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| Securities Lawyer's Deskbook
of Cincinnati College of Law
Form and Content of Financial Statements
Rule 4-08 -- General Notes to Financial Statements
If applicable to the person for which the financial statements
are filed, the following shall be set forth on the face of the appropriate statement
or in appropriately captioned notes. The information shall be provided for each
statement required to be filed, except that the information required by items
(b), (c), (d), (e), and (f) shall be provided as of the most recent audited balance
sheet being filed and for item (j) as specified therein. When specific statements
are presented separately, the pertinent notes shall accompany such statements
unless cross-referencing is appropriate.
- Principles of consolidation or combination.
With regard to consolidated or combined financial statements, refer to Rules 3A-01
to 3A-08 for requirements for supplemental information in notes to the financial
- Assets subject to lien. Assets mortgaged pledged,
or otherwise subject to lien, and the approximate amounts thereof, shall be
designated and the obligations collateralized briefly identified.
- Defaults. The facts and amounts concerning any default
in principal, interest, sinking fund, or redemption provisions with respect
to any issue of securities or credit agreements, or any breach of covenant
of a related indenture or agreement, which default or breach existed at the
date of the most recent balance sheet being filed and which has not been subsequently
cured, shall be stated in the notes to the financial statements. If a default
or breach exists but acceleration of the obligation has been waived for a
stated period of time beyond the date of the most recent balance sheet being
filed, state the amount of the obligation and the period of the waiver.
- Preferred shares.
- Aggregate preferences on involuntary liquidation,
if other than par or stated value, shall be shown parenthetically in the
equity section of the balance sheet.
- Disclosure shall be made of any restriction upon retained
earnings that arises from the fact that upon involuntary liquidation the
aggregate preferences of the preferred shares exceeds the par or stated
value of such shares.
- Restrictions which limit the payment of dividends by
- Describe the most significant restrictions, other than as
reported under paragraph (d) of this section, on the payment of dividends by the
registrant, indicating their sources, their pertinent provisions, and the amount
of retained earnings or net income restricted or free of restrictions.
- Disclose the amount of consolidated retained earnings
which represents undistributed earnings of 50 percent or less owned persons
accounted for by the equity method.
- The disclosures in paragraph (3)(i) and (ii) in this section
shall be provided when the restricted net assets of consolidated and unconsolidated
subsidiaries and the parent's equity in the undistributed earnings of 50 percent
or less owned persons accounted for by the equity method together exceed 25 percent
of consolidated net assets as of the end of the most recently completed fiscal
year. For purposes of this test, restricted net assets of subsidiaries shall mean
that amount of the registrant's proportionate share of net assets (after intercompany
eliminations) reflected in the balance sheets of its consolidated and unconsolidated
subsidiaries as of the end of the most recent fiscal year which may not be transferred
to the parent company in the form of loans, advances or cash dividends by the
subsidiaries without the consent of a third party (i.e., lender, regulatory agency,
foreign government, etc.). Not all limitations on transferability of assets are
considered to be restrictions for purposes of this test, which considers only
specific third party restrictions on the ability of subsidiaries to transfer funds
outside of the entity. For example, the presence of subsidiary debt which is secured
by certain of the subsidiary's assets does not constitute a restriction under
this rule. However, if there are any loan provisions prohibiting dividend payments,
loans or advances to the parent by a subsidiary, these are considered restrictions
for purposes of computing restricted net assets. When a loan agreement requires
that a subsidiary maintain certain working capital, net tangible asset, or net
asset levels, or where formal compensating arrangements exist, there is considered
to be a restriction under the rule because the lender's intent is normally to
preclude the transfer by dividend or otherwise of funds to the parent company.
Similarly, a provision which requires that a subsidiary reinvest all of its earnings
is a restriction, since this precludes loans, advances or dividends in the amount
of such undistributed earnings by the entity. Where restrictions on the amount
of funds which may be loaned or advanced differ from the amount restricted as
to transfer in the form of cash dividends, the amount least restrictive to the
subsidiary shall be used. Redeemable preferred stocks (210.5-02.27) and noncontrolling interests shall be deducted in computing net assets
for purposes of this test.
