Frequently Requested

Prepared by Accounting Staff Members

U.S. Securities and Exchange Commission,

CONTENTS

A. Redeemable Equity Securities

Commission releases and staff accounting bulletins (Rule 5-02 of Regulation S-X. Financial Reporting Codification Section 211, SAB 3C, and SAB 6B(1)) describe the accounting and reporting that is applicable to mandatorily redeemable preferred stock. The staff considers that guidance to be applicable to all equity securities (not only preferred stock) the cash redemption of which is outside the control of the issuer, including stock subject to rescission rights.

Redeemable equity securities should be presented separately from stockholders’ equity if they are redeemable at the option of the holder, or at a fixed date, or redemption is otherwise beyond the control of registrant. (See also EITF 96-13 concerning the need to classify certain puttable securities as liabilities.) This presentation is required even if the likelihood of the redemption event is considered remote. Where material, disclosures should include title of security, carrying amount, and redemption amount on the face of balance sheet. In notes, disclose general terms, redemption requirements in each of the succeeding five years, and number of shares authorized, issued and outstanding.

Redeemable securities are recorded initially at their fair value. If redeemable currently, the security should be adjusted to its redemption amount at each balance sheet date. If the security will become redeemable at a future determinable date, the security should be accreted in each period to the ultimate contractual redemption amount using an appropriate methodology, usually the interest method. The resulting increases or decreases in the carrying amount of the redeemable security reduce or increase income applicable to common shareholders in the calculation of EPS [SAB 3C]. Any extinguishment of redeemable securities for consideration that exceeds the carrying amount of the securities at that time should be treated as a reduction of income applicable to common shareholders. If charges or credits are material to income, separate disclosure of income applicable to common shareholders on the face of the income statement is required [SAB 6B(1)].

In some cases, the feature of the equity security that makes it redeemable is characterized as a liquidation event. Ordinary liquidation events, which involve the redemption and liquidation of all equity securities, do not result in a security being classified as redeemable equity. However, deemed liquidation events that would require one or more particular classes or types of equity security to be redeemed cause those securities to be classified outside of permanent equity. Examples of deemed liquidation events that we have seen as requiring the redemption of preferred stock and such redemption is beyond the control of the registrant include the following:

violation of a debt or other covenant

These events are commonly characterized as deemed liquidation events, and the clauses describing the events are commonly included in the Liquidation section of the preferred stock indentures. By characterization of the provisions as liquidation provisions, registrants have sought to avoid ASR 268 treatment. However, the staff believes that these types of provisions are equivalent to ordinary redemption clauses that would cause the securities to be classified outside of permanent equity.

Canadian registrants must classify redeemable equity securities as debt pursuant to requirements of Canadian GAAP. The staff has not required that such classification be discussed in the footnote that reconciles Canadian GAAP to US GAAP. Further, the staff would not object if a US registrant classified and accounted for redeemable equity securities as debt.

B. Accounting for Advertising Costs

The AICPA provided guidance regarding the accounting for advertising costs in Statement of Position 93-7. The scope of that guidance applies to any promotional activity intended to stimulate, directly or indirectly, a customer’s purchase of goods or services. It includes the use of commercial media, mailings, directory listings, catalogues, brochures, billboards and other means of attracting customers. However, other accounting literature is applicable to premiums, prizes, rebates, discounts and similar promotional devices.

The SOP provides that, with the limited exception of qualifying direct response advertising, all advertising costs must be either expensed as incurred or deferred until first use of the advertising. For example, costs of producing material to be used in an advertising program may be expensed as incurred, or deferred until the advertising program commences. Costs of communicating an advertisement (for example, broadcast fees) are expensed as the communication occurs. Brochures, catalogues and similar material under the possession of the company may be accounted for as prepaid supplies — that is, expensed in relation to use, with write-off when superseded or otherwise diminished in utility. Advertising costs required to be expensed pursuant to the SOP may not be deferred as pre-opening costs, contract acquisition costs, or other similar characterization. However, the SOP does not amend SFAS 53 (film industry), SFAS 60 (insurance industry), or SFAS 67 (real estate industry).

Certain direct response advertising costs may be deferred under the SOP. Qualifying costs relating to a specific advertising activity must meet all of the following criteria:

(a)

A direct relationship between a sale and the specific advertising activity for which cost is deferred must be demonstrated clearly. More than trivial marketing effort after customer response to the advertising and before the sale is consummated (such as customer contact with a sales person or furnishing of additional product or financing information) will disqualify the sale as being deemed a direct result of the advertising. A significant lapse of time between the advertising activity and the ultimate sale in an environment of broad general advertising may disqualify the sale as being deemed a direct result of the advertising.