Training Material
2000 Edition (3.31.00)

Division of Corporation Finance
an Overview

Accounting Disclosure Rules and Practices

Topic One: Registrant's Financial Statements

Table of Contents

I. Financial Statements and Schedules in Registrations and
Proxy Materials

A. Audited Annual Financial Statements

1. Required audited financial statements for a domestic registrant in a registration statement or proxy materials:

* See Topic Five for S-B eligibility criteria.

NOTE: Financial statements included in Form 10-SB need only be audited for the most recent fiscal year if audited financial statements for the preceding year are not otherwise available. If this is the case, unaudited financial statements prepared in accordance with GAAP for the preceding year should be included in the filing. [Part F/S of Form 10-SB]

2. Exceptions and Special Cases

a) Form 1-A (available for qualifying small stock issuances) requires two years of financial statements. They may be unaudited unless the issuer is otherwise required to file audited statements with the Commission.

b) Unaudited fiscal year-end data may be provided if it is not otherwise required to be audited. [SAB 1C]

c) An income statement may be omitted if income and expense through the balance sheet date are nominal, but an audited footnote should summarize any activity. [SP]

d) A change in fiscal year requires transition period financial statements. Refer to III.E.

B. Unaudited Interim Financial Statements

Required unaudited interim financial statements [SX Article 10] for a domestic registrant to be presented in a registration statementmade effective or a proxy statement mailed 135 days or more after the fiscal year-end:

Statement Regulation SX and SB Special Notes

* Corresponding prior year interim period not required in Form 1-A.

C. Supplemental Schedules [Article 12]

1. Required for fiscal years or year-ends as specified by the applicable article of Regulation SX.

2. Not required for SB filers or Form 1-A.

Not required in proxies, except certain schedules required for insurance and real estate companies. [PR Item 13 Instruction 3]

D. Proxy Materials

1. An annual report to shareholders containing audited financial statements for the most recently completed year must accompany or precede a proxy relating to an annual meeting at which officers and directors will be elected.

For what actions are financial statements required in proxy materials?

Financial statements are required where action is taken to authorize, issue, exchange or modify securities, or for a material merger or acquisition. For actions other than business combinations, financial statements are not required if they would not be material for the exercise of prudent judgment concerning the matter to be acted upon, like authorization or issuance of securities for cash. [Instructions to PR Item 13a.]

2. Business Combinations

In a proposed business combination, what financial statements are required in proxy materials?

The answer depends on who is voting and the nature of the consideration.

Voting Shareholders Consideration Financial Statements

NOTE: If the consideration issued in the business combination includes registered securities, registrants must comply with the financial statement requirements of Form S-4 or Form F-4. See Topic Two.

3. Audit Requirement The audit requirements for nonreporting target companies have been relaxed. Financial statements for the latest fiscal year must be audited if practicable.

Financial statements for prior years need not be audited if they were not previously audited.

E. Bank Reorganizing under Newly-formed Holding Company

* Generally, a reorganization with no changes in relative interests, no leverage, and no new classes of stock. In SAB 1F, ''Form S-4'' should be substituted for all references to ''Form S-14''.

1. Registrants marking the box on the cover of Form S-4 that are in compliance with General Instruction G to the Form are declared effective automatically. Failure to check the box or to meet all of the conditions of General Instruction G means that the registration statement will not be declared effective automatically.

2. General Instruction G requires that the transaction being registered involves the organization of a bank or savings holding company for the sole purpose of acquiring the stock of a bank or savings institution in addition to the requirements in SAB 1F. If the purpose of the transaction includes other actions by shareholders, the registrant may not satisfy the conditions of Instruction G. Even though the registration statement is not declared effective automatically, financial statements may not be required provided all of the conditions of SAB Topic 1F are met.

F. Recently Organized Registrant [SP] What is a ''shell'' company?

What is a "shell" company?

A ''shell'' company is an entity with minimal net assets and operations.

