APPENDIX II

A MODEL OF BUSINESS

REPORTING

RESPONSIVE TO THE INFORMATION NEEDS OF INVESTORS AND CREDITORS AS UNDERSTOOD BY THE AICPA SPECIAL COMMITTEE ON FINANCIAL REPORTING

A Model of Business Reporting Overview

The following is a comprehensive model of business reporting (the model) based on the Committee's understanding of the information needs of investors and creditors (users) in making rational capitalallocation decisions related to forprofit companies. Reporting under the model would promote an efficient capitalallocation process, which is critical for a healthy economy. Standard setters long have recognized the usefulness of models or frameworks. However, existing models focus on financial statements rather than on the broad range of users' information needs.

The model, based on the key concepts noted below, was designed to help focus attention on a broader, integrated range of information and provide the foundation for future improvements to business reporting. The model does not satisfy all of the users' needs for information. Rather, it provides only that portion of information that is within management's expertise and for which management is the best source and which can be provided at acceptable costs. Information in the model would replace, not be in addition to, much of the information currently contained in annual and quarterly reports and filings with the SEC.

The model provides information that is both reliable and relevant by expanding, reorganizing, and changing the information currently provided by business reporting and is flexible in its application by reporting entities. It is designed to provide information that fits into the decision processes that many investors and creditors use to make forecasts, value companies, or assess the prospect of repayment. Specialized accounting and reporting requirements that may apply to different industries are not addressed. For example, although the model suggests that interest expense would be excluded from core activities, a financial services company would likely include certain interest activity in its core activities.

As such, specific applications of the concepts of the model will vary among industries and even among companies within an industry. Although the model is responsive to the needs of users, the reporting requirements have been tempered to address companies' concerns about costs of preparation and dissemination (at a time when many companies are downsizing and streamlining operations), of disclosing competitively sensitive information, and the potential for increased litigation. More specifically, the model includes the following constraints on disclosure to reduce costs when costs could be significant:

Business reporting should exclude information outside of management's expertise or for which management is not the best source, such as information about competitors.
Management should not be required to report information that would significantly harm the company's competitive position.
Management should not be required to provide forecasted financial statements. Rather, management should provide information that helps users forecast for themselves the company's financial future.
Other than for financial statements, management need only report the information it knows. That is, management should be under no obligation to gather information it does not have, or need, to manage the business.
Certain elements of business reporting should be presented only if users and management agree they should be reported a concept of flexible reporting.
Companies should not have to expand reporting of forwardlooking information until there are more effective deterrents to unwarranted litigation that discourages companies from doing so.
The Committee believes that its recommendations are sufficiently costbeneficial to merit consideration by standard setters, who would ; as a matter of course ; perform further cost and benefit analysis as part of their due process.

`KEY CONCEPTS`

To assess the feasibility of its ideas, the Committee designed and illustrated the model based on the following key concepts.

Allow for flexible reporting. The model includes ten elements within five broad categories of information. The elements provide a menu of choices that allows for flexible reporting. Because users differ in their needs for information, not all companies should report all elements of the model. Rather, companies should report only those elements of the model that users need in the particular circumstances. Requiring all companies to report all elements would result in excessive costs and, in many circumstances, provide more information than is needed.
Business reporting should include at least the financial statement element and such other elements of the model as users and the reporting entity agree should be provided in the particular circumstances. Since regulators already require much of what is included in the model, they probably would choose to receive from public companies most, if not all, of the model's elements. On the other hand, nonpublic company owners and lenders probably would limit reporting to the specific elements required for their purposes.
Report separately on each business segment of a company's business having diverse opportunities and risks. Multisegment companies operate diverse businesses that are subject to different opportunities and risks. Many users view business segments as the engines that generate future earnings or cash flows and, thereby, drive returns on investments. Segment information provides additional insight into the opportunities and risks of investments and sharpens predictions. For a company with more than one business segment, most types of information specified by the model apply to the business segment level. Because of its predictive value, improving segment reporting is of the highest priority.
Explain the nature of a company's businesses, including the linkage between events and activities and the financial impact on a company of those events and activities. Users that follow fundamental approaches of analysis need to understand the nature of a company's businesses. The nature of a business refers to the types of products or services offered, the methods of producing or delivering those products or services, the number and types of suppliers and customers, the locations of facilities and markets, and other factors that describe the activities of a business.
Understanding the linkage between events and activities and the financial impact on a company of those events and activities is a critical part of understanding a business. Users recognize that financial results are a consequence of a company's business activities and events.
Provide a forwardlooking perspective. Users focus on the future while today's business reporting focuses on the past. Although information about the past is a useful indicator of future performance, users also need more forwardlooking information.
Provide management's perspective. Many users want to see a company through the eyes of its management to help them understand management's perspective and predict where management will lead the company.
Indicate the relative reliability of information in business reporting. The usefulness of information is a function of its relevance and its reliability. Users obviously need information that is most relevant to their purposes. They also need information to be as reliable as possible. However, users also need to be able to distinguish between information that is highly reliable and that which is less reliable ; that is, they need to understand the measurement uncertainty of less reliable information.
Focus on measurement to help users understand a company's performance relative to that of competitors and other companies. While descriptions of business events are important, numbers are important too. Management should disclose the measurements it uses in managing the business that quantify the effects of key activities and events.
Promptly communicate important changes affecting a company. Reporting under the model should be prompt and at least quarterly. For critical transactions and events, information should be reported within a few days of the transaction or event. In the future, reporting should be made ever more prompt as the rate of change in business activities accelerates and as information technology reduces the cost of collecting and providing updated information.
Communicate effectively and efficiently. The information should be communicated to the users in the most effective and efficient manner. For some users, the information will continue to be transmitted on paper. Others may access the information in electronic form.
To the extent possible, the information in the model should be supplemented with charts and graphs to improve and speed up users' comprehension of the information. Those charts and graphs should follow presentation standards to ensure that they fairly present the information that is comparable among companies.
Consider the costs and benefits of business reporting. Standard setters and regulators should continue to be sensitive to the costs of business reporting and should search for ways to limit the costs of reporting while still providing more useful information.
The Committee's recommendations also seek to improve the credibility of business reporting by including elements that help ensure balanced, neutral, and unbiased reporting. Those elements include (a) the reporting of risks as well as opportunities, (b) the focus on measurements rather than only qualitative discussion, © the comparison of actual business performance to previously disclosed forwardlooking information, and (d) reporting about the uncertainty of reported measurements.

