Critical Accounting Estimates

SEC aims to improve transparency of financials

Through disclosure of judgments and estimates
used to prepare financial statements
Recognizes inherent uncertainty and subjectivity
in many GAAP determinations

SEC summaries

Cautionary advice on critical accounting policies 2001

Strongly recommends that companies include an
MD&A discussion of the most critical factors

Those where materially different amounts would be reported under different conditions or using different assumptions

SEC proposes to amend S-K 303

To require MD&A disclosure of the
critical accounting estimates that a company makes
Proposal still pending

Objectives III.A
Scope of proposals III.B
Proposed disclosures III.C
◊ Accounting estimates covered III.C.1
◊ Identification and description III.C.2
◊ Impact of the estimate III.C.3
◊ Quantitative disclosures III.C.4
◊ Management discussions with audit committee III.C.5
◊ Segment disclosures III.C.6
Examples III.D
◊ Electrical equipment manufacturer
◊ Software developer
◊ Data storage devices - hard drives
Auditor examination III.E
Quarterly updates III.F
Initial adoption of accounting policies III.G
Disclosure presentation III.H
Foreign private issuers III.I
Small business issuers III.J
Safe harbors for forward-looking information III.K

SEC 2003 Interpretive Release

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