- Describe the nature of any restrictions
on the ability of consolidated subsidiaries and unconsolidated subsidiaries
to transfer funds to the registrant in the form of cash dividends,
loans or advances (i.e., borrowing arrangements, regulatory restraints,
foreign government, etc.)
- Disclose separately the amounts of such restricted
net assets for unconsolidated subsidiaries and consolidated subsidiaries
as of the end of the most recently completed fiscal year.
- Significant changes in bonds, mortgages and similar debt.
Any significant changes in the authorized or issued amounts of bonds, mortgages
and similar debt since the date of the latest balance sheet being filed for
a particular person or group shall be stated.
- Summarized financial information of subsidiaries not
consolidated and 50 percent or less owned persons.
- The summarized information as to assets, liabilities
and results of operations as detailed in Rule
1-02(bb) shall be presented in notes to the financial statements on
an individual or group basis for:
- Subsidiaries not consolidated; or
- For 50 percent or less owned persons accounted
for by the equity method by the registrant or by a subsidiary of the
registrant, if the criteria in Rule 1-02(w)
for a significant subsidiary are met:
- Individually by any subsidiary not consolidated
or any 50% or less owned person; or
- On an aggregated basis by any combination
of such subsidiaries and persons.
- Summarized financial information shall be presented insofar
as is practicable as of the same dates and for the same periods as the audited
consolidated financial statements provided and shall include the disclosures prescribed
by Rule 1-02(bb). Summarized information of subsidiaries not consolidated shall
not be combined for disclosure purposes with the summarized information of 50
percent or less owned persons.
- Income tax expense.
- Disclosure shall be made in the income statement or
a note thereto, of
- the components of income (loss) before income
tax expense (benefit) as either domestic or foreign;
- the components of income tax expense, including
- taxes currently payable and
- the net tax effects, as applicable, of
timing differences (indicate separately the amount of the estimated
tax effect of each of the various types of timing differences,
such as depreciation, warranty costs, etc., where the amount of
each such tax effect exceeds five percent of the amount computed
by multiplying the income before tax by the applicable statutory
Federal income tax rate; other differences may be combined.)
Amounts applicable to United States Federal income taxes, to foreign
income taxes and the other income taxes shall be stated separately for
each major component. Amounts applicable to foreign income (loss) and
amounts applicable to foreign or other income taxes which are less than
five percent of the total of income before taxes or the component of
tax expense, respectively, need not be separately disclosed. For purposes
of this rule, foreign income (loss) is defined as income (loss) generated
from a registrant's foreign operations, i.e., operations that are located
outside of the registrant's home country.
- Provide a reconciliation between the amount of reported
total income tax expense (benefit) and the amount computed by multiplying
the income (loss) before tax by the applicable statutory Federal income
tax rate, showing the estimated dollar amount of each of the underlying
causes for the difference. If no individual reconciling item amounts to
more than five percent of the amount computed by multiplying the income
before tax by the applicable statutory Federal income tax rate, and the
total difference to be reconciled is less than five percent of such computed
amount, no reconciliation need be provided unless it would be significant
in appraising the trend of earnings. Reconciling items that are individually
less than five percent of the computed amount may be aggregated in the
reconciliation. The reconciliation may be presented in percentages rather
than in dollar amounts. Where the reporting person is a foreign entity,
the income tax rate in that person's country of domicile should normally
be used in making the above computation, but different rates should not
be used for subsidiaries or other segments of a reporting entity. When
the rate used by a reporting person is other than the United States Federal
corporate income tax rate, the rate used and the basis for using such
rate shall be disclosed.
- Paragraphs (h)(1) and (2) of this section shall be applied
in the following manner to financial statements which reflect the adoption of
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes.
- The disclosures required by paragraph (h)(1)(ii)
and by the parenthetical instruction at the end of paragraph (h)(1) and by the
introductory sentence of paragraph (h)(2) of this section shall not apply.
- The instructional note between paragraphs (h)(1)
and (2) and the balance of the requirements of paragraphs (h)(1) and (2) shall
continue to apply.
- Warrants or rights outstanding. Information with
respect to warrants or rights outstanding at the date of the related balance
sheet shall be set forth as follows:
- Title of issue of securities called for by warrants
- Aggregate amount of securities called for by warrants
or rights outstanding.