DIFFERENCES BETWEEN THE MODEL AND BUSINESS

REPORTING BY U.S. PUBLIC COMPANIES

The Committee's model differs from current reporting by U.S. public companies to the SEC in the areas described below.

Business segment perspective. The model focuses more on reporting at the segment level than does reporting in current practice. It encourages companies to report on more business segments, and it reports a broader array of information at the segment level, such as management's analysis. It also encourages flexible standards that limit, in certain circumstances, disclosures of geographic segment information.
Financial statements. The model generally retains the form and content of today's financial statements and footnote disclosures. However, the Committee developed several recommendations to improve financial statements, as discussed in the following section.
Highlevel operating data and performance measurements. The Committee's model includes highlevel operating data and performance measurements that management uses to manage the business. With certain exceptions, U.S. public companies currently are not required to report that type of information, although many voluntarily provide substantial information of this type. Highlevel operating data and performance measures will vary by industry and by company. Management should identify measures it believes are significant and meaningful to its business and that are leading indicators of a company's future.
Management's analysis. Management's analysis in the model differs in important respects from that in current practice. For example, management's analysis in the model addresses trends and changes in operating data and performance measures as well as trends and changes in financial statements. Current practice focuses on changes in financial data. Further, management's analysis in the model addresses separately the performance of each industry segment within a multisegment company. Current practice does not require analysis at the segment level.
Forwardlooking information. Business reporting currently focuses on information about the past. In contrast, the model calls for a balance of reporting between past and forwardlooking information. However, the model does not require projections or forecasts. It defines forwardlooking information as: (a) opportunities and risks, including those resulting from key trends; (b) management's plans, including critical success factors; © comparison of actual business performance to previously disclosed forwardlooking information.
The SEC already requires, in MD&A, disclosures about opportunities and risks. The model, however, elevates disclosure about opportunities and risks to a separate element of the business report and provides a framework for the disclosure.
Background about the company. The model divides information in the background category into three elements: (1) broad objectives and strategies, (2) scope and description of business and properties, and (3) impact of industry structure on a company. Current practice already requires disclosures in the scope and description of business and properties category. The Committee's model for that type of information is substantially consistent with that practice. Current practice does not require information for the remaining elements, although public companies often voluntarily discuss their objectives and strategies in business reporting.

IMPROVEMENTS IN FINANCIAL STATEMENTS

Although the model generally retains the form and content of today's financial statements and related disclosures, it includes certain changes that affect display, measurement, disclosure, summary data, and interim reporting.

