SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 211

[Release No. SAB 98]

Staff Accounting Bulletin No. 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;

Topic 3.A - Convertible Securities; Topic 4.D - Earnings per

Share Computations in an Initial Public Offering; Topic

6.B.1 - Income or Loss Applicable to Common Stock; and,

Topic 6.G.1 - Selected Quarterly Financial Data (Item 302(a)

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.

STAFF ACCOUNTING BULLETIN NO. 98

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."

TOPIC 1: FINANCIAL STATEMENTS

* * * * *

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

Question

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)?

Interpretive Response

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

Question

What is the staff's position with respect to

dividends declared by the subsidiary subsequent to the

balance sheet date?

Interpretive Response

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.

TOPIC 3: SENIOR SECURITIES

* * * * *

A. Convertible Securities

Facts

Company B proposes to file a registration

statement covering convertible securities.

Question

In registration, what consideration should be

given to the dilutive effects of convertible securities?

Interpretive Response

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.

TOPIC 4: EQUITY ACCOUNTS

* * * * *

D. Earnings Per Share Computations in an Initial Public

Offering

Facts

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.

Question 1

Does the staff continue to believe that such

treatment for stock and warrants would be appropriate upon

adoption of SFAS 128?

Interpretive Response

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.

Question 2

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?

Interpretive Response

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.

TOPIC 5: INTERPRETATIONS OF ACCOUNTING SERIES RELEASES

* * * * *

B. Accounting Series Release No. 280 - General Revision of

Regulation S-X

1. INCOME OR LOSS APPLICABLE TO COMMON STOCK

Facts

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.

Question

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?

Interpretive Response

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).

TOPIC 6: INTERPRETATION OF ACCOUNTING SERIES RELEASES

* * * * *

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

* * *

Question 4

What is meant by "per-share data based upon such

income" as used in Item 302(a)(1)?

Interpretive Response

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.