or repaired in the area subject to the

requirements of this AD. For fire

extinguishers that have been modified,

altered, or repaired so that the performance

of the requirements of this AD is affected, the

owner/operator must request approval for an

alternative method of compliance in

accordance with paragraph (b) of this AD.

The request should include an assessment of

the effect of the modification, alteration, or

repair on the unsafe condition addressed by

this AD; and, if the unsafe condition has not

been eliminated, the request should include

specific proposed actions to address it.

Compliance: Required as indicated, unless

accomplished previously.

To prevent fire extinguisher failure due to

leakage, which could result in an

uncontained fire and damage to the aircraft,

accomplish the following:

(a) Within 3 months after the effective date

of this AD, perform a one time inspection of

fire extinguishers for leakage, and replace

leaking fire extinguishers with serviceable

parts, in accordance with First Technology

Fire and Safety Ltd. SB No. 26–110, dated

January 1998.

(b) An alternative method of compliance or

adjustment of the compliance time that

provides an acceptable level of safety may be

used if approved by the Manager, Boston

Aircraft Certification Office. Operators shall

submit their request through an appropriate

FAA Principal Maintenance Inspector, who

may add comments and then send it to the

Manager, Boston Aircraft Certification Office.

Note 2: Information concerning the

existence of approved alternative methods of

compliance with this AD, if any, may be

obtained from the Boston Aircraft

Certification Office.

(c) Special flight permits may be issued in

accordance with sections 21.197 and 21.199

of the Federal Aviation Regulations (14 CFR

21.197 and 21.199) to operate the aircraft to

a location where the requirements of this AD

can be accomplished.

Issued in Burlington, Massachusetts, on

June 23, 1998.

Dated: June 23, 1998.

Jay J. Pardee,

Manager, Engine and Propeller Directorate,

Aircraft Certification Service

[FR Doc. 98–17416 Filed 6–30–98; 8:45 am]

BILLING CODE 4910–13–P

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.

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: rulecomments@sec.gov. 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’’).

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

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.

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
Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Proposed Rules 35887

12We refer to this below as the ‘‘management

approach.’’ 13The 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. 14SFAS No. 131, ¶ 18. 15SFAS 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.

16Segment assets included all tangible and

intangible assets used by the segment, including

goodwill, other intangibles, and deferred income

and expenses.

17Certain enterprises may report segment interest

revenue net of its interest expense. See SFAS 131,

¶ 27.

18 Id.

19See Sections II.A.1a. and II.B.2.

20The 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.

21 17 CFR 229.101(b).

22We 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.

resources and assess performance.12

Specifically, SFAS No. 131 states that

an operating segment is a component of

a business: • 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 • 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

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 equitymethod investee, and the effect of a

change in accounting principle on

operating profit (loss). 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

• Interest expense; 18

• 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

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.

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
35888 Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Proposed Rules

23 17 CFR 229.101(c)(1)(i).

24 17 CFR 229.101(b)(1)(ii).

25See SFAS No. 131, ¶ 34.

26 f17 CFR 229.102.

2 17 CFR 229.303(a).

28 15 U.S.C. 78a et seq.

29See proposed Instruction 3 to Item 17 of Form

20–F.

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?

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.

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.’’

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

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

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.
Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Proposed Rules 35889

30See SFAS No. 131, ¶ 38.

31The proposed changes would include

eliminating Appendix B of Regulation S–K Item

101, which illustrates how to present the currentlyrequired 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.

32SFAS No. 30 amended SFAS No. 14 and

retained this provision to disclose revenues from

major customers.

33 17 CFR 229.101(c)(1)(vii).

34See SFAS No. 131¶ 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 ¶ 1.

35SFAS No. 131 ¶ 98 and ¶ 99.

36SFAS No. 131 ¶ 40.

37 Id.

38See 17 CFR 210.4–01(a)(1).

39 15 U.S.C. 78w(a)(2).

40 15 U.S.C. 77b(b).

41 15 U.S.C. 78c(f).

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

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

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.

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

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

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.

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

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
35890 Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Proposed Rules

42 5 U.S.C. 605(b).

43 44 U.S.C. 3501 et seq.

44Where 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 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.

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-comments@sec.gov. All

comment letters should refer to File No.

S7–17–98; please include this file

number in the subject line if you use email. 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.

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.

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 multisegment 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.