Financial statement display. The model distinguishes between the effects of core and noncore activities. Core activities are usual (ordinary and typical) and recurring (expected to occur again after an interval) activities, transactions, or events and continuing operations [business(es) that management does not intend to discontinue or abandon], excluding interest. Most users' concept of core excludes interest, particularly in valuing companies and assessing credit risk. However, for financial services entities and the like, a portion of, if not all, interest activity would likely be included in core earnings. The concept of noncore is described as unusual (abnormal activities or those that are unrelated to the ordinary and typical operations of the entity) or nonrecurring (not expected to occur again after an interval) activities, transactions, or events or discontinued operations [business(es) that management intends to discontinue or abandon].
Companies should distinguish between core and noncore earnings on the face of the income statement, and between core and noncore cash flows on the cashflow statement. Further, companies should separately display noncore assets and liabilities on the balance sheet. The model calls for per share measures related to both core earnings and net income, and it permits per share measures related to cash flows. In general, the model calls for more detailed captions either on the face of the statements or in the notes, compared to the level of detail displayed in current practice.
Measurement. The model retains the current mixedattribute rules for measurement of assets and liabilities, with the exception of those that result from noncore activities. These noncore assets and liabilities should be measured at fair value. Changes in unrealized appreciation or depreciation in those assets or liabilities are charged or credited directly to shareholders' equity.
Disclosure of disaggregated information. At a minimum, companies should report business segments on an industry basis. Segment disclosures on a geographic basis should also be reported if materially disparate business opportunities and risks exist. Some companies in certain circumstances should report business segments on other bases, such as lineofbusiness or individual products, if those are materially different opportunities and risks. In general, companies would report on more industry segments under the model than they report on in current practice. They would also report more information about unconsolidated entities.
In concept, users would like complete financial statements for each industry and geographic segment. However, as a practical matter, companies may limit their disclosures to the few key statistics that are the minimum necessary for the user to understand the business. In general, users will require more detail about the income statement than the balance sheet. However, users need disaggregated balance sheet and cashflow information, which should be disclosed if it is available to the company.
Other disclosures. Pending resolution by standard setters of issues involving recognition and measurement of financial instruments and offbalancesheet financing arrangements, the model calls for more disclosures about the risks associated with those instruments and arrangements. Also, for assets and liabilities that are subject to significant measurement uncertainties, companies should describe how the amounts were derived and explain the estimates, assumptions, and judgments made in measuring the underlying asset or liability. Finally, companies should disclose the rationale used to distinguish core earnings and noncore activities, although appropriate accounting standards will need to be established to allow for useful and meaningful disclosures.
Summary information and restatement of financial data. The model calls for a summary of selected financial and nonfinancial data on a consolidated basis as well as for each industry segment. That data would include, among others, sales, gross margin percentage, core earnings, and ratios related to financial position. The period or periods of key statistics and ratios to be presented should be agreed upon by users and the reporting entity, but generally should not exceed five years.
Financial data should be restated or reclassified for dispositions, accounting changes, changes in the definition of an industry segment, and possibly other items as well if the restatement or reclassification information can be reasonably assembled and is necessary for a better and more complete understanding of the business. Otherwise, restatement or reclassification is not required.
Interim reporting. Interim information should be provided at least quarterly and should consist of uncondensed financial statements, although condensed footnotes are often appropriate. Disaggregated information should be reported on an interim basis, consistent with the information provided in the annual presentation. Quarterly reporting should include quarterly cashflow statements. Fourthquarter reporting should be no different than that for the other quarters, except for the disclosure of significant yearend adjustments.
The Model of Business Reporting follows on page 136.

`MODEL OF BUSINESS REPORTING ;`

`MAJOR COMPONENTS`

I. Financial and NonFinancial Data

(A) Financial statements and related disclosures

(B) Highlevel operating data and performance measurements that management uses to manage the business

II. Management's Analysis of Financial and NonFinancial Data

(A) Reasons for changes in the financial, operating, and performancerelated data, and the identity and past effect of key trends

III. ForwardLooking Information

(A) Opportunities and risks, including those resulting from key trends

(B) Management's plans, including critical success factors

IV. Information About Management and Shareholders

(A) Directors, management, compensation, major shareholders, and transactions and relationships among related parties

V. Background About the Company

(A) Broad objectives and strategies

(B) Scope and description of business and properties

MODEL OF BUSINESS REPORTING ;

DETAILS WITHIN MAJOR COMPONENTS

I. FINANCIAL AND NONFINANCIAL DATA

(A) Financial Statements and Related Disclosures

1. Periods to Be Reported, Restatement, and Summary Information

(a) Consistent with the flexible reporting feature of the model, financial statements and related note disclosures should be reported for a period or periods agreed upon by users and the reporting entity.

(b) Financial information should be restated or reclassified for all material business combinations, dispositions, accounting changes, changes in the definition of an industry segment, and possibly other items as well, if the restatement or reclassification information can be reasonably assembled and is necessary for a better and more complete understanding of the business. Otherwise, restatement or reclassification is not required.

(c) The model calls for a summary of key statistics and ratios. The statistics would include, among others, sales, gross margin percentage, core earnings, and ratios related to financial position. The period or periods of key statistics and ratios to present should be agreed upon by users and the reporting entity, but generally should not exceed five years.

2. Types of Financial Statements

(a) The model includes three financial statements: (1) statement of financial position, (2) statement of income, and (3) statement of cash flows.

(b) An analysis of changes in shareholders' equity is also required. However, that analysis can be included in the notes to the statements. It need not be a separate statement.

(c) The model retains the form and content of today's financial statements and note disclosures except as specified in I(A)3 through I(A)8.

3. Measurement

(a) The model retains the current mixedattribute rules for measurement of assets and liabilities, with the exception of those that result from noncore activities. Noncore assets and liabilities should be measured at fair values. Changes in unrealized appreciation or depreciation in noncore assets or liabilities are charged or credited directly to shareholders' equity.

(b) Net income is measured the same as in current GAAP.

4. Display

(a) Report separately the effects of core and noncore activities and events. The goal of distinguishing, on the face of the financial statements, between the effects of core and noncore activities is to present the best possible information with which to analyze trends in a company's business.

A company's core activities are usual and recurring activities, transactions, or events and continuing operations, excluding interest. Usual means that the activity is ordinary and typical for a particular company. Recurring means that the activity, transaction, or event is expected to occur again after an interval. Core activities include usual and recurring operations and recurring nonoperating gains and losses.

Conversely, noncore activities, transactions, or events are unusual (not typical for a particular company) or nonrecurring (not expected to occur again in the foreseeable future or before a specified interval). Examples include:

Discontinued operations (businesses that management intends to discontinue or abandon).
Unusually large transactions that are not expected to recur in the foreseeable future.
The effects of a rare natural disaster.
Unique transactions, such as selling real estate by a company that rarely sells real estate.
The effects of changes in accounting principles.

