TEI Urges SEC to Change Disclosure Rules.

A proposed rule to require the disclosure of additional confidential company information relating to accruals for contingent income and franchise tax liabilities raises serious concerns, Tax Executives Institute told the Securities and Exchange Commission in April. The Institute objected to the issuance of the new rule, adding that at the very least the loss accrual rules of new Item 302(c) should not encompass tax contingencies.

The Institute's comments were made in response to proposed rules issued on January 21, 2000, that would reposition certain supplementary schedule information currently required under Rule 12-09 of Regulation S-X within a new Item 302(c) of Regulation S-K. Item 302(c) would expand the scope of disclosure of information relating to valuation and loss accrual amounts. Under the proposed rules, the amount of tax accrued as a contingency for each material issue or transaction, and the annual changes in the accrual, would be disclosed in publicly available schedules filed with the SEC.

Although the Institute commended the SEC for its goal of enhancing the utility of financial disclosure statements, it questioned whether disclosure of a tax contingency or valuation reserve for material items comprising the issuer's tax reserve would improve the reader's understanding of the statements. "Indeed, we question whether anyone other than the company's competitors or tax authorities will possess sufficient understanding of the significance of the disclosures to make them meaningful," TEI stated.

Equally important, TEI added, "we fear that any improvements in disclosure would come at a substantial cost to the company, to its shareholders, and ultimately to the public." The routine disclosure of confidential information to financially interested parties -- including competitors and tax authorities -- could ultimately lead to increased tax costs for the company and to widespread replication of a company's legitimate tax-saving techniques and ideas. The Institute expressed concern that the costs of complying with the proposed rule outweigh the benefits and utility of the proposed disclosures.

In its comments, TEI explained that a careful balance must be struck between (1) disclosure of meaningful financial information to financial statement users and (2) disclosure of confidential tax planning and compliance issues to tax administrators and competitors. FASB Statement No. 5 governs the treatment of contingencies, including accrual of reserves for pending and potential tax disputes. Moreover, FASB Statement No. 109 provides guidance concerning the overall method and process for calculating and reporting a company's tax liabilities in its financial statements. Both financial statement issuers and users, the Institute remarked, have extensive experience and understanding in the interpretation and application of these statements and the corresponding effect under the SEC's current disclosure rules. "[T]hose rules strike the necessary and proper balance, requiring issuers of financial statements to disclose meaningful information about the scope of their actual and potential tax liabilities without compelling the disclosure of confidential company assessments of alternative legal interpretations that the tax authorities might assert in audits," TEI stated.

TEI's comments, which are reprinted in this issue beginning on page 237, were prepared under the aegis of its Federal Tax Committee, whose chair is Philip G. Cohen of Unilever United States Inc.