- Date from which warrants or rights are exercisable.
- Price at which warrant or right is exercisable.
- Related party transactions which affect the financial
- Related party transactions should be identified
and the amounts stated on the face of the balance sheet, income statement,
or statement of cash flows.
- In cases where separate financial statements
are presented for the registrant, certain investees, or subsidiaries,
separate disclosure shall be made in such statements of the amounts in
the related consolidated financial statements which are
- eliminated and
- not eliminated.
- Also, any intercompany profits or losses resulting
from transactions with related parties and not eliminated and the effects
thereof shall be disclosed.
- Repurchase and reverse repurchase agreements.
- Repurchase agreements (assets sold under
agreements to repurchase).
- If, as of the most recent balance sheet
date, the carrying amount (or market value, if higher than the carrying
amount or if there is no carrying amount) of the securities or other
assets sold under agreements to repurchase ("repurchase agreements")
exceeds 10% of total assets, disclose separately in the balance sheet
the aggregate amount of liabilities incurred pursuant to repurchase
agreements including accrued interest payable thereon.
- If, as of the most recent balance sheet date,
the carrying amount (or market value, if higher than the carrying amount) of securities
or other assets sold under repurchase agreements, other than securities or assets
specified in (1)(ii)(B) of this section, exceeds 10% of total assets, disclose
in an appropriately captioned footnote containing a tabular presentation, segregated
as to type of such securities or assets sold under agreements to repurchase (e.g.,
U.S. Treasury obligations, U.S. Government agency obligations and loans), the
following information as of the balance sheet date for each such agreement or
group of agreements (other than agreements involving securities or assets specified
in (1)(ii)(B) of this section) maturing (1) overnight; (2) term
up to 30 days; (3) term of 30 to 90 days; (4) term over 90 days
and (5) demand:
- carrying amount and market
value of the assets sold under agreement to repurchase, including
accrued interest plus any cash or other assets on deposit
under the repurchase agreements; and
- the repurchase liability
associated with such transaction or group of transactions
and the interest rate(s) thereon.
- For purposes of (1)(ii)(A) of this section
only, do not include securities or other assets for which unrealized changes in
market value are reported in current income or which have been obtained under
reverse repurchase agreements.
- If, as of the most recent balance
sheet date, the amount at risk under repurchase agreements with any
individual counterparty or group of related counterparties exceeds
10% of stockholders' equity (or in the case of investment companies,
net asset value), disclose the name of each such counterparty or group
of related counterparties, the amount at risk with each, and the weighted
average maturity of the repurchase agreements with each. The amount
at risk under repurchase agreements is defined as the excess of carrying
amount (or market value, if higher than the carrying amount or if
there is no carrying amount) of the securities or other assets sold
under agreement to repurchase, including accrued interest plus any
cash or other assets on deposit to secure the repurchase obligation,
over the amount of the repurchase liability (adjusted for accrued
interest). (Cash deposits in connection with repurchase agreements
shall not be reported as unrestricted cash pursuant to Rule 5.02.1.)
- Reverse repurchase agreements (assets purchased
under agreements to resell).
- If, as of the most recent balance sheet
date, the aggregate carrying amount of "reverse repurchase agreements"
(securities or other assets purchased under agreements to resell)
exceeds 10% of total assets:
- disclose separately such amount
in the balance sheet; and
- disclose in an appropriately
- the registrant's policy
with regard to taking possession of securities or other assets
purchased under agreements to resell; and
- whether or not there are
any provisions to ensure that the market value of the underlying
assets remains sufficient to protect the registrant in the
event of default by the counterparty and if so, the nature
of those provisions.
- If, as of the most recent balance
sheet date, the amount of risk under reverse repurchase agreements
with any individual counterparty or group of related counterparties
exceeds 10% of stockholders' equity (or in the case of investment
companies, net asset value), disclose the name of each such counterparty
or group of related counterparties, the amount at risk with each,
and the weighted average maturity of the reverse repurchase agreements
with each. The amount at risk under reverse repurchase agreements
is defined as the excess of the carrying amount of the reverse repurchase
agreements over the market value of assets delivered pursuant to the
agreements by the counterparty to the registrant (or to a third party
agent that has affirmatively agreed to act on