G. Predecessor Financial Statements

Financial information of a registrants predecessor is required for all periods prior to the registrants existence, with no lapse in audited periods or omission of other information required about the registrant. Any interim period of the predecessor prior to its acquisition by the registrant should be audited when audited financial statements for the period after the acquisition are presented. Schedules required by SX Article 12 are required for predecessor entities.

What is a predecessor entity?

The definition of "predecessor" at RC 405 is very broad. For purposes of financial statements, the staff generally does not require designation of an acquired business as a predecessor except where a registrant succeeds to substantially all of the business (or a separately identifiable line of business) of another entity (or group of entities) and the registrant's own operations prior to the succession appear insignificant relative to the operations assumed or acquired. [SP]

H. Development Stage Company [FAS 7]

1. What is a development stage company?

It is an entity that is devoting substantially all of its efforts to establishing a new business and either its planned principal operations have not commenced, or (b) its planned principal operations have commenced but have not yet generated significant revenues.

2. Financial statements required to be presented for a development stage company:

a) Statements identified as those of a development stage company. The first year after exiting the development stage, the company should disclose that it is no longer a development stage company.

b) Balance sheet with cumulative net losses described as ''deficit accumulated during the development stage.''

c) Income and cash flows statements for each period, plus a cumulative income statement from inception.

d) Statement of stockholders equity showing each issuance of stock since inception.

e) Ordinarily, a development stage company may omit financial statements of the prior comparable interim period. However, if the registrant remains in the development stage more than two years, comparable period information may be necessary to evaluate trends in administrative and other costs. [SP]

NOTE: Auditor association with the cumulative data is required on an annual basis as long as the registrant is in the development stage. If the cumulative column in a registration statement includes results from an unaudited interim period subsequent to the latest audited balance sheet date, the auditors report need not make reference to the cumulative data. The staff will consider requests for waiver of the requirement for audit of the cumulative data in annual statements where it is impracticable to obtain that audit.[SP]

I. Supplemental Financial Statements

If a material business combination to be accounted for using the pooling-of-interests method has been consummated after the latest balance sheet date and post-combination operating results have not been published, a registrant may not reflect the business combination in its financial statements. However, the registrant may elect to provide, and may be required to provide in connection with registration statements or proxies, supplemental audited financial statements giving effect to the pooling of interests. See Appendix C for guidance applicable to supplemental or restated financial statements as a result of post-balance sheet events, including transactions accounted for in a manner similar to a pooling of interests.

II. Age of Financial Statements in a Registration Statement or Proxy
[SX 3-12, SB 310(g)]

A. Staff Review

1. Staff should not commence review of a filing unless the registrants financial statements comply with the rules for age of financial statements and audit at the date of filing. The staff should evaluate compliance immediately upon assignment for review.

2. In certain circumstances, the staff will consider an issuers special processing needs for a transaction. However, the issuer is expected to discuss their particular needs with the Division's staff in advance of filing.

B. Age Requirements

1. The following applies to both SX and SB filers.

a) General Rule Latest balance sheet must be as of a date less than 135 days (or 180 days on Form 1-A) before the effective date of the registration statement (or date the proxy is mailed).

Example: A Form S-1 with an audited December 31, 1997 balance sheet (fiscal year -end) can not be declared effective after May 14, 1998 without updating.

b) Rule for Initial Filers A registration statement should not be declared effective later than the 134th day after the latest balance sheet date, except that third quarter data is timely through the 45th day after the most recent fiscal year-end. After the 45th day that fiscal year must be audited. SB issuers may be declared effective with third quarter financial information up to 90 days after year-end if the issuer expects to report income in the current year and has reported income in at least one of the two previous years.

Example: A Form S-1 for a registrant with a calendar year-end with an interim balance sheet as of the end of the first quarter (March 31) can not be declared effective after August 12 without updating. A Form S-1 for a calendar year-end registrant with an interim balance sheet dated September 30 can not be declared effective after February 14.

c) Year-end Rule for Repeat issuers do not need to update third quarter interim Repeat Filers financial statements until the 90th day after their fiscal year end, if they satisfy the 3 conditions of SX 3-01(c)
[SB 310(g) for SB filers]:

• Filed all Exchange Act reports due,
• Expect to report income in the year just completed, and
• Reported income in at least one of the two previous years.

