(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Proposal Calls for MD&A Disclosure of "Critical" Estimates

The SEC has proposed a disclosure requirement for companies to include a separately-captioned section regarding the application of critical accounting policies in the MD&A portion of their SEC filings. This section would cover disclosures about 1) critical accounting estimates made by the company in applying its accounting policies and 2) the initial adoption of an accounting policy by the company.

As proposed, an accounting estimate should be recognized in the financial statements as critical if the estimate requires the company to make assumptions about matters that are highly uncertain at that time. An estimate should also be considered critical if other reasonable alternative estimates or reasonably foreseeable changes in the accounting estimate would have a material impact on the presentation of the company's financial condition.

The proposal would require the MD&A section to include 1) a discussion of the estimate and the methodology used, 2) an explanation of the significance of the accounting estimate to the company's financial condition, 3) a quantitative discussion of changes in line items in the financial statements if the accounting estimate changed, 4) a quantitative and qualitative discussion of the nature and impact of any material changes made to the accounting estimate in the past three years, 5) a statement of whether company management has discussed the development and selection of the accounting estimate and MD&A disclosure with the audit committee and 6) an identification of business segments affected, if applicable, and a discussion of the estimate on a segment basis. Companies would be required to update this part of the required disclosure to show material changes in their quarterly reports.

The proposals would also require a statement regarding a company's initial adoption of an accounting policy if the accounting policy was adopted in the past year and had a material impact on the company's financial condition. Companies would be required to disclose 1) the events or transactions that gave rise to the initial adoption, 2) the accounting principle that has been adopted and the method of applying that principle, 3) a qualitative discussion of the impact of the adoption and 4) a discussion of any available alternatives. Comments on the proposed disclosure requirements are due within 60 days following publication in the Federal Register.

¨  The proposing release will be published in a forthcoming REPORT.