The term core activities is sometimes used in the business community to mean major, critical, or central operations as opposed to emerging or peripheral operations. It is not intended for the concept of core earnings to narrowly represent the major, critical, or central operations of a company, but rather the broad usual and recurring activities for the company as a whole (including emerging or peripheral operations). In fact, there may be a presumption that all operations of the company are core unless considered otherwise by management. Furthermore, most users' concept of core excludes interest when valuing companies and assessing credit risk. However, for financial services entities and the like, a portion of, if not all, interest activity would likely be included in core earnings. It is important to include disclosures surrounding management's rationale used to distinguish core earnings and noncore activities, transactions, or events, although appropriate accounting standards must be in place to allow for useful and meaningful disclosures.

(i) Income Statement: Core earnings are not a prediction of future earnings. Rather, core earnings are historical earnings adjusted to exclude the effects of historical unusual or nonrecurring items. The goal of presenting core earnings is not to present an estimate of normal income or recurring income. Neither should core earnings be averaged or artificially smoothed. The core earnings of a business that is inherently cyclical or volatile should appear cyclical or volatile ; not smooth.

Distinguishing between core and noncore earnings would require the following changes in current practice:

The statement should present two categories of earnings in the following order: (1) core and (2) noncore and financing costs.
Interest income and expense should be relocated from a component of pretax income to the section below core earnings under financing costs. Gains and losses from extinguishment of debt should be relocated from extraordinary items to a component of financing costs and should be separately disclosed.
The effects of unusual or nonrecurring transactions or events should be separately displayed as a component of noncore income. Amounts in the unusual or nonrecurring category should be reclassified from revenues, expenses, gains, and losses.
Discontinued operations is defined in current practice as a component of a company whose activities represent a separate major line of business or class of customer. That definition should be broadened to include all significant discontinued operations whose assets and results of operations and activities can be distinguished physically and operationally and for businessreporting purposes.
Extraordinary items should be eliminated. The concept is too narrow to be useful and is redundant with the unusual or nonrecurring category. Items classified as extraordinary should be classified as unusual or nonrecurring transactions or events, or financing costs if related to debt.
At a minimum, companies should provide share data related to core earnings, noncore income or expense and financing costs, and net income. Other share data also may be provided.

(ii) Statement of Cash Flows: Distinguishing between core and noncore cash flows would require the following changes in current practice:

The cash flows from the operating activities portion of the statement of cash flows should present two categories of cash flow in the following order: (1) core and (2) noncore and financing costs.
Net cash flows from core activities plus cash flows from noncore activities and financing costs should total to net cash provided by the operating activities.
The model proposes no changes to the investing and financing sections of the statement of cash flows. In concept, however, the investing and financing sections could also separately display core and noncore cash flows, although the incremental insight from that display would not justify the increased complexity of the cashflow statement and the cost of preparing the information.
The model permits disclosure of core cash flows per share.

(iii) Balance Sheet: The model calls for companies to distinguish, on the face of the balance sheet, between core assets and liabilities and noncore assets and liabilities. Core assets and liabilities result from a company's usual and recurring activities, transactions, or events. Conversely, noncore assets and liabilities result from unusual or nonrecurring activities, transactions, or events.

Noncore assets include for example: ; A receivable related to an unusually large sale of product that is not expected to recur in the foreseeable future. ; Real estate held for investment by a company that only rarely invests in real estate.
Noncore liabilities include for example: ; Liabilities that are closely associated with noncore assets, such as a mortgage liability related to noncore real estate. ; A contingent liability related to a discontinued business.

(b) Companies should increase the amount of detail in the statements, particularly in the income statement, as a means of helping users understand the business, the linkage between the financial statements and actual events, and the opportunities and risks. More specifically, companies should consider the following:

Dividing operating expenses into fixed and variable, or controllable and noncontrollable, or discretionary and nondiscretionary categories.
Disclosing the portions of costofsales that relate to purchased materials, salaries, fringe benefits, occupancy costs, property taxes, and other major components of costs.
Disclosing selling expenses separately from general and administrative expenses.
Disclosing the portion of costofsales and SG&A expenses that is depreciation.
Disclosing the portion of costs and expenses that relate to employees versus those that do not.
Disclosing the cash versus the noncash parts of unusual expenses.
Disclosing details of the equity income line item.
Disclosing amortization separately from depreciation.
Disclosing the components of capital expenditures, distinguishing between capital expenditures that are essential to maintaining the business and those that could be postponed; those that enhance a company's productive capacity versus those that do not; and those that are required by regulation, such as pollution control equipment, and those that are not.
Providing more detail of items in other assets and other deferred charges and credits, using a lower materiality threshold than is currently used in practice.
Displaying separately pastdue receivables or an aging of receivables.
Displaying separately slowmoving inventory or an aging of inventory.
Providing more details about the nature of and changes in valuation reserves.

5. Classification

(a) The statement of financial position should retain the current and noncurrent classification of assets and liabilities as presently provided in generally accepted accounting principles.

6. Disclosure

(a) More qualitative and quantitative information about the risks associated with financial instruments and offbalancesheet financing arrangements (for example, hedging strategy, sensitivity analysis to interest and foreign exchange rates, credit, and counterparty risks on derivatives).

(b) The historical costs, fair values, and methods and assumptions used in determining the fair values of noncore assets and liabilities.

