SAB No. 98
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 211
[Release No. SAB 98]
AGENCY: Securities and Exchange Commission.
ACTION: Publication of Staff Accounting Bulletin.
SUMMARY: This staff accounting bulletin revises the views
of the staff contained in certain topics of the staff
accounting bulletin series to be consistent with the
provisions of certain accounting standards recently adopted
by the Financial Accounting Standards Board. Topics
include: Topic 1.B - Allocation of Expenses and Related
Disclosure in Financial Statements of Subsidiaries,
Divisions or Lesser Business Components of Another Entity;
Share Computations in an Initial Public Offering; Topic
6.B.1 - Income or Loss Applicable to Common Stock; and,
of Regulation S-K).
EFFECTIVE DATE: February 3, 1998.
FOR FURTHER INFORMATION CONTACT: Cody L. Smith, Office of
the Chief Accountant (202-942-4400), Kenneth T. Marceron,
Division of Corporation Finance (202-942-2960), Securities
and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549.
SUPPLEMENTARY INFORMATION: The statements in staff
accounting bulletins are not rules or interpretations of the
Commission, nor are they published as bearing the
Commission's official
approval. They represent interpretations and practices
followed by the Division of Corporation Finance and the
Office of the Chief Accountant in administering the
disclosure requirements of the Federal securities laws.
Jonathan G. Katz Secretary
Date: February 3, 1998
Part 211 - (AMEND)
Accordingly, Part 211 of Title 17 of the Code of
Federal Regulations is amended by adding Staff Accounting
Bulletin No. 98 to the table found in Subpart B.
The staff hereby amends the following in the Staff
Accounting Bulletin Series:
(a) Topics 1.B.2 and 1.B.3, regarding the allocation of
expenses and related disclosure in financial statements of
subsidiaries, divisions or lesser business components of
another entity to eliminate instructions to delete
historical EPS in the entity's financial statements;
(b) Topic 3.A, regarding the presentation of
supplemental earnings per share in a convertible security
registration to remove the reference to APB Opinion No. 15,
Earnings per Share, and remind registrants of the pro forma
requirements of Regulation S-X;
(c) Topic 4.D, regarding the computation of earnings
per share in an initial public offering (IPO) to revise
instructions regarding the dilutive effects of stock issued
for consideration below the IPO price or options and
warrants to purchase common stock with exercise prices below
the IPO price. New guidance highlights the treatment that
should be given to the dilutive effect of common stock or
options and warrants to purchase common stock issued for
nominal consideration (referred to as nominal issuances);
(d) Topic 6.B.1, regarding the presentation of income
or loss applicable to common stock to clarify the Topic's
continuing applicability to all registrants and to suggest a
presentation format for registrants that elect to present a
single statement of income and comprehensive income; and
(e) Topic 6.G.1, regarding selected quarterly financial
data to replace the terms "primary" and "fully diluted" with
"basic" and "diluted."
* * * * *
B. Allocation of expenses and related disclosure in
financial statements of subsidiaries, divisions or lesser
business components of another entity
* * * * *
2. Pro forma financial statements and earnings per share
What disclosure should be made if the registrant's
historical financial statements are not indicative of the
ongoing entity (e.g., tax or other cost sharing agreements
will be terminated or revised)?
The registration statement should
include pro forma financial information that is in
accordance with Article 11 of Regulation S-X and reflects
the impact of terminated or revised cost sharing agreements
and other significant changes.
3. Other matters
What is the staff's position with respect to
dividends declared by the subsidiary subsequent to the
balance sheet date?
The staff believes that such
dividends either be given retroactive effect in the balance
sheet with appropriate footnote disclosure, or reflected in
a pro forma balance sheet. In addition, when the dividends
are to be paid from the proceeds of the offering, the staff
believes it is appropriate to include pro forma per share
data (for the latest year and interim period only) giving
effect to the number of shares whose proceeds will be used
to pay the dividend. A similar presentation is appropriate
when dividends exceed earnings in the current year, even
though the stated use of proceeds is other than for the
payment of dividends. In these situations, pro forma per
share data should give effect to the increase in the number
of shares which, when multiplied by the offering price,
would be sufficient to replace the capital in excess of
earnings being withdrawn.
* * * * *
A. Convertible Securities
Company B proposes to file a registration
statement covering convertible securities.
In registration, what consideration should be
given to the dilutive effects of convertible securities?
In a registration statement of
convertible preferred stock or debentures, the staff
believes that disclosure of pro forma earnings per share
(EPS) is important to investors when the proceeds will be
used to extinguish existing preferred stock or debt and such
extinguishments will have a material effect on EPS. That
disclosure is required by Article 11, Rule 11-01(a)(8) and
Rule 11-02(a)(7) of Regulation S-X, if material.
* * * * *
D. Earnings Per Share Computations in an Initial Public
Offering
A registration statement is filed in connection with
an initial public offering (IPO) of common stock. During
the periods covered by income statements that are included
in the registration statement or in the subsequent period
prior to the effective date of the IPO, the registrant
issued for nominal consideration1 common stock, options or
warrants to purchase common stock or other potentially
dilutive instruments (collectively, referred to hereafter as
"nominal issuances").
