July 31, 1998 Mr. Jonathan G. Katz Secretary U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Comments On Proposed Rule-Segment Reporting (Commission File No. S7-17-98) Dear Mr. Katz: We support the Commission's rule-making to conform its segment disclosure requirements to those prescribed in FASB Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("FAS 131"). However, we have some suggestions to clarify and streamline the proposed rulesare disappointed that the Commission's rule proposal (Release Nos. 33-7549; 34-40126). doesn't go further to fully embrace FAS 131. The release retains certain disclosures (e.g., principal methods of distribution of products and services by segment, name of major customers, and certain narrative disclosures) that are more extensive than those required by FAS 131. We believe the Commission should take this opportunity to further streamline its rules by completely conforming its disclosure requirements to FAS 131. In this regard, oOne of the goals of the FASB's current Business Reporting Research Project is to consider ways to coordinate generally accepted accounting principles and the Commission's disclosure requirements to eliminate redundancies and to gather all the information about a particular topic in one place. Conforming the Commission's segment disclosure requirements to those of FAS 131 and eEliminating redundancies in the text of the rule would be a perfect opportunity to take advantage of that project's direction. It also would eliminate some of the complexities that public companies face when preparing their disclosure documents. General Comments on Proposed Rule We have the following comments on the proposed rule: Non-GAAP Measures of Segment Profitability. We note the Commission's expectation that the effects of management's use of non-GAAP measures of segment operating performance will be explained in a "balanced and informative manner," and that MD&A will include a discussion of "how that segment's performance has affected the registrant's GAAP financial statements." Our concerns are: It is unclear what the Commission means by "balanced and informative manner." We are concerned that this phrase may override some of the flexibility afforded by FAS 131's management approach to segment disclosures by requiring disclosure of segment operating profit or loss on a basis other than that used by the registrant in its internal reporting. We believe the Commission should expand this guidance to indicate more clearly what is meant by "balanced and informative manner," possibly by providing illustrative examples. Similarly, the meaning of "how a segment's performance has affected the registrant's GAAP financial statements" is unclear. If segment operating profit or loss is determined on a basis other than GAAP, or if it excludes the effects of items otherwise attributable to a segment, this provision could be interpreted to require disclosure of net income by segment. Such a requirement would clearly be incremental to FAS 131 and in our view is unnecessary. We believe the Commission's staff should clarify what it means by this phrase. Disclosure Flexibility Allowed Under FAS 131. FAS 131 calls forallows companies to present their primary (Tier 1) segment disclosures based upon how the company is organized for reporting to the chief operating decision maker. As a result, a company could have a single reportable segment, or it could have multiple segments organized along differences in products and services, geographic areas, or some other basis (e.g., a combination of product lines and geographic areas). If a company is not organized on the basis of similar products and services or geographically, it must present enterprise-wide (Tier 2) level disclosures about products and services (Par.37) and/or geographic areas (Par. 38). In addition, FAS 131 requires general disclosures (Par. 26) about how segments are determined and the types of products and services from which each reportable segment derives its revenues. However, as provided in Par. 36 of FAS 131, Tier 2 level disclosures are required only if the information is not provided as part of the Tier 1 disclosures. As constructed, the rule proposal seems to ignore some of the flexibility afforded by FAS 131. For example: The proposed text of S-K 101(c)(1)(i) would require, for each segment (to the extent material to an understanding of the registrant's business), disclosure of "information about products produced and services rendered by the registrant in the segment, and the principal markets for, and methods of distribution of the segment's principal products and services" (emphasis added). This phrase could be interpreted to mean that registrants must disclose revenues from principal products and services on a segment by segment basis, thus precluding registrants from satisfying the requirements of Item 101 by providing information about principal products and services as part of their general or Tier 2 disclosures as allowed by FAS 131. We believe that public companies that provide disclosures about products and services under Paragraphs 26 and 37 of FAS 131 should not have to provide incremental disclosures to comply with Item 101. The proposed text of S-K 101(d)(1) requires information about geographic areas that is substantially consistent with Par. 38 of FAS 131 (i.e., enterprise-wide disclosures) but ignores situations where a registrant's primary basis of segmentation is on a geographic basis. Thus, as proposed, the rule would seem to always require geographic area disclosures to be on an enterprise-wide basis in order to comply with Item 101. If this paragraph is retained in the final rule, to promote consistency with paragraph 36 of FAS 131, it should be revised to clarify that these disclosures are required only if the registrant's primary basis of segmentation is not based on differences in geographic areas. Incremental Disclosures About Principal Markets and Distribution Methods. The Commission