(c) The footnotes should disclose a company's accounting policies used to distinguish between core and noncore income or expense and the details of the individual items included in captions on the income statement. For example, the accounting policies footnote should discuss a company's policy for determining unusual and nonrecurring transactions or events. The footnotes should also identify, describe, and quantify the effects of each individually significant transaction or event that is classified as unusual or nonrecurring.

(d) With respect to specific financial statement items, a statement that uncertainties are inherent in measuring those financial statement items because estimates, assumptions, and judgments are necessary in determining their reported amounts.

(e) Identify in financial statement notes the specific types of assets and liabilities subject to significant measurement uncertainties.

(f) For those assets and liabilities subject to significant measurement uncertainties, disclose how the reported amounts were derived and explain the estimate's assumptions and judgments about the future events considered in their measurement.

7. Disaggregated Information

(a) Basis of Disaggregation: Companies should determine the segments to be reported based on opportunities and risks: activities having similar opportunities and risks should be aggregated while those having diverse opportunities and risks should be reported as separate segments. At a minimum, however, companies should provide disaggregated information on an industry basis. Segment disclosures on a geographic basis should also be reported if materially disparate business opportunities and risks exist. Further, companies should provide disaggregated information for lineofbusiness or individual products if they are critical drivers of the company's opportunities and risks.

(i) Disaggregation Based on Industry: The model does not propose changes to the concept or definition of industry segments as currently defined in Statement 14. However, standard setters should consider practical devices that will help companies define their product and service groupings more narrowly and disclose information about more industry segments.

The primary means to improving industry segment reporting should be alignment of business reporting with internal reporting. That is, to the extent possible, companies should define industry segments for business reporting in a manner consistent with their definitions for internal reporting to senior management or the board of directors. The fact that a company defines industry segments more narrowly for internal reporting to senior management than it does for business reporting strongly suggests that it should expand the number of segments reported externally.

In addition to aligning business reporting with internal reporting, standard setters should consider the following practical devices that should help companies define their industry segments more narrowly. In deciding on industry segments, companies should:

Consider the way in which companies carry out their business activities. The fact that certain products or groups of products require different or specialized functions within the company suggests that the company is in multiple segments. For example, the fact that a dedicated marketing team supports one group of products but not others suggests that group may be a reportable segment.
Look to the manner in which analysts attempt to segment the company in their published reports. If the company is not followed by analysts, it should look to the manner in which analysts attempt to segment their publicly held competitors.
Look to the industry segment definition used by competitors. Competitors reporting separate segments for industries in which the reporting company participates suggests the segments to be reported. However, a company should not use the reporting practices of competitors to justify reporting fewer segments as that practice results in lowestcommondenominator reporting.
Not need to report on more than eight to ten industry segments.

(ii) Disaggregation Based on Geographic Location: Because the usefulness of geographic segment information varies, flexible standards should be considered by standard setters. Those standards should:

Require geographic segment information only when it provides insight into the opportunities and risks a company faces.
Require that companies consider disclosures of geographic segment information based on market locations or operating locations or both, depending on which bases provide insight about opportunities and risks.
Not specify the geographic regions to be reported. Rather, companies should group locations based on the groupings that provide the most insight into opportunities and risks, which may result in groupings smaller or larger than countries.
Require that companies consider disclosing geographic segment information for each industry segment, rather than geographic information for all of a company's activities in a location, if that method provides greater insight into the opportunities and risks for the industry segments.
Align, to the extent possible, geographic segment information reported externally with information reported internally to senior management or the board of directors.

(b) Disaggregated Information to Be Provided: In concept, users would like complete financial statements for each industry and geographic segment. However, as a practical matter, companies should be allowed to limit segment disclosures to those key financial statistics that a company has available (with the exception of revenues and cost of revenues which should be reported at a minimum). A statistic is available to a company if it is used for internal reporting purposes or if information already captured by the company's system can be aggregated to develop the statistic, without arbitrary allocations. In general, users will require more detail about the income statement than the balance sheet. However, users need disaggregated balance sheet and cashflow information, which should be disclosed if it is available to the company.

Standard setters should reconsider the key statistics to be reported for segments, including whether the statistics should vary by industry or sector. In addition, standard setters should consider whether the key statistics should be expanded beyond those now required to include:

Gross margin or some other statistic, to help users understand the segment's operating leverage.
Cashflow statistics, to assist those users that focus on cash flows.
Improved disclosure about the effects of unusual or nonrecurring items, to help users identify core earnings or cash flows.
Working capital, to help users understand the segment's need for capital.
Research and development costs, to help users understand the segment's commitment and need to develop new products, services, or processes.
Major classes of assets, such as receivables, inventories, and property, plant and equipment, to help users assess the segment's need for capital and evaluate opportunities and risks.

In specifying the computation of the key statistics, standard setters should not require arbitrary allocations of revenues, expenses, assets, or liabilities. Rather, standard setters should allow companies to report the statistic on the same basis it is reported for internal purposes, if the statistic is reported internally. Segment reporting should apply to all multisegment companies (public or private).

(c) Restatement of Historical Disaggregated Information When Segments Change: Companies frequently change the definitions of industry and geographic segments. Disaggregated information should be restated or reclassified for changes in the definition of an industry segment if the restatement or reclassification information can be reasonably assembled and is necessary for a better and more complete understanding of the business. Otherwise, restatement or reclassification is not required.

