Securities Act Release No. 6958A

Exchange Act Release No. 31197A

Holding Company Act Release No. 25633A

Investment Company Act Release No. 18960A

Financial Reporting Release 40A

September 24, 1992

Amendments to Rules and Forms

ACTION: Final Rules.

SUMMARY: The Commission announces amendments to various rules and forms under the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, and the Investment Company Act of 1940. These amendments are being adopted to conform such rules and forms to recently adopted accounting standards.

EFFECTIVE DATE: [Insert date 30 days after publication in the Federal Register]. Registrants, however, are permitted to comply immediately after publication of this Release in the Federal Register.

FOR FURTHER INFORMATION CONTACT: John W. Albert, Office of the Chief Accountant (202-272-2130), or Robert Bayless or Teresa Iannaconi, Division of Corporation Finance (202-272-2553), Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION:

The Securities and Exchange Commission is adopting amendments to Rules [*  equals footnotes 1 thru 16. CCH.] 3-02,¹ 3-03,² 3-09,³ 3-12,⁴ 3-18,⁵ 3-19,⁶ 3-21,⁷ 4-08,⁸ 4-10,⁹ 7-04,¹⁰ 10-01,¹¹ 12-04,¹² and 12-16 ¹³ of Regulation S-X (S-X) ¹⁴ and revisions to Schedules 13E-3¹⁵  and 13E-4,¹⁶  Rule 14a-3(b)(1),¹⁷  and Forms X-17A-5,¹⁸  20-F,¹⁹  and 10-K²⁰  under the Securities Exchange Act of 1934 (Exchange Act), Form U5S²¹  under the Public Utility Holding Company Act of 1935 (Utility Act), and Form N-4²²  under the Investment Company Act of 1940 (Investment Company Act).

Table of Contents

I. Executive Summary

At the request of the Office of the Federal Register, the Commission has made certain revisions to this release. Accordingly, the copy issued by the Commission on September 17, 1992 should not be relied upon. The Commission historically has looked to the private sector standard setting bodies designated by the accounting profession to establish and improve accounting principles, subject to Commission oversight.²³  The Commission's rules require compliance with generally accepted accounting principles (GAAP), and the requirements of the Commission's rules and forms generally are used to interpret, supplement, or expand upon the basic GAAP requirements. The purpose of these amendments is to eliminate duplicative and obsolete disclosures and to conform reporting requirements as necessary to achieve consistency between the Commission's rules and forms and existing accounting principles.²⁴

The following chart summarizes the significant amendments and provides the rationale for such changes.

SUMMARY OF AMENDMENTS

The table that follows is presented as a guide to assist the reader in understanding the amendments by presenting a brief description of the changes together with an explanation of the rationale for each change. This table should be used as a supplement to the discussion provided in later sections of this release. As used in this table, SFAS refers to Statements of Financial Accounting Standards issued by the Financial Accounting Standards Board (FASB).

(b) Accounting practices differ and therefore disclosure should enhance comparability of registrants' financial statements.

II. Proposing Release

On February 17, 1989, the Commission proposed for public comment the amendments discussed herein.²⁵  The Commission received 46 comment letters on the proposed amendments. The majority of letters (38) were received from representatives of industry. Letters were also received from five accounting firms and one accounting association, a law firm, and an individual. Commentators generally expressed support for the Commission's objective of conforming its rules with the requirements of GAAP; however, many commentators also expressed reservations about certain of the proposed amendments which would call for financial reporting disclosures that exceed those required under GAAP. Comments are summarized in the relevant sections of this release.

III. Statement of Cash Flows

In November 1987 the FASB issued SFAS 95, Statement of Cash Flows. SFAS 95 requires presentation of a statement of cash flows as a component of a set of basic financial statements and supersedes the previous requirement to present a statement of changes in financial position.

A. Interim Reporting

1. Abbreviated Format of Statement

Rule 10-01 of S-X is being amended as proposed to permit the use of an abbreviated form of the statement of cash flows for interim financial statements. This is consistent with the previous rule which permitted the use of an abbreviated form of the statement of changes in financial position.

Several commentators questioned the use of cash flows from operations as the criterion to trigger disclosure of cash flows from investing and financing activities. The amended rule requires such disclosure when individual types of cash flows exceed 10% of average net cash flows from operating activities for the most recent three years. Several commentators suggested use of beginning cash balances rather than the average cash flows from operating activities as the measurement criterion for disclosure of significant investing and financing activities. However, as one commentator noted, many companies do not maintain significant cash balances and any percentage test applied to cash balances could result in excessively detailed disclosure. Therefore, the amended rule is based on average operating cash flows as the appropriate measure of significance for this disclosure.