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

Segments

Year 3 Year 2 Year 1

($ million) Percent of

total ($ million) Percent oftotal ($ million) Percent oftotal

Segment I .................................................. 585 55 479 53 420 48

Segment II ................................................. 472 45 433 47 457 52

Total Sales ................................................ 1057 100 912 100 877 100
Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Proposed Rules 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

Segments

Year 3 Year 2 Year 1

($ million) Percent of

total ($ million) Percent oftotal ($ million) Percent oftotal

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:

§ 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 § 210.12–16 by

revising footnote one to the table to read

as follows:

§ 210.12–16 Supplementary insurance

information.

* * * * *
35892 Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Proposed Rules

1Segments 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 § 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.

§ 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 § 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.

* * * * *

§ 240.14a–101 [Amended]

8. By amending § 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 § 249.220f) by removing
Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Proposed Rules 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

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 48

[REG–119227–97]

RIN 1545–AV71

Kerosene Tax; Aviation Fuel Tax; Tax

on Heavy Trucks and Trailers

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Proposed rule, notice of

proposed rulemaking by cross-reference

to temporary regulations and notice of

public hearing.

SUMMARY: In the Rules and Regulations

section of this issue of the Federal

Register, the IRS is issuing temporary

regulations relating to the kerosene and

aviation fuel excise taxes and the tax on

the first retail sale of certain tractors,

truck, trailer, and semitrailer chassis

and bodies. The text of those temporary

regulations also serves as the text of

these proposed regulations.

DATES: Written comments must be

received by September 29, 1998.

Requests to speak and outlines of oral

comments to be discussed at the public

hearing scheduled for Wednesday,

November 4, 1998, must be received by

September 29, 1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–119227–97),

room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions

may be hand delivered between the

hours of 8:00 a.m. and 5 p.m. to:

CC:DOM:CORP:R (REG–119227–97),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW.,

Washington, DC. Alternatively,

taxpayers may submit comments

electronically via the Internet by

selecting the ‘‘Tax Regs’’ option on the

IRS Home Page, or by submitting

comments directly to the IRS Internet

site at http://www.irs.ustreas.gov/prod/

taxlregs/comments.html. The public

hearing will be held in the IRS

Auditorium, Seventh Floor, 7400

Corridor, Internal Revenue Building,

1111 Constitution Avenue, NW.,

Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Frank

Boland (202) 622–3130; concerning

submissions and the hearing, LaNita

VanDyke (202) 622–7180 (not toll-free

numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in this notice of proposed

rulemaking has been submitted to the

Office of Management and Budget for

review in accordance with the

Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)). Comments on the

collection of information should be sent

to the Office of Management and

Budget, Attn: Desk Officer for the

Department of the Treasury, Office of

Information and Regulatory Affairs,

Washington, DC 20503, with copies to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, OP:FS:FP,

Washington, DC 20224. Comments on

the collection of information should be

received by August 31, 1998. Comments

are specifically requested concerning:

Whether the proposed collection of

information is necessary for the proper

performance of the functions of the

Internal Revenue Service, including

whether the information will have

practical utility;

The accuracy of the estimated burden

associated with the proposed collection

of information (see below);

How the quality, utility, and clarity of

the information to be collected may be

enhanced;

How the burden of complying with

the proposed collection of information

may be minimized, including through

the application of automated collection

techniques or other forms of information

technology; and

Estimates of capital or start-up costs

of operation, maintenance, and

purchase of services to provide

information.

The collection of information in this

notice of proposed rulemaking is in

§§ 48.4052–1, 48.4082–7(a), 48.4082–

8(e), 48.4091–3(c), 48.4101–2(a)(4),

48.4101–3(d), and 48.6427–11. This

information is required to support

exempt transactions and to inform

consumers of the type of fuel that is

being purchased. The likely respondents

are businesses and other for-profit

organizations.

Estimated total annual reporting

burden: 3,340 hours.

The estimated annual burden per

respondent varies from .20 hours to 1

hour, depending on individual

circumstances, with an estimated

average of .29 hour.

Estimated number of respondents:

11,600.

Estimated annual frequency of

responses: On occasion.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number

assigned by the Office of Management

and Budget.

Books or records relating to a

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Background

Temporary regulations published in

the Rules and Regulations section of this

issue of the Federal Register provide

rules relating to the kerosene tax, certain

aviation fuel tax refunds allowed by

section 4091(d), and registration

requirements for certain heavy vehicle

manufacturers and retailers. The text of

those regulations also serves as the text

of these proposed regulations relating to

kerosene. The preamble to the

temporary regulations explains the

temporary regulations.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in EO 12866. Therefore, a regulatory

assessment is not required. It also has

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) does not apply to these