(d) Format of Disclosures: Companies should report disaggregated information in a format that reconciles the disaggregated information to the corresponding aggregated total. Often, that reconciliation will include an "other" segment that includes those businesses or geographic regions that individually do not meet the criteria for disclosure as a separate segment.

(e) Disaggregated Information Related to Unconsolidated Entities:

The equity method of accounting should be retained because alternative methods offer no advantages
The notes to the financial statements should include more information about unconsolidated investees in general, and significant investees in particular. The SEC should consider lowering its threshold test for determining which investees are deemed to be significant.
The need for information about investees is similar to the need for information about segments. Although users would like complete financial statements for each significant investee, as a practical matter, companies should be able to limit disclosures to those required for industry segments.

8. Interim Reporting

(a) Disaggregated information should be reported on an interim basis, consistent with the information provided in the annual presentation.

(b) When interim information is reported, the company and user of the information should negotiate and agree on the frequency (however, users of public company business reporting believe that interim information should be provided at least quarterly).

(d) Companies should report fourthquarter information even if that information is released concurrently with annual reporting. Fourthquarter reporting should be no different from that for other quarters except for the disclosure of significant yearend adjustments. Footnotes related to yearend balance sheet amounts can generally be omitted if the fourthquarter financial statements are included in annual reporting.

(e) Interim information should consist of uncondensed financial statements. However, condensed footnotes are often appropriate, except for fourthquarter balancesheet information included in an annual report.

(f) When applicable, disclosures should state that certain interim amounts are derived by estimation methods that may cause these amounts to be less reliable at interim dates than they are at yearend when the reported amounts are based on more refined estimation methods. Companies should also disclose the interim assumptions and methods that differ from annual calculations.

`(B) HIGHLEVEL OPERATING DATA AND PERFORMANCE MEASUREMENTS`

`THAT MANAGEMENT USES TO MANAGE THE BUSINESS`

Highlevel operating data and performance measurements will vary by industry and company. Management should identify those measures that it believes are significant and meaningful to its business, and that are leading indicators of the company's future. Nonfinancial information is important to understanding a company, its financial statements, the linkage between events and the financial impact on the company of those events, and predicting the company's future. For companies with more than one segment, such information should be reported at the segment level.

Generally, the following disclosures of nonfinancial information would be of quantitative measurements, assuming those measurements are sufficiently reliable for external presentation; however, companies should supplement quantitative measurement disclosures with qualitative discussions where meaningful. To the extent nonfinancial information is not known to the company or is considered insignificant to understanding its operations and to an understanding of the company, and its financial statements, disclosure is not required. The information should be presented for the same period(s) as the financial statements and the summary of key statistics and ratios. Information such as the following should be considered for disclosure:

Statistics related to activities that produce revenues, market acceptance, and quality, such as units and prices of product or services sold; growth in units sold or average prices of units sold; growth or shrinkage in market share; measures of customer satisfaction; percentage of defects or rejections; and backlog.
- Statistics related to activities that result in costs, such as the number of employees and average compensation per employee, and the volume and prices of materials consumed.
- Statistics related to productivity, such as the ratio of outputs to inputs.
- Statistics related to the time required to perform key activities, such as production or delivery of products or services and developing new products or services.
- Statistics related to the amount and quality of key resources, including human resources, such as the average age of key assets, or the quantity of proved reserves of natural resources.
- Measures related to innovation, such as the percentage of units produced in the current year that were designed within the last three years, or the number of suggestions to improve businesses processes received from employees in the last year.
- Measures of employee involvement and fulfillment, such as employee satisfaction and the rate of change in that measure.
- Measures of strength in vendor relationships, such as vendor satisfaction, and the rate of change in that measure.

II. MANAGEMENT'S ANALYSIS OF FINANCIAL AND NONFINANCIAL DATA

(A) REASONS FOR CHANGES IN THE FINANCIAL, OPERATING, AND

PERFORMANCERELATED DATA AND THE IDENTITY AND PAST EFFECT

OF KEY TRENDS

This section identifies key changes in amounts in the historical financial statements and nonfinancial statistics and discusses the reasons for those changes. The explanations thus serve as the nonfinancial counterpart to the financial statements. That is, just as the financial statements explain what happened in a financial sense, the explanations of changes explain what happened in a nonfinancial business sense. For annual reporting, management's analysis of the data should focus on at least the last year. The explanations should address at least the areas described below.

1. Reasons for Changes

(a) Market acceptance, such as the changes in revenues resulting from changes in prices, changes in volumes, and new products or services, and the reasons for those changes.

(b) The reasons for changes in ratios, such as the ratio of outputs to inputs.

(c) Innovation, such as the percentage of revenues resulting from products that did not exist within the last three years, or the percentage reduction in costs resulting from new processes, and the reasons for changes in those percentages.

(d) Profitability, such as the ratio of net income to sales and the reasons for changes in that percentage.

(e) Changes in financial position, such as the number of days sales in receivables and the reasons for changes in that number.

(f) Liquidity and financial flexibility, such as the ratio of debt to equity and the reason for the change in that ratio.

(g) Identity and effect of unusual or nonrecurring transactions and events included in financial statements.