Unless all three conditions are met, registration statements declared effective after the 45th day following the fiscal year end must include audited financial statements for the most recent fiscal year end. A repeat issuer that has not filed its first Exchange Act report since an initial offering has not met condition (1) above.

NOTE: If the audited financial statements for the most recently completed fiscal year are available or become available prior to effectiveness or mailing, they must be included in the filing.

d) Newly formed registrant

Audited financial statements are required as of a date less than 135 days before the initial filing date of the registration statement. Subsequent updates to comply with the 135 day rule may be made on an unaudited basis, except that audited financial statements are required if the registration statement is to be made effective more than 45 days after the companys fiscal year end. [SX 3-01(a)]

Example: A registrant with a December 31, 1997 year end was formed on May 1, 1997. A Form S-1 is filed on November 5, 1997. The Form S-1 must contain an audited balance sheet dated June 24, 1997 or later.

e) Accommodation for timely filers

The staff will declare a registration statement effective if:

• interim financial statements in the filing are at least as recent as the quarterly information that has been filed as required by the Exchange Act at the time of effectiveness, and
• the filer has filed all of its Exchange Act reports in the last 12 months in a timely fashion.

However, the issuer must confirm that the quarterly report will be timely filed after effectiveness and that there have been no material trends, events or transactions that arose subsequent to the date of the latest balance sheet included in the filing that would materially affect an investors understanding of the registrants financial condition and results of operations. A description of these items in the next quarter ordinarily will not suffice.

Example: A Form S-3 eligible registrant with a calendar year-end files a registration statement containing interim period financial statements as of June 30. Interim period financial statements as of September 30 would ordinarily be required under the 135 day rule on November 12. Since the registrants September 30 Form 10-Q would not be due until November 14 (45 days after September 30), the Form S-3 may be declared effective on November 12 or November 13 provided that the above representations are made.

f) Continuous and Shelf Offering  A prospectus must be updated by post-effective amendment if it is in use beyond nine months after its effective date and if the audited balance sheet is more than 16 months old. [33A-10(a)(3) & RC 427]

g) Proxies  Same as the guidance for registration statements, except substitute the date of mailing for date of effectiveness.

h) Combination Form S-4 / Proxy  Age of financial statements is determined with reference to the date of effectiveness of the Form S-4 and not the mailing of the proxy, unless mailing is delayed beyond the time necessary to prepare the material for mailing (generally no more than a few days after effectiveness of the S-4).

i) Forms 10 and 10-SB  Age of financial statements is determined by reference to the effective date of the filing. See Section III.A.4 for discussion of automatic effectiveness.

NOTE: During the period between initial filing and effectiveness, a registrant may update financial statements by amending the registration statement or by filing the applicable Exchange Act form (e.g. Form 10-Q). [SP]

j) Post-effective Amendments  All post-effective amendments that revise the prospectus are considered ''new filings'' and need to include updated financial statements meeting the requirements of Regulation SX at effectiveness of the amendment. [SK 512]

NOTE: Amendment of a registration statement to provide an exhibit does not amend the prospectus.

k) Sticker Supplements and Post-effective Amendments consolidating Sticker Supplements for Real Estate

Sticker supplements and post-effective amendments that consolidate supplements are not considered new filings for purposes of updating the registrants financial statements if they are filed by real estate companies pursuant to Undertaking D of Guide 5 solely for the purpose of providing the financial statements of acquired properties. [R33-6405]

l) Effect of Holiday or Weekend  If the last day of the period after which financial statements must be updated (that is, the 134th day after the first, second, or third quarter-end, or the 45th or 89th day following a fiscal year end) falls on a Saturday, Sunday or holiday, the filing may be made on the next following business day without updating the financial statements [RC 417]. The same rule holds true when an Exchange Act filing due date falls on a weekend or holiday. [EAR 0-3]

2. Circumstances in which the staff or the registrant believes relief from rules governing age of financial statements is appropriate should be brought to the attention of DCAO.