Prior to the effective date of Statement of Financial
Accounting Standards No. 128 (SFAS 128), Earnings per Share,
the staff believed that certain stock and warrants2 should
be treated as outstanding for all reporting periods in the
same manner as shares issued in a stock split or a
recapitalization effected contemporaneously with the IPO.
The dilutive effect of such stock and warrants could be
measured using the treasury stock method.
Does the staff continue to believe that such
treatment for stock and warrants would be appropriate upon
adoption of SFAS 128?
Generally, no. Historical EPS
should be prepared and presented in conformity with SFAS
128.
In applying the requirements of SFAS 128, the staff believes
that nominal issuances are recapitalizations in substance.
In computing basic EPS for the periods covered by income
statements included in the registration statement and in
subsequent filings with the SEC, nominal issuances of common
stock should be reflected in a manner similar to a stock
split or stock dividend for which retroactive treatment is
required by paragraph 54 of SFAS 128. In computing diluted
EPS for such periods, nominal issuances of common stock and
potential common stock3 should be reflected in a manner
similar to a stock split or stock dividend.
Registrants are reminded that disclosure about materially
dilutive issuances is required outside the financial
statements. Item 506 of Regulation S-K requires tabular
presentation of the dilutive effects of those issuances on
net tangible book value. The effects of dilutive issuances
on the registrant's liquidity, capital resources and results
of operations should be addressed in Management's Discussion
and Analysis.
Does reflecting nominal issuances as
outstanding for all historical periods in the computation of
earnings per share alter the registrant's responsibility to
determine whether compensation expense must be recognized
for such issuances to employees?
No. Registrants must follow
generally accepted accounting principles in determining
whether the recognition of compensation expense for any
issuances of equity instruments to employees is necessary.4
Reflecting nominal issuances as outstanding for all
historical periods in the computation of earnings per share
does not alter that existing responsibility under GAAP.
* * * * *
B. Accounting Series Release No. 280 - General Revision of
Regulation S-X
1. INCOME OR LOSS APPLICABLE TO COMMON STOCK
A registrant has various classes of preferred stock.
Dividends on those preferred stocks and accretions of their
carrying amounts cause income applicable to common stock to
be less than reported net income.
In ASR No. 280, the Commission stated that
although it had determined not to mandate presentation of
income or loss applicable to common stock in all cases, it
believes that disclosure of that amount is of value in
certain situations. In what situations should the amount be
reported, where should it be reported, and how should it be
computed?
Income or loss applicable to common
stock should be reported on the face of the income
statement1 when it is materially different in quantitative
terms from reported net income or loss2 or when it is
indicative of significant trends or other qualitative
considerations. The amount to be reported should be
computed for each period as net income or loss less: (a)
dividends on preferred stock, including undeclared or unpaid
dividends if cumulative; and (b) periodic increases in the
carrying amounts of instruments reported as redeemable
preferred stock (as discussed in Topic 3.C) or increasing
rate preferred stock (as discussed in Topic 5.Q).
* * * * *
G. ACCOUNTING SERIES RELEASE Nos. 177 and 286 - Relating
to Amendments to Form 10-Q, Regulation S-K, and Regulation S-
X Regarding Interim Financial Reporting
* * *
1. SELECTED QUARTERLY FINANCIAL DATA (ITEM 302(a) OF
REGULATION S-K)
* * *
a. Disclosure of Selected Quarterly Financial Data
* * *
What is meant by "per-share data based upon such
income" as used in Item 302(a)(1)?
Item 302(a)(1) only requires
disclosure of per share amounts for income before
extraordinary items and cumulative effect of a change in
accounting. It is expected that when per share data is
calculated for each full quarter based upon such income, the
per share amounts would be both basic and diluted. Although
it is not required by the rule, there are many instances
where it would be desirable to disclose other per share
figures such as net earnings per share and the per share
effect of extraordinary items also. Where such disclosure
is made, per share data should be both basic and diluted.
_______________________________ 1 Whether a security was issued for nominal consideration should be determined based on facts and circumstances. The consideration the entity receives for the issuance should be compared to the security's fair value to determine whether the consideration is nominal. 2 The stock and warrants encompassed by the prior guidance were those issuances of common stock at prices below the IPO price and options or warrants with exercise prices below the IPO price that were issued within a one- year period prior to the initial filing of the registration statement relating to the IPO through the registration statement's effective date. 3 SFAS 128 defines potential common stock as "a security or other contract that may entitle its holder to obtain common stock during the reporting period or after the end of the reporting period." 4 As prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, and related interpretations. 1 If a registrant elects to follow the encouraged disclosure discussed in paragraph 23 of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, and displays the components of other comprehensive income and the total for comprehensive income using a one-statement approach, the registrant must continue to follow the guidance set forth in Topic 6.B.1. One approach may be to provide a separate reconciliation of net income to income available to common stock below comprehensive income reported on a statement of income and comprehensive income. 2 The assessment of materiality is the responsibility of each registrant. However, absent concerns about trends or other qualitative considerations, the staff generally will not insist on the reporting of income or loss applicable to common stock if the amount differs from net income or loss by less than ten percent.