2. Disclosure of Cash Interest and Taxes Paid

The proposing release would have required that cash payments for interest and income taxes be separately disclosed in the abbreviated statement or in a footnote thereto since such information was believed to be valuable for financial statement analysis.

Opponents of this aspect of the proposed rules cited the cost and time burden required to develop the data on an interim basis. Some commentators specifically noted the difficulties that would be encountered by multinational companies where data collection on a worldwide basis and the effects of exchange rates and foreign currency hedging transactions may compound the difficulty of developing these data for interim disclosure.

Respondents argued that these data would not be particularly meaningful outside of the context of a full cash flow statement. Specifically they pointed out that disclosures about significant cash payments for interest and taxes are intended to provide comparability between cash flow statements prepared under the direct and indirect methods, and that comparability is not a factor within the interim reporting rules which do not distinguish between use of the direct versus indirect methods of reporting. It was also argued that as incremental information, such a requirement would be inconsistent with the concept of an abbreviated statement.

The rules as adopted do not require interim cash flow statements to include separate disclosure of the amounts of cash interest and taxes paid.

B. Foreign Private Issuers

The Commission is amending Regulation S-X, Rule 3-19, and Items 17 and 18 of Form 20-F²⁶  (which contains the general financial statement requirements applicable to foreign private issuers) to adopt a requirement to provide a statement of cash flows or substantially similar information as a component of the financial statements included in filings with the Commission in place of the previous requirement to provide a statement of changes in financial position.

The Commission's requirements provide that, while foreign issuers' financial statements may be prepared according to a comprehensive body of accounting principles other than those generally accepted in the United States, they must disclose an informational content substantially similar to financial statements that comply with United States GAAP.

Thus, the amendment requires that financial statements that are prepared in accordance with a comprehensive body of principles that does not require a statement of cash or funds flow must include a statement of cash flows that complies with the requirements of SFAS 95. If the financial statements are prepared in accordance with a body of principles that requires a cash or funds flow statement in a format that differs from the U.S. required statement, the amendment permits presentation of substantially similar information in financial statement or footnote form.

Of the respondents who commented on this proposal, a substantial majority supported the proposed amendments citing among other reasons the desirability of maintaining a "level playing field" in terms of financial reporting requirements for U.S. and foreign registrants. Opposing commentators cited the potential time and cost burden for some foreign registrants, specifically addressing the hardship of applying the SFAS 95 cash flow reporting requirements to certain foreign depository financial institutions.²⁷  Respondents also detailed differences in the manner of operations of British versus U.S. depository financial institutions which compound the hardship of strict compliance with the SFAS 95 cash flow reporting requirements. However, the subsequent amendment of the U.S. cash flow standard and the recent adoption of a new U.K. standard have substantially eliminated this hardship.²⁸

Both proponents and opponents recommended that flexibility be allowed in the adoption and implementation of any cash flow reporting requirement.

The Commission believes that the disclosures prescribed by SFAS 95 are useful,²⁹  and it is appropriate to adopt this amendment, which will continue the Commission's existing requirement that foreign issuers should provide basic financial statements that reflect information that is substantially similar to that which is required by U.S. GAAP. As adopted, the Commission's requirement for cash flow reporting by foreign private issuers is flexible in that it permits presentation of the cash flow information in alternative formats in circumstances where a registrant's home country has a cash flow or funds flow reporting requirement that differs from the U.S. requirement. Further, the Commission emphasizes that, as with other accounting issues, the Commission's staff is willing to work with individual foreign registrants to resolve any unusual difficulty or burden imposed by the Commission's rules.

C. Other Technical Amendments

Many of the amendments being adopted are "housekeeping" matters, which result from the issuance of SFAS 95. All rules and forms that contain references to the previously required statement of changes in financial position are being amended to refer to the newly adopted statement of cash flows.

SFAS 95, as amended by SFAS 102, requires certain investment companies to include a statement of cash flows as a component of a set of basic financial statements. Rule 3-18 is being amended to adopt a requirement that investment companies provide a cash flow statement as a component of a set of basic financial statements to the extent required by GAAP.