III. Periodic Reporting Requirements (Exchange Act Filings)

A. Companies Required to Report

1. If a company has registered an offering of securities under the Securities Act, that Company is required to file reports for periods ending after the date of the last balance sheet included in the registration statement. [EAR 15d]

2. Companies are required to register securities and file periodic reports if they:

• have 500 or more shareholders and $10 million or more of assets as of the latest fiscal year-end [EAS 12(g)],

  OR
  

• have shares traded on a national exchange. [EAS 12(b)]

3. A Company already reporting pursuant to Sections 13 or 15(d) may register under Section 12 of the Exchange Act by filing Form 8-A. Other U.S. companies must register on Form 10 (foreign companies register on Form 20-F). A Form 8-A filed concurrently with a Securities Act registration statement becomes effective automatically on the later of the filing of the Form 8-A, the effective date of the registration statement, or, if the securities will be listed on a U.S. stock exchange, receipt by the Commission of certification from the exchange.

4. Certain registration statements go effectively automatically as follows:

If Filed Under:	Registration Statement Goes Effective:
Section 12(g)	60 days after the initial filing, or earlier if acceleration is requested and granted.
Section 12(b)	30 days after certification by the applicable exchange or earlier if acceleration is requested and granted.

5. A Company may suspend its reporting requirement by filing a Form 15 if [EAR 12h-3, 12g-4]:

• the Company has less than 300 shareholders and has filed at least one Form 10-K (not including a Special Report),

  OR

• the Company has:
  1. Fewer than 500 shareholders,
  2. Less than $10 million in assets for the last three fiscal year-ends, and
  3. Has filed at least three Form 10-Ks since the most recent registered offering of its securities.

B. Financial Statements Required

* Financial statements may be condensed and must be reviewed by an independent accountant prior to filing as described in SX Article 10.

1. Special Reporting Cases

a) Inactive registrants may provide unaudited financial statements in Form 10K.

What is an inactive registrant?

A registrant whose gross receipts or expenditures do not exceed $100,000; no purchases, sales or distributions of securities; and no material changes (no bankruptcy, reorganization, etc.) (SX 3-11).

b) Registrants Operating under the Protection of Bankruptcy Laws

(1) Such registrants may obtain relief from certain Exchange Act reporting requirements by writing to OCC prior to the due date for filing the report in which relief is requested. In certain circumstances, OCC has taken a no-action position when a registrant has filed only the information it filed with the Bankruptcy Court. See Staff Legal Bulletin 2.

(2) If relief is granted for filings while operating under the protection of the bankruptcy laws, the registrant is required to file an audited balance sheet as of the date of emergence.

(3) Even if prior relief from Exchange Act reporting obligations is granted, a subsequent Securities Act registration statement will not be declared effective if audited financial statements for all periods required by the Form, including pre-emergence periods, are not included. A registrant that has filed only Bankruptcy Court filings under relief would not be considered ''current'' in its Exchange Act reporting for Form S-2 or Form S-3 eligibility purposes.

c) Mutual life insurance companies and certain mining companies in the exploratory stage are exempt from Part I disclosures required by Form 10-Q [EAR 13a-13(b)].

C. Due Dates

1. Exchange Act reports are due as follows:

Annual reports (Forms 10-K and 10-KSB)	90 days after the fiscal year-end.
Quarterly reports (Forms 10-Q and 10-QSB)	45 days after the quarter end.
Other disclosures reportable under Form 8-K	15 days after the event, except for changes in accountants and resignations of directors, which must be reported within 5 business days.

2. Automatic extensions of due dates for periodic reports are available (up to 5 calendar days for quarterly reports and 15 calendar days for annual reports) if all or any portion of the report cannot be filed timely without unreasonable effort or expense. A registrant must file Form 12b-25 no later than one day after the due date of the form for which relief is requested. No further extensions are available.

