Venable SEC Update We are pleased to introduce Venable s SEC - PDF document

July 2002 Venable SEC Update We are pleased to introduce Venable’ s SEC Update, which is designed to keep you informed of developments affecting SEC reporting companies. Post Enron Initiatives The SEC, NYSE and Nasdaq recently have adopted or recommended a number of new rules intended to address some of the issues arising out of the current crisis in confidence in the public markets related to the Enron debacle. A variety of propos- als from many corners in the accounting, legal and business world have been made to improve best practices in the accounting, disclosure and corporate governance areas; this update will let you know what rules have just been adopted or what proposals we believe are very likely to be adopted in the near future. We will keep you posted from time to time on new rules and proposals from the SEC or the SROs that could affect your company. SEC PROPOSES CHANGES TO CERTAIN DISCLOSURE REQUIREMENTS MD&A Disclosure of Critical Accounting Policies In May 2002, the SEC released a proposal addressing disclosure requirements relating to (i) accounting estimates a company makes in applying its accounting policies and (ii) the initial adoption by a company of an accounting policy that has a material impact on its financial presentation. Accounting Estimates The Management’ s Discussion and Analysis section of the annual report (MD&A) would contain a qualitative and quantitative disclosure identifying and describing critical accounting estimates, assumptions and uncertainties and other related matters. A critical accounting estimate means that (i) the estimate requires the company to make assumptions about highly uncertain matters and (ii) that it must be the case that different estimates which could have reasonably been used would have a material impact on the company’ s financial presentation. The disclosure would include: - An identification and discussion of the critical accounting estimate, the methodol- ogy used in determining the critical accounting estimate and certain other information, such as material underlying assumptions and known trends, events or uncertainties that are reasonably likely to occur and materially affect the methodology or assumptions described; w w w. v e n a b l e . c o m - A description of the significance of the accounting estimate to the company’ s financial condition, changes in financial condition and results of operations; - A quantitative discussion of changes in overall financial performance and material line item changes that would occur assuming the accounting estimate Continued

Continued from page 1 was changed, either by using reasonably possible near-term changes in the material assumptions underlying the estimate or by using the reasonably possible range of the estimate; - A quantitative and qualitative discussion of any material changes made to the accounting estimate in the last three years, the reasons for the changes and the effect on line items in the financial statements and overall financial performance; - A statement whether senior management has discussed the accounting estimate and related MD&A disclosure with the audit committee; and - If the company has more than one segment, an identification of the segments affected by the estimate and a discussion of the estimate on a segment basis. Nasdaq Board Approves Corporate Accounting Policies Governance Changes MD&A would contain a qualitative discussion (in addition to the existing financial state- In June, Nasdaq approved rule ment footnote disclosure) about (i) events or transactions giving rise to the adoption of the changes that, when approved by the policy, (ii) the accounting policy itself and (iii) the impact the adoption of such policy will SEC, will require among other things: have on the company’ s financial presentation. If upon initial adoption of an accounting policy the company is permitted a choice among acceptable accounting principles, it would - shareholder approval for any be required to disclose in the MD&A that it made a choice, identify the alternatives, de- equity based plans that include executive officers or directors; and scribe why it made the choice it did and, where material, provide a qualitative discussion of the impact on the financial condition and results of operation that the alternatives would - approval of related-party have had. Also, if there is no accounting literature relating to the events or transactions transactions by the audit giving rise to the adoption of the accounting policy, the company would be required to committee (or other committee explain its decision regarding which accounting principle and method to use. composed of independent directors). In quarterly reports, companies would be required to provide an update to the MD&A In addition, the rules would tighten information related to critical accounting estimates disclosed in the last filed annual or the definition of independent director quarterly report. to exclude any director from the definition who receives or whose The SEC also indicated that it is considering subjecting the MD&A to the auditing family member receives any payments process or some other review by the independent auditors. (other than payments for Board service) in excess of $60,000 or whose The SEC is taking comments on this proposal until July 19. charity receives more than the greater of $200,000 or 5% of the gross revenues of the company or the Form 8-K Amendments Regarding Certain Management Transactions charity. In the case of charities, the director must have been an executive In April 2002, the SEC proposed to amend Form 8-K to require reporting companies to officer of the charity. report the following in a new Item 10: Companies would also be allowed to use Reg FD compliant disclosure - Transactions by each director and executive officer in the company’ s equity methods for disclosure of material securities (whether or not registered), including derivative securities; information, such as conference calls, press conferences and web casts, not - The adoption, modification or termination of a Rule 10b5-1(c) sales plan; and just releases through news services, so - Loans of money to each director or executive officer made or guaranteed by the long as the public is provided adequate notice (generally by press company or its affiliate. releases) and granted access. The Form 8-K would be due (i) within two business days after any transaction or loan with Finally, the receipt of going concern an aggregate value of $100,000 or more (other than employee benefit plan grants) and (ii) opinions would have to be disclosed within two business days of the week following the date of the transaction for employee through the news media. benefit plan grants, and transitions or loans under $100,000. Reports of transactions not in excess of $10,000 could be deferred until the aggregate value of unreported transactions for These rules have been sent to the SEC, such director or executive officer exceeded $10,000. which is expected to approve them in late summer or fall of this year. The SEC expects the amendment to be come effective within 60 days after its adoption (with an additional 60 day delay applicable to some provisions).