The proposing release requested comments on whether the Commission should expand the summary financial information requirements in Rule 1-02(aa) of Regulation S-X to include summary cash flow data. Commentators did not express support for inclusion of cash flow data because such information was not deemed useful or relevant in all circumstances under which the data prescribed by Rule 1-02(aa) are required. A requirement that these data be routinely provided is not being adopted.

IV. Reporting on Income Taxes

SFAS 96, Accounting for Income Taxes, established financial accounting and reporting standards for the effects of income taxes on reporting entities.³⁰  Subsequent to the rule proposal and attendant public comment, the FASB initiated a project to amend SFAS 96 with a standard that would, among other things, revise the criteria by which deferred tax assets are recognized and measured. In February 1992, the FASB issued SFAS 109 which is effective for fiscal years beginning after December 15, 1992. Similar to the standard it amends, SFAS 109 assumes an asset and liability approach to accounting and reporting for income taxes. Rule 4-08(h) of Regulation S-X contains the Commission's income tax disclosure requirements. Some of the disclosure requirements of Rule 4-08(h) were adopted by SFAS 109 in either the original or a modified form. Rule 4-08(h) is being amended to delete those requirements that are now duplicated for registrants complying with SFAS 109. Other income tax accounting requirements are discussed below.

A. Disclosures Relating to Significant Temporary Differences

SFAS No. 109 requires disclosure of the tax effects of the principal temporary differences that give rise to deferred tax assets and liabilities. This represents a change from the approach initially taken in SFAS 96 under which companies would be required to disclose only the nature of the temporary differences that give rise to deferred tax assets and liabilities. The proposing release focused on the lack of quantified disclosure requirements under SFAS 96. Rules were proposed to require disclosure of the amount of each significant component of deferred tax assets and liabilities based on the view that quantified disclosure would be meaningful to financial statements users in assessing the potential timing and degree of management control over the reversal of timing differences.

A separate rule is no longer considered necessary as a result of the adoption of quantified disclosures under SFAS 109.

B. Other Technical Amendment

Rule 4-10(j) of Regulation S-X, captioned Income taxes, requires registrants engaged in oil and gas producing activities to apply comprehensive interperiod tax allocation by the deferred method. Reference to the deferred method of income tax allocation is being deleted in recognition of the change to the liability method required under SFAS 109. Also, the existing guidance on the income tax accounting treatment of excess statutory depletion is being deleted since it would be either (1) redundant of the existing requirements under GAAP for applying the deferred method of income tax allocation or (2) not applicable once SFAS 109 is adopted. The rule is revised to refer to the requirements of GAAP generally since registrants that have not already voluntarily adopted SFAS 109 presently have the option of continuing to apply the deferred method until the effective date of SFAS 109.

V. Loan Origination Fees

In December 1986, the FASB issued SFAS 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. Rule 9-03 of Regulation S-X, which governs the form and content of balance sheets of bank holding companies, currently requires presentation of the total loan portfolio balance with separate disclosure of related loan loss allowances and unearned income. The Commission proposed an amendment of Rule 9-03.7 to require disclosure in the balance sheet of the net unamortized deferred loan origination fees and costs.

A majority of commentators opposed the proposal. The principal reasons cited for opposition were (1) that the balance sheet disclosure exceeds the requirements of GAAP since SFAS 91 addresses only the accounting and not the financial statement display of loan origination fees and (2) that the separate information would not necessarily be relevant or useful to financial statement users and the amount of such deferred loans and fees would be included in unearned income which is required by S-X, Rule 9-03.7, to be separately disclosed if material.

The Commission finds merit in certain of these arguments. The amended rules do not include the requirement for separate disclosure of net unamortized deferred loan fees and costs.

VI. Accounting and Reporting by Insurance Companies

In December 1987 the FASB issued SFAS 97, Accounting and Reporting by Insurance Enterprises for Certain Long Duration Contracts and for Realized Gains and Losses from the Sale of Investments. Article 7 of S-X governs the form and content of financial statements of insurance enterprises.

A. Realized Gains and Losses

SFAS 97 requires that, consistent with all other industries, net realized investment gains and losses be included in the determination of income from operations rather than being presented below operating earnings and shown net of applicable income taxes in the income statement. Consistent with this standard, the Commission is amending Rule 7-04 of Regulation S-X to present net realized gains and losses on a pretax basis in the computation of income or loss from continuing operations. A majority of commentators objected to separate income statement line item presentation. Some objected to the proposed requirement that separate line item presentation would be required regardless of size.