3. After a registrants first registration statement is declared effective, a Form 10-Q for the quarter following the period included in the registration statement is due the later of 45 days after effectiveness or the date the Form 10-Q would otherwise be due. [EAR 15d-13]

Example: If a registrants fiscal quarter ended June 30 and the registration statement went effective on July 14, the Form 10-Q for the quarter ended June 30 is due 45 days from July 14, which is August 28. If the registration statement went effective on June 24, the Form 10-Q is due on the date it would ordinarily be due (45 days from the end of the quarter), which is August 14.

4. When an IPO is made effective within 45 days (90 days for a Small business Issuer) after the fiscal year-end, but does not include the audited statements of the just recently completed year, the following reporting requirements apply:

If the registrant files a Form 8-A to register under Sections 12(b) or 12(g) of the Exchange Act	File an Annual Report on Form 10-K within 90 days after its fiscal year-end.
If the registrant is subject to the Exchange Act reporting requirements by virtue of Section 15(d)	File a Special Report* on Form 10-K  within 90 days of effectiveness containing audited statements for that year. A complete Annual Report on Form 10-K is not required until the following fiscal year. [EAR 15d-2]

* This Special Report does not need to include MD&A or other narrative disclosures ordinarily required in a Form 10-K, but registrants are encouraged to provide that information. To comply with rules of the exchange on which they are listed (not Commission rules), companies may need to file a complete Form 10-K, rather than a special report. Even if omitted from a special report, MD&A and other omitted information would need to be included in any subsequent registration statement or proxy statement.

D. Length of Fiscal Year

1. Fiscal years may not exceed 12 months. Under SX 3-06, nine to twelve months of audited financial statements will meet the requirement for one year of audited financial statements:

• for financial statements of an acquired business,

  or
  

• when a registrant has changed its fiscal year (see immediately below).

NOTE: These criteria also apply to SB filers.

2. A registrant can not substitute nine months of results in satisfaction of a requirement for one year in other circumstances without prior consultation with DCAO.

E. Changes in Fiscal Year

1. When a company changes its fiscal year it is required to file a report covering the transition period. [EAR 13a-10, 15d-13 & FRC 102.05]

What is a transition period?

The period between the closing of the registrants most recent fiscal year and the opening date of its newly selected fiscal year.

2. Transition reporting requirements are as follows:

3. Other notes regarding changes in fiscal periods:

a) Transition reports must include prior year information comparable to the transition period. Comparable year information may be unaudited and may be provided on a condensed basis and in the footnotes to financial statements instead of separate statements. [FRR 35] All information responsive to the textual items of the reporting form (i.e., SK Items 101, 103, and 303 for Form 10-K) must be provided in the transition report. [FRR 35]

b) No audited reporting period, under any circumstances, may exceed 12 months for domestic issuers.

c) Even if an issuer complies with Exchange Act requirements following an election to change the fiscal year, it may be required to provide more current audited financial statements in a Securities Act registration statement by the forms instructions.

d) A business combination accounted for as a reverse acquisition may result effectively in a change in fiscal year. See Appendix B.

IV. General Considerations (All Filings)

A. Basis of Reporting

1. Regulation S-X and GAAP must be followed. Financial statements not prepared in accordance with GAAP are presumed to be inaccurate or misleading. [SX 401(a)(1)] Exceptions to compliance with S-X are:

a) Small Business Issuer Follow Regulation S-B and not S-X. S-X differs from GAAP and S-B primarily in its requirement for supplemental schedules and in its designation of specific formats and quantitative levels of materiality for many disclosures. Auditor reporting and independence requirements of SX Article 2 and the full cost oil and gas disclosures required by SX 4-10 apply to Small Business Issuer forms. Small business issuers should comply with the requirements of SB 310(d), but may wish to consider the guidance in SX Article 11.

b) Annual Report to Shareholders Does not need to include the separate financial statements, pro forma data, or schedules required by Articles 3, 11 and 12 of Regulation SX, or predecessor audit reports. [PR 14a-3]

c) Royalty Trusts May report on a different basis pursuant to SAB 12E.

d) Mutual life insurance companies May present financial statements on statutory basis. [SX 7-02] For periods after December 31, 1995, statutory basis financial statements can no longer be characterized as being in conformity with GAAP. However, a mutual insurance company converting to stock form must follow GAAP for stock companies for all periods presented.