2. The Identity and Past Effect of Key Trends

(a) The identity of social, demographic, technological, political, macroeconomic, and regulatory trends that management has identified and believes have significantly affected the business.

(b) The past effect of each trend identified in II(A)2(a) if management has formed a conclusion about that impact.

III. FORWARDLOOKING INFORMATION

Although prospective financial and nonfinancial information is often useful for financial analysis, users often prepare it themselves and it is not a required part of the reporting model for costbenefit reasons. If presented, prospective data are not a substitute for the other elements of the model. If management elects to present prospective information, the presentation should meet minimum standards, such as the AICPA's standards for reporting forecasts. In reporting forwardlooking information, the following elements should be considered.

(A) OPPORTUNITIES AND RISKS, INCLUDING THOSE RESULTING FROM

KEY TRENDS

Opportunities and risks are characterized as material trends [as identified in II(A)2(a)], demands, commitments, concentrations, and events, including legal proceedings, known to management that would cause reported financial information not to be necessarily indicative of future core earnings, net income, cash flows, or of future financial conditions.

1. The nature of each opportunity or risk that meets the disclosure criteria in III(A)4, and the identity of the trend, demand, commitment, or event, including legal proceedings, that gives rise to it should be disclosed.

2. For each opportunity or risk identified in III(A)1, disclose the effects, if any, on the business's future core earnings and future core cash flows. The disclosures should be made separately for each class of opportunities or risks described in III(A)4 that are applicable to the business's circumstances.

3. Disclosures about the risk of illiquidity should focus on financial flexibility: that is, the ability of an entity to adjust its future cash flows to meet needs and opportunities, both expected and unexpected. More specifically, the disclosures should:

(a) Identify and describe internal and external sources of liquidity and material unused sources of liquid assets.

(b) Describe any known trends, favorable or unfavorable, in the type, amount, sources, or cost of capital that the company or segment is able to attract.

(c) Identify known trends, commitments, events, or uncertainties that are reasonably likely to result in the company's or segment's liquidity increasing or decreasing in a material way. If a material deficiency is identified, indicate the course of action that the company or segment has taken or will take to remedy the situation.

4. Companies should disclose the information in III(A)1 through III(A)3 for each opportunity and risk that meets all of the following criteria at the reporting date:

(a) Current Exposure: The opportunity or risk should not develop wholly in the future.

(b) Important Concern: Where a trend, commitment, concentration, or event, including legal proceedings, is known, management should consider three factors: likelihood of occurrence, magnitude of potential impact, and imminence of potential impact.

Management should consider the three factors together to determine if the opportunity or risk is sufficiently important to result in disclosures that are useful to investors and creditors. Disclosure becomes more useful (1) as the likelihood that the trend, commitment, concentration, or event will come to fruition grows; (2) as the magnitude of potential impact on financial position, core earnings, net income, comprehensive income, or cash flows increases; and (3) as the potential impact comes nearer to the occurrence. Management should follow the following guidelines in applying the concept in this paragraph.

Disclosure is required if it is probable that the known trend, demand, commitment, or event will come to fruition, and if the potential impact is at least material.
Disclosure is generally not required if the likelihood of occurrence is remote. Disclosure is required, however, if the magnitude of the potential impact is severe, such as one that would threaten the company's ability to survive.
Disclosure is required if the potential impact could seriously disrupt or dramatically change the company's operations, and if the likelihood of occurrence is greater than remote.
Imminence of potential impact is the least important of the three factors. Generally, disclosure should be limited to opportunities and risks that could affect the company within the foreseeable future, although generally not for a period beyond three years from the balancesheet date.
Management may be unable to determine the likelihood of occurrence, the magnitude of potential impact, or the imminence of potential impact. If management cannot make that determination, it should evaluate whether disclosure would be useful on the assumption that the occurrence is probable, the magnitude is large, or the impact is imminent.

(c) Specific or Unusual Exposure: The opportunity or risk should be specific to the entity or the entity should be unusually exposed to a material trend, demand, commitment, concentration, or event, including legal proceedings, that is abnormal and significantly different than the ordinary environment in which the company operates.

(d) Helps Estimate Cash Flows or Earnings: A lack of disclosure must adversely affect the ability of users to estimate future cash flows or earnings.

(e) Limited to opportunities and risks that have been identified and considered by management in the operation of the business.

5. In identifying risks and opportunities that meet the disclosure criteria, companies should consider the following classes of risks and opportunities:

Opportunities and risks resulting from participation in additional industries.
Opportunities and risks resulting from changes in the segment's industry structure. The components of industry structure are listed in V©.
Opportunities and risks resulting from concentrations (for example, concentrations in assets, customers, or suppliers)
Risk of illiquidity
Contingent gains and losses related to the business's rights and obligations, including legal proceedings

(B) MANAGEMENT'S PLANS, INCLUDING CRITICAL SUCCESS FACTORS

1. The identity of management's activities and plans to meet the broad objectives and business strategy identified in V(A) that management believes will significantly impact future cash flows

2. The identity and importance of factors or conditions that management believes must be present to meet the broad objectives and business strategy identified in V(A), on the following bases:

(a) Factors and conditions that must occur within the business.

(b) Factors or conditions that must occur in the external environment.