The requirement to disclose net realized gains and losses "regardless of size" is consistent with the language for the similar requirement for bank holding companies at Rule 9-04.13 of S-X. The net amount of realized gains and losses, together with other required information concerning investing activities, provides meaningful information to financial statement users.³¹  The utility of the information is not diminished because the amounts of gains versus losses happen to offset in a particular period and therefore the net amount becomes small in relation to some other measure of performance. Consequently, the amendment is being adopted as proposed.

B. Gains and Losses Allocable to Policyholders and Separate Accounts

It is the Commission's understanding that there is diversity in practice among insurance companies with respect to inclusion of investment income and realized gains and losses allocable to policyholders and separate accounts together with other investment income and realized gains and losses reported in the financial statements.³²  The Commission is amending its rules to require disclosure of an insurance enterprise's policies with respect to the manner in which the financial statements report or include investment income and realized gains and losses allocable to separate accounts and policyholders together with disclosure of the amounts of such allocable investment income and realized gains and losses included in the financial statements. This amendment is being adopted to enable users of financial statements to identify income, gains, and losses that accrue to the benefit of shareholders as compared to the benefit of policyholders and separate accounts and to facilitate comparability of financial statements.

Certain commentators objected to the proposal on the basis that this is only one area in which there is diversity in practice among insurance companies and suggested that this should be referred to the private sector for deliberation. While Commission policy supports having the private sector consider the establishment of standards, the Commission cannot ignore dealing with divergent accounting practices when they are identified. Further, the Commission has been encouraged by the favorable response from registrants in the insurance industry to go forward with this amendment. Therefore, this amendment, as modified to clarify the disclosure to be provided, is being adopted.

C. Other Consideration

SFAS 97 addresses accounting for other consideration earned by insurance enterprises, including administrative and surrender charges on investment contracts such as universal life policies. The proposing release included a proposal to amend Rule 7-04 to include a new revenue caption, "Other Consideration."

Respondents to this proposal were evenly divided with supportive commentators suggesting that a different descriptive title be adopted. Opponents generally observed that the disclosure would not be meaningful or necessary and exceeds the requirements of GAAP. It was also observed that if this "other consideration" is not otherwise separately disclosed but is included in "other income" it, nevertheless, would be required to be presented separately pursuant to the requirements of S-X, Rule 7-04.3 (Rule 7-04.4 as amended), if it exceeds five percent of total revenue.

The Commission is persuaded by these comments that these sources of revenue may be included in "other income" with separate disclosure left to the discretion of registrants subject to the requirement for separate disclosure where such amounts exceed five percent of total revenue. Therefore, the proposed amendment is not being adopted.

VII. Oil and Gas Disclosure Requirements

The Commission is deleting Rule 4-10(k) of S-X which requires supplemental disclosures of oil and gas producing activities which are substantially similar to disclosure requirements which are contained in SFAS 69, Disclosures about Oil and Gas Producing Activities. This rule is no longer necessary because the transition period for the application of comparable rules under SFAS 69 has expired.³³  As a result of the deletion of Rule 4-10(k), Rule 4-10(i)(4) (which currently refers to Rule 4-10(k)(6)) is also being amended to incorporate directly the language previously referenced. This is a change from the proposal to cross reference to certain related provisions of SFAS 69, which certain commentators argued could have the unintended effect of changing the method of applying the full cost ceiling test.³⁴

Rule 4-10(i)(4) as presently being amended includes the current requirement to consider the tax effects of differences in bases of unproved properties, referred to in subparagraph (D) of existing Rule 4-10(i)(4). The provisions of subparagraph (D) were inadvertently omitted from the proposed rule printed in the Federal Register.

VIII. Other Technical Amendments

The Commission is adopting other technical amendments in response to public comment that certain other rules are no longer operative due to actions taken by the FASB. These amended rules include:

A. Rule 3-21 of Regulation S-X captioned, Special Provisions as to Financial Statements of Companies Engaged in Marketing Computer Software. This rule is supplemented by a note indicating that its requirements shall not apply to financial statements that reflect the adoption of a FASB pronouncement that provides guidance in this area. This rule is being deleted since SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, is applicable to fiscal years beginning after December 15, 1985.

B. Rule 4-08(j) of Regulation S-X captioned, Leased assets and lease commitments of regulated enterprises subject to the rate-making process. This rule requires expanded lease-related disclosures in the financial statements of certain rate regulated registrants that are not required to follow the provisions of SFAS 13, Accounting for Leases. Consistent with the provisions of SFAS 71, Accounting for the Effects of Certain Types of Regulation, rate regulated registrants are no longer exempt from the provisions of SFAS 13. Therefore, the rule is being deleted since it is no longer necessary.