B. Consolidated Financial Statements [SX 3A-02]

Generally, majority owned subsidiaries should be consolidated but that presumption may, in some circumstances, be overcome. Careful analysis of the facts and circumstances should be applied to evaluate the existence of a controlling financial interest equivalent to majority ownership of voting stock, notwithstanding the absence of legal ownership of a majority of voting stock. [FRC 105, ARB 51, FAS 94 and EITF 96-16] Certain changes in equity ownership are reflected in the financial statements as follows:

C. Guaranteed Securities

A guarantee of a security is considered a security, and the guarantor is subject to the reporting and registration requirements applicable to other issuers. Relief from separate reporting and financial statement requirements is available for guarantors in certain limited circumstances. [See Topic Two, IV.A]

D. Liquidation Basis Financial Statements

In unusual circumstances it may be appropriate to present financial statements on a liquidation basis. Audit reports on those statements are described in AU 9508.33-37.

E. Fiscal Years Differing by 93 Days or Less

1. Consolidation of a parent and subsidiaries wth year-end differences not exceeding 93 days is permissible (accompanied by disclosure of the different closing date and its justification). However, intervening events that materially affect financial position or operating results should be disclosed. [ARB 51] Where fiscal years differ by more than 93 days, statements of the subsidiary should be adjusted to a period that more nearly corresponds with the fiscal period of the parent.

2. In connection with a retroactive combination of financial statements of an entity following a pooling, the financial statements of the combining entities may be combined even if their respective fiscal periods do not end within 93 days of each other. However, in this instance the financial statements of the latest fiscal year (i.e., the fiscal year in which the pooling is consummated) shall be recast to dates which do not differ by more than 93 days. The ''catch-up'' period is reflected as an adjustment to shareholders equity. In the absence of other circumstances, where practicable, we believe that the most preferable presentation usually will combine twelve sequential months of the conforming companys results while minimizing the number of days that are omitted from, or counted twice in, the restated financial statements. The staff will object to methods of retroactively combining the financial statements that do not result in a fair representation of historical results of the combined entities.

3. Financial Statement Disclosures

a) The periods combined and the revenues, net income before extraordinary items and net income of any interim periods excluded from, or included more than once in, the results of operations as a result of recasting;

b) The operating, investing and financing cash flows of any interim period excluded from, or included more than once in, the recast financial statements on the face of the statement of cash flows, or in the notes to the financial statements; and

c) Any additional quantitative and narrative disclosure about gross profit, selling and marketing expenses, and operating expenses necessary to inform readers about the effects of unusual charges or adjustments in the omitted or double counted period. [SX 3A-02]

F. Partnerships [SAB 4F]

1. Consolidation and Equity Method Accounting Partnerships controlled by the registrant should be consolidated. [SOP 78-9, EITF Topic D-46 and TPA 1400.13 & 1400.19] Limited partnership interests owned by the registrant generally should be accounted for under the equity method, unless the investor's interest is so minor that the limited partner may have virtually no influence over the partnership's operating and financial policy. Investments of more than 3%-5% generally are considered to be more than minor.

2. Financial Statement Presentation

Equity Section of the Balance Sheet	Statement of Changes in Equity	Statements of Income & Comprehensive Income
Distinguish between amounts ascribed to each ownership class (i.e. GP vs. LPs), with authorized and outstanding units disclosed for each class.	Present for each class.	Show net income allocable to each class, with results of operations and comprehensive income reported on a per unit basis.