has proposed to retain existing requirements to disclose principal markets and distribution methods of each segment's principal products and services, citing that such disclosure is useful to investors. We question whether the Commission's staff has performed sufficient analysis or research to determine whether in fact this incremental disclosure is useful to investors or other users, or whether a majority of financial statement users agree that this disclosure is useful or even helpful. We believe that the disclosures required by FAS 131 (Paragraphs 26 and 37) about the types of products and services from which each reportable segment derives its revenues and enterprise-wide revenues from principal products and services are sufficient and the Commission should not impose incremental disclosure requirements without an appropriate basis for concluding that such disclosures are necessary for the protection of investors. Incremental Disclosures About Major Customers. The FASB considered from the beginning of its segment disclosure project whether disclosures about major customers was important and, while ultimately it concluded that such disclosures were needed, the FASB never considered it necessary to disclose the name of the customer. The SEC should reconsider whether this disclosure is necessary in light of the FASB's conclusions. Redundancies in Text of Proposed Rule. In general, there are several paragraphs in the proposed rule that duplicate (in some cases verbatim) the requirements of FAS 131. The text of the rule could be significantly streamlined with a general instruction that cross-references to the requirements of FAS 131 without enumerating in detail portions of that statement's requirements. Quantitative Thresholds. We believe there is no need to retain the existing quantitative thresholds in S-K 101(c)(i). While FAS 131 does not provide specific quantitative thresholds for the disclosures about products and services required by Paragraphs 26 or 37, in our view the concept of materiality is embodied in all generally accepted accounting principles. The absence of a specific materiality threshold in FAS 131 does not mean that companies are required to disclose immaterial amounts in order to comply with FAS 131. In addition to the foregoing, Attachment A describes several suggestions for improving the text of the proposed rule that we encourage the Commission to consider. Additional Considerations In this rule proposal, the Commission's staff has not proposed to eliminate any of the narrative disclosures about business segments in S-K 101(c)(1)(i) through (x). This would be an excellent opportunity for the Commission to assess the disclosure overload issue by reconsidering each of the disclosure requirements in this section that go beyond those called for by FAS 131 and to eliminate any that are no longer considered necessary for the protection of investors. We note the proposed revisions to update the language in S-K Item 102 to conform to the "operating segment" terminology used in FAS 131. This also would be an excellent opportunity to reconsider whether the disclosures about physical properties should identify the applicable segment(s), or whether such disclosures could be eliminated. We appreciate this opportunity to comment on the Commission's proposal. We would be pleased to discuss our comments with you at your convenience. Very truly yours, Janine C. Paris-Mesanko Attachment Copy to: Lynn Turner, Chief Accountant, Office of the Chief Accountant Supplemental Comments on Text of Proposed Rule 1. The text of the proposed revision to S-K 101 (b) could be streamlined to combine the requirements of proposed paragraphs (b) and (d) by stating: "Provide disclosure of information about operating segments and geographic areas as required by generally accepted accounting principles (i.e., FASB Statement 131). If the information is provided in the footnotes to the financial statements, registrants may cross reference from the description of business to the financial statement footnotes; conversely, a registrant may include some or all of the disclosures required by FASB Statement 131 in response to this section and cross reference to this section in lieu of presenting duplicative information in the financial statement footnotes." This change would eliminate the need for proposed paragraphs 101(d)(1) and 101(d)(2). To further streamline the text, the Commission's staff should reconsider the organization and necessity of proposed sections 101(d)(3) and 101(d)(4). To the extent disclosures about risks attendant to foreign operations and comparability of geographic area data are not already required by S-K Item 303, "Management's Discussion and Analysis of Financial Condition and Results of Operations," these portions of the rule could be moved to that Item. 2. The proposed revision to S-K 101 (b)(1) seems unnecessary. While we support changing the rule to conform the Commission's requirements to paragraphs 34 and 35 of FAS 131 in the event that a registrant changes the way it determines its reportable segments, we question the need for redundantly incorporating this language into the text of the rule. We suggest that the text of the proposed revision to S-K Item 101 (b) be eliminated from the final rule. 3. The proposed text of Items 101(b) and (d) require disclosure of the specified information for each of the last three fiscal years. To the extent the disclosures required by these paragraphs pertain to balance sheet amounts (e.g., total segment assets, long-lived assets, long-term customer relationships of a financial institution), the text of the rule should clarify that these disclosures are required for each of the last two fiscal years. 4. The proposed text of Instruction 2 to Item 101 regarding interperiod comparability is substantially the same as Paragraph 22 of FAS 131. We question whether this redundant instruction is necessary and suggest that it be eliminated from the final rule.