Certain Findings

Section 23(a)(2) of the Securities Exchange Act ("the Act")35  requires the Commission, in adopting rules under the Act, to consider the anti-competitive effect of such rules, if any, and to balance any impact against the regulatory benefits gained in terms of furthering the purposes of the Act. The Commission has considered the amendments and additions to Regulation S-X, Forms 10-K, X-17A-5, 20-F, Schedules 13E-3 and 13E-4, and Rule 14a-3, in light of the standard cited in Section 23(a)(2) and believes that adoption of these changes will not impose any burden on competition not necessary or appropriate in furtherance of the Act.

Regulatory Flexibility Act Certification

Pursuant to Section 605(b) of the Regulatory Flexibility Act [5 U.S.C. 605(b)], the Chairman of the Commission previously certified that the proposed amendments will not have a significant impact on a substantial number of small entities. No comments were received on this certification.

List of subjects in 17 CFR Parts 210, 240, 249, 259 and 274

Accounting, Reporting and Recordkeeping Requirements, Securities, Utilities, Investment Companies

Text of Amended Rules

In accordance with the foregoing, Title 17, Chapter II, of the Code of Federal Regulations is amended 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, in part, as follows:

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

§210.3-01 [Amended]

2. The first paragraph of the introductory note preceding §210.3-01 is amended by revising the phrase "changes in financial position" to read with "cash flows".

§§210.3-02, 210.3-03, 210.3-09 and 210.3-12 [Amended]

3. By amending the following sections to revise the phrase "changes in financial position" to read "cash flows".

§210.3-02(a) and (b)

§210.3-03(b)(2) (2 places)

§210.3-09(c)

§210.3-12(a)

4. By amending §210.3-18 to redesignate paragraph (a)(3) as (a)(4) and by adding new paragraph (a)(3) and by revising paragraph (b) to read as follows:

§210.3-18 Special Provisions as to registered management investment companies and companies required to be registered as management investment companies.

(a) * * *

(3) An audited statement of cash flows for the most recent fiscal year if necessary to comply with generally accepted accounting principles. (Further references in this rule to the requirement for such statement are likewise applicable only to the extent that they are consistent with the requirements of generally accepted accounting principles.)

(b) If the filing is made within 60 days after the end of the registrant's fiscal year and audited financial statements for the most recent fiscal year are not available, the balance sheet or statement of assets and liabilities may be as of the end of the preceding fiscal year and the filing shall include an additional balance sheet or statement of assets and liabilities as of an interim date within 245 days of the date of filing. In addition, the statements of operations and cash flows (if required by generally accepted accounting principles) shall be provided for the preceding fiscal year and the statement of changes in net assets shall be provided for the two preceding fiscal years and each of the statements shall be provided for the interim period between the end of the preceding fiscal year and the date of the most recent balance sheet or statement of assets and liabilities being filed. Financial statements for the corresponding period of the preceding fiscal year need not be provided.

§210.3-18 [Amended]

5. By amending §210.3-18(c) to revise the phrase to "statements of operations and changes in net assets" to read "statements of operations, cash flows, and changes in net assets".

§210.3-19 [Amended]

6. By amending §210.3-19(a)(2) and (d) to revise the phrase "changes in financial position" to read "cash flows".

§210.3-21 [Amended]

7. By removing §210.3-21.

8. By amending §210.4-08 to add paragraph (h)(3) to read as follows:

§210.4-08 General notes to financial statements

(h) * * *

(3) Paragraphs (h)(1) and (2) of this section shall be applied in the following manner to financial statements which reflect the adoption of Statement of Financial Accounting Standards 109, Accounting for Income Taxes.

(i) The disclosures required by paragraph (h)(1)(ii) and by the parenthetical instruction at the end of paragraph (h)(1) and by the introductory sentence of paragraph (h)(2) of this section shall not apply.

(ii) The instructional note between paragraphs (h)(1) and (2) and the balance of the requirements of paragraphs (h)(1) and (2) of this section shall continue to apply.

9. By removing and reserving paragraph (j) of §210.4-08.

10. By amending §210.4-08(k)(1) to revise the phrase "changes in financial position" to read "cash flows".

11. By revising paragraph (i)(4)(i) of §210.4-10 to read as follows:

§210.4-10 Financial accounting and reporting for oil and gas producing activities pursuant to the Federal securities laws and the Energy Policy and Conservation Act of 1975.