(C) COMPARISON OF ACTUAL BUSINESS PERFORMANCE TO PREVIOUSLY

DISCLOSED OPPORTUNITIES, RISKS, AND MANAGEMENT'S PLANS

For the following categories of leading indicators, the identity of major differences between previously reported information and actual results and the reasons for those differences:

1. Opportunities and risks, including those from key trends.

2. Management's plans, including critical success factors.

IV. INFORMATION ABOUT MANAGEMENT AND SHAREHOLDERS

(A) DIRECTORS, MANAGEMENT, COMPENSATION, MAJOR

SHAREHOLDERS, AND TRANSACTIONS AND RELATIONSHIPS AMONG

RELATED PARTIES

1. Identity and background of directors and executive management. Background information about executive management is not required if the executive has been in the same position with the company for the past five years. The identity of any criminal convictions related to directors and executive management is required.

2. The types and amount of director and executive management compensation (broadly defined) and the methods or formulas used in computing that compensation. The board's policies for executive compensation and the relationship of company performance to executive compensation.

3. Security Ownership

(a) The identity of each major owner of the company's stock, and the number of shares that each owns.

(b) The number of shares owned by the directors as a group, management as a group, and employees as a group.

4. Transactions and relationships among major shareholders, directors, management, suppliers, customers, competitors, and the company.

5. Nature of disagreements with directors, independent auditors, bankers, and lead counsel who are no longer associated with the company.

6. Information about compensation committee interlocks and insider participation in compensation decisions.

V. BACKGROUND ABOUT THE COMPANY

As noted previously, nonfinancial information is important to understanding a company, its financial statements, the linkage between events and the financial impact on the company of those events, and for predicting the company's future. In contrast to disclosing quantitative measurements that management believes are significant and meaningful to its business, the following disclosures of nonfinancial information generally would be of a qualitative nature, although companies should supplement qualitative disclosures with quantitative measurements where practical and meaningful, assuming those measurements are sufficiently reliable for external presentation. To the extent nonfinancial information is not known to the company or is considered insignificant to understanding its operations or to an understanding of the company and its financial statements, disclosure is not required.

(A) BROAD OBJECTIVES AND STRATEGIES

1. Broad Objectives

(a) Management's broad objectives for the business, including those objectives that include quantified measures.

2. Strategy

(a) Management's principal strategies to achieve the broad objectives identified in V(A)1.

(b) Discussion of the consistency or inconsistency of the strategy with key trends affecting the business identified in II(A)2.

(B) SCOPE AND DESCRIPTION OF BUSINESS AND PROPERTIES

The following items, which may replace much of what is currently reported by U.S. public companies in filings with the SEC, while not allinclusive, should be considered for disclosure:

1. Management's description of the industry or industries in which its business or businesses participate.

2. Description of the general development of the business. For example, the year organized, if within the past five years; the form of organization; the identity of major events within the past five years, such as bankruptcy, merger, dispositions of assets, and changes in mode of conducting the business.

3. Description of principal products produced and services rendered.

4. Description of principal markets and market segments (based on demographic, geographic, use of product, or other basis) served by the segment's products and services.

5. Description of processes used to make and render principal products and services.

6. Description of key inputs to the processes, including materials, human resources, and capital additions.

7. Description of distribution and delivery methods for principal products and services.

8. Description of any seasonality and cyclicality (resulting from general economic cycles) related to the segment's products or services.

9. The types of existing and proposed laws and regulations that management believes have or could have a significant impact on the business.

10. Description and duration of important patents, trademarks, licenses, franchises, and concessions that offer the business a competitive advantage.

11. Description of types (not measures) of macroeconomic activity, such as housing starts or defense spending, that management believes are closely correlated with the business's revenues or expenses. Users can, and should, independently obtain measurement information pertaining to macroeconomic activity from sources outside the company.

12. Description of major contractual relationships between the business and its customers and suppliers.

13. The location, nature, productive capacity, and extent of utilization of the company's principle plants and other important physical properties.

(C) IMPACT OF INDUSTRY STRUCTURE ON THE COMPANY

1. Management's information about technological and regulatory changes that may affect the business's market through introductions by others of products or services that are superior to those offered by the business.

2. The Bargaining Power of Resource Providers

(a) Identity of the general types of major resources and related suppliers.

(b) For each general type of resource, the availability of supply and the relative bargaining power of the suppliers to the business. The discussion should highlight cases in which the business must rely on only one or a few suppliers for a general type of resource, the loss of any one of which would adversely affect the business.

(c) If possible, measures of relative bargaining power, such as the number of resource providers available to the business offering a general type of resource and the magnitude of recent price increases or decreases for a general type of resource.

3. The Bargaining Power of Customers

(a) The extent to which the business is dispersed among its customers. The discussion should include measurements of that dispersion. For example, companies might present a table indicating the number of customers, based on descending order from largest to smallest, generating 10 percent of revenues, 25 percent of revenues, and in total.

(b) The names of any dominant customers.

(c) If possible, measures of the relative bargaining power of customers. Those measures could include, for example, the magnitude of recent price increases or decreases for the business's major products and the number of customers gained and lost for a recent period.

4. The Intensity of Competition in the Industry

(a) The dispersion of competitors, such as the number of competitors and the names of major competitors.

(b) Measures of the intensity of rivalry, if possible to develop. Examples of those measures include frequency of price changes in response to competitor price changes; number of customers who switch from competitors to the business and viceversa; capacity utilization; and average number of companies bidding on major contracts.

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