1. Taxable income should be disclosed in a reconciliation from GAAP net income. [SP]

G. Quasi Reorganizations [TPA 4220, SAB 5S, FRC 210]

1. Fair market valuation of assets and liabilities should not result in a net asset value exceeding that reported prior to the quasi-reorganization. Any reorganization value in excess of previously reported net assets should be treated as a reduction of goodwill, then other intangibles, then other non-current assets.

2. Registrants are required to recognize liabilities under FAS 87 and FAS 106 in a quasi-reorganization, as well as other liabilities that would be recognized in allocation of purchase price in a business combination.

3. For a period of at least ten years subsequent to the effective date of a quasi-reorganization, any description of retained earnings should indicate the point in time from which the new retained earnings dates. Indicate the total amount of deficit eliminated on the face of the balance sheet for a period of time of at least three years. [SX 5-02.31.b]

H. Miscellaneous Considerations

1. Fiscal Year-end. Presumed to be calendar year-end if no closing date has been adopted. [SX 1-02(k)]

2. Ordering of Fiscal Year Data. Consistent chronological order generally should be followed in presentation of financial data throughout the filing to avoid confusion. [SAB 11E]

3. Substance Over Form-Financial. Accounting should emphasize the economic substance over legal form. [AU 9411.11] However, legal form may be decisive with respect to matters involving control, liability, ownership and other factors that are central to the substance of a transaction. In addition, accounting literature specifically prescribes certain treatments on the basis of the form of the transaction (for example, pooling-of-interest method).

4. Staff Accounting Bulletins. Should be applied to analogous circumstances.

5. GAAP Hierarchy. Registrants should apply the hierarchy of GAAP literature as defined at AU 411.10.

I. Materiality

1. Defined as a matter about which an average prudent investor ought reasonably to be informed. [SX 1-02(o)] A matter is material if there is a substantial likelihood that a reasonable person would consider it important.

2. If an item otherwise required by SX is not material, it need not be presented separately. Inapplicable items of SX need not be followed, but the reasons for omission should be clearly stated. [SX 4-02 & 03]

3. SX Article 5 applies a materiality level of 5% of current assets and liabilities and 5% of total assets and liabilities for caption display.

4. For purposes of assessing a financial statement misstatement, the use of a numerical threshold, such as 5%, may provide the basis for a preliminary assumption that -- without considering all relevant circumstances -- a deviation of less than the specified percentage with respect to a particular item on the registrants financial statements is unlikely to be material. The staff has no objection to such a ''rule of thumb'' as an initial step in assessing materiality. But quantifying, in percentage terms, the magnitude of a misstatement is only the beginning of an analysis of materiality; it cannot appropriately be used as a substitute for a full analysis of all relevant considerations. [SAB 1M]

5. Materiality must not be considered just in terms of a numerical or percentage misstatement. The ''total mix'' of information should also be considered. The total mix includes not only numerical or percentage terms of misstatement, it also includes the factual context in which the user of financial statements would view the financial statement item. Factors that may affect the materiality of a quantitatively small misstatement include, but are not limited to, the following:

• degree of precision inherent in an estimate
• a change in earnings or other trends
• failure to meet analysts consensus expectations for the enterprise
• change from a loss to income or vice versa
• effect on a segment identified as playing a significant role in the registrants operations or profitability
• compliance with regulatory requirements
• compliance with loan covenants or other contractual requirements
• effect on managements compensation
• concealment of an unlawful act [SAB 1M]

6. When changes in accounting occur or accounting errors are identified, their materiality should be considered in relation to both the effects of each change separately and the combined effect of all changes. If a change or correction has a material effect on results of the current period, the guidance of APB 20 should be followed. A change which does not have a material effect in the period of change but is reasonably certain to have a material effect in later periods should be disclosed whenever the financial statements of the period of change are presented. [APB 20]

7. Assessments of materiality of liabilities should not be made on a "net" basis after consideration of related receivables and other claims unless a right of setoff exists. Assets and liabilities may not be offset unless a right of setoff exists. The conditions for right of setoff are found in FIN 39 and discussed in SAB Topic 5Y.