(i) Application of the full cost method of accounting.

(4) Limitation on capitalized costs. (i) For each cost center, capitalized costs, less accumulated amortization and related deferred income taxes, shall not exceed an amount (the cost center ceiling) equal to the sum of:

(A) The present value of estimated future net revenues computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus

(B) the cost of properties not being amortized pursuant to paragraph (i)(3)(ii) of this section; plus

(C) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less

(D) income tax effects related to differences between the book and tax basis of the properties referred to in paragraphs (i)(4)(i)(B) and (C) of this section.

12. By amending paragraph (j) of §210.4-10 to revise in the first sentence the phrase "income tax allocation by the deferred method" and to read "income tax allocation by a method which complies with generally accepted accounting principles", and removing the second sentence of the paragraph.

13. By removing paragraph (k) of §210.4-10.

14. By amending §210.7-04 by removing paragraph 12 and by redesignating paragraphs 3 through 11 as paragraphs 4 through 12 and by adding paragraph 3 to read as follows:

§210.7-04 Income statements.

3. Realized investment gains and losses. Disclose the following amounts:

(a) Net realized investment gains and losses, which shall be shown separately regardless of size.

(b) Indicate in a footnote the registrant's policy with respect to whether investment income and realized gains and losses allocable to policyholders and separate accounts are included in the investment income and realized gain and loss amounts reported in the income statement. If the income statement includes investment income and realized gains and losses allocable to policyholders and separate accounts, indicate the amounts of such allocable investment income and realized gains and losses and the manner in which the insurance enterprise's obligation with respect to allocation of such investment income and realized gains and losses is otherwise accounted for in the financial statements.

(c) The method followed in determining the cost of investments sold (e.g., "average cost," "first-in, first-out," or "identified certificate") shall be disclosed.

(d) For each period for which an income statement is filed, include in a note an analysis of realized and unrealized investment gains and losses on fixed maturities and equity securities. For each period, state separately for fixed maturities [see §210.7-03. 1(a)] and for equity securities [see §210.7-03.1(b)] the following amounts: (1) realized investment gains and losses, and (2) the change during the period in the difference between value and cost.

The change in the difference between value and cost shall be given for both categories of investments even though they may be shown on the related balance sheet on a basis other than value.

15. By amending §210.7-04 by revising newly re-designated paragraphs 11 and 12 to read as follows:

§210.7-04 Income Statements

11. Equity in earnings of unconsolidated subsidiaries and 50% or less owned persons. State, parenthetically or in a note, the amount of dividends received from such persons. If justified by the circumstances, this item may be presented in a different position and a different manner. (See §210.4-01(a).)

12. Income or loss from continuing operations.

16. By revising §210.10-01(a)(4) to read as follows:

(a) * * *

(4) The statement of cash flows may be abbreviated starting with a single figure of net cash flows from operating activities and showing cash changes from investing and financing activities individually only when they exceed 10% of the average of net cash flows from operating activities for the most recent three years. Notwithstanding this test, §210.4-02 applies and de minimis amounts therefore need not be shown separately.

17. By amending §210.10-01(c)(3) and (4) to revise the phrase "changes in financial position" to read "cash flows".

§210.12-04 [Amended]

18. By amending §210.12-04(a) to revise the the phrase "changes in financial position" to read "cash flows".

§210.12-16 [Amended]

19. By amending §210.12-16 to revise "Segment heading under Column H of this schedule to read "Benefits, claims, losses, and settlement expenses (caption 5)" and to revise footnote 4 to the schedule to read, "The total of columns I and J should agree with the amount shown for income statement caption 7."

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

20. The authority citation for Part 240 continues to read as follows:

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

§§240.13e-100, 240.13e-101, 240.14a-3 and 240.17a-5 [Amended]

21. By amending the following sections by revising the phrase "changes in financial position" to read "cash flows".

§240.13e-100 Item 14(a)(2)

§240.13e-101 Item 7(a)(2)

§240.14a-3(b)(1)

§240.17a-5(g)(1)

§240.17a-5 [Amended]

22. By amending §240.17a-5 by revising the phrase "Changes in Financial Position" to read "Cash Flows".

PART 249 FORMS, SECURITIES EXCHANGE ACT OF 1934

23. The authority citation for Part 249 continues to read as follows:

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

24. By amending Form 20-F (referenced in §249.220f) Item 17(c) to redesignate paragraph (2) as paragraph (3) and Item 18(c) to redesignate paragraphs (2) and (3) as paragraphs (3) and (4) and by adding new Items 17(c)(2) and 18(c)(2) both to read as follows:

§249.220f Form 20-F, registration of securities of foreign private issuers pursuant to section 12(b) or (g) and annual and transition reports pursuant to sections 13 and 15(d). Form 20-F

* * * * *

(c) * * *

(2) If financial statements are prepared under a comprehensive body of accounting principles that does not include a requirement for a statement of changes in financial position or a statement of cash or funds flow, the basic financial statements shall include a statement of cash flows which meets the requirements of U.S. generally accepted accounting principles. If the financial statements are prepared under a comprehensive body of accounting principles that includes a requirement for a statement of cash or funds flow that differs from the requirements under U.S. generally accepted accounting principles, cash flow information that is substantially similar to the requirements under U.S. generally accepted accounting principles may be presented in a separate statement of cash flows or in a footnote.

§249.310 [Amended]

25. By amending Form 10-K (referenced in §249.310) Item 8(a)(2) to revise the phrase "changes in financial condition" to read "cash flows".

PART 259 FORMS PRESCRIBED UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935

26. The authority citation for Part 259 is revised to read as follows:

AUTHORITY: 15 U.S.C. 79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q, 79t.

§259.5s [Amended]

27. By amending Form U5S (referenced in §259.5s) ITEM 9 to revise the phrase "changes in financial position" to read "cash flows".

PART 274 FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

28. The authority citation for Part 274 continues to read, in part, as follows:

AUTHORITY: The Investment Company Act of 1940, 15 U.S.C. 80a-1, et seq., unless otherwise noted;

* * * * *

29. By amending Form N-4 (referenced in §274.11c) to revise Item 23(a)(iii) and add new Item 23(a)(iv) to read as follows:

§274.11c Form N-4, registration statement of separate accounts organized as unit investment trusts.

Form N-4

Item 23. Financial Statements

(a) * * *

(iii) An audited statement of cash flows for the most recent fiscal year if necessary to comply with generally accepted accounting principles.

(iv) Audited statements of changes in net assets conforming to the requirements of Rule 6-09 of Regulation S-X [17 CFR 210.6-09 LK:NON: SEC-ALNK 17CFR210.6-09 ] for the two most recent fiscal years.

By the Commission.

¹ 17 CFR 210.3-02 LK:NON: SEC-ALNK 17CFR210.3-02.

² 17 CFR 210.3-03 LK:NON: SEC-ALNK 17CFR210.3-03.

³ 17 CFR 210.3-09 LK:NON: SEC-ALNK 17CFR210.3-09.

⁴ 17 CFR 210.3-12 LK:NON: SEC-ALNK 17CFR210.3-12.

⁵ 17 CFR 210.3-18 LK:NON: SEC-ALNK 17CFR210.3-18.

⁶ 17 CFR 210.3-19 LK:NON: SEC-ALNK 17CFR210.3-19.

⁷ 17 CFR 210.3-21 LK:NON: SEC-ALNK 17CFR210.3-21.

⁸ 17 CFR 210.4-08 LK:NON: SEC-ALNK 17CFR210.4-08.

⁹ 17 CFR 210.4-10 LK:NON: SEC-ALNK 17CFR210.4-10.

¹⁰ 17 CFR 210.7-04 LK:NON: SEC-ALNK 17CFR210.7-04.

¹¹ 17 CFR 210.10-01 LK:NON: SEC-ALNK 17CFR210.10-01.

¹² 17 CFR 210.12-04 LK:NON: SEC-ALNK 17CFR210.12-04.

¹³ 17 CFR 210.12-16 LK:NON: SEC-ALNK 17CFR210.12-16.

¹⁴ 17 CFR 210 LK:NON: SEC-ALNK 17CFR210.

¹⁵ 17 CFR 240.13e-100 LK:NON: SEC-ALNK 17CFR240.13E-100.

¹⁶ 17 CFR 240.13e-101 LK:NON: SEC-ALNK 17CFR240.13E-101.

¹⁷ 17 CFR 240.14a-3 LK:NON: SEC-ALNK 17CFR240.14A-3 (b)(1).

¹⁸ 17 CFR 240.17a-5 LK:NON: SEC-ALNK 17CFR240.17A-5.

¹⁹ 17 CFR 249.220f LK:NON: SEC-ALNK 17CFR249.220F.

²⁰ 17 CFR 249.310 LK:NON: SEC-ALNK 17CFR249.310.

²¹ 17 CFR 259.5s LK:NON: SEC-ALNK 17CFR259.5S.

²² 17 CFR 274.11c LK:NON: SEC-ALNK 17CFR274.11C.

²³ See Accounting Series Release No. 150 (December 20, 1973) [39 FR 1260].

²⁴ The Commission also notes that although its mandatory peer review proposal, published in Securities Act Release No. 6695 (April 1, 1987) [52 FR 11665], is being withdrawn, it continues to believe that the peer review process contributes significantly to improving the quality control systems of accounting firms auditing Commission registrants and enhances the consistency and quality of practice before the Commission. The Commission, therefore, encourages accounting firms practicing before the Commission who have not joined a peer review program to do so, and the staff will continue to monitor enrollment in and the peer review activities of the SEC Practice Section (SECPS) of the American Institute of Certified Public Accountant's Division of CPA Firms with a view to whether there is need for a direct Commission requirement.

²⁵ Release 33-6818; File No. 57-4-89 (February 17, 1989) [54 FR 8202].

²⁶ Form 20-F (17 CFR 249.220f LK:NON: SEC-ALNK 17CFR249.220F ) is both the registration form and the annual report form which may be filed by foreign private issuers pursuant to the requirements of the Exchange Act.

²⁷ In December 1989 the FASB issued SFAS 104 which amends SFAS 95 to expand the circumstances under which depository financial institutions' cash flows from deposit and lending activities may be presented on a net, rather than gross, basis. This amendment will reduce but not eliminate some of the cash flow reporting burden of depository financial institutions.

²⁸ In September 1991 the recently created Accounting Standards Board of the United Kingdom published Financial Reporting Standard 1, Cash Flow Statements. The staff has indicated to U.K. registrants that the U.K. statement (with a few incremental disclosures) substantially satisfies the cash flow statement requirement in filings with the Commission. Additionally, FASB issued a new standard that modified the U.S. cash flow statement requirement to permit disclosures of certain cash flow items on a net basis. This revision largely addresses the concern expressed by U.K. commentators.

²⁹ The Commission notes that cash flows may be particularly useful in assessing the relative performance of foreign and U.S. issuers since, unlike the other statements, this information is not dependent on the differing accounting rules followed in preparing the balance sheet and income statements. Further, the Commission also notes that the International Accounting Standards Committee issued an exposure draft dated July, 1991 that would require a cash flow statement. The existing IASC standard calls for a statement of changes in financial position on either a funds or cash flow basis.

³⁰ In December 1989, FASB issued SFAS 103 which amends SFAS 96 to defer the effective date of that statement to fiscal years beginning after December 15, 1991. The effective date was later deferred until fiscal years beginning after December 15, 1992 in recognition of the imminent adoption of a revised accounting standard.

³¹ S-X, Rule 7-04.3 (as amended), and, previously, Rule 7-04.12 contain a requirement that the caption for realized gains or losses must be referenced to a footnote that provides an analysis of realized and unrealized gains and losses for each period for which an income statement is provided.

³² A separate account is defined in Section 2(a)(37) of the Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(37), and in paragraphs 53 and 54 of SFAS 60, Accounting and Reporting by Insurance Enterprises. Although the assets of a separate account are the legal assets of the insurance company, the investment income and realized gains and losses from such assets accrue to the benefit of the separate account. Some insurance companies report the investment income and realized gains and losses on separate account assets together with the general operating accounts of the insurance enterprise and include the allocation of the separate account benefits with other insurance claims accruals. Other companies "net" the allocation against the investment income and realized gains and losses resulting in exclusion of separate account activities from the income statement of the insurance company.

³³ When SFAS 69 was adopted in 1982, it was made effective for years beginning on or after December 15, 1982 with earlier application encouraged but not required. The Commission's rules were amended in 1983 to indicate that the requirements of Rule 4-10(k) would not apply to fiscal years beginning on or after December 15, 1982, thus ensuring that supplemental disclosure requirements under Rule 4-10(k) would phase out as SFAS 69 requirements phased in.

³⁴ One commentator indicated that a literal application of SFAS 69 would effectively eliminate use of the so-called "short-cut" method of calculating income taxes, presently permitted under Topic 12-D-1 of the staff accounting bulletin series.

³⁵ 15 U.S.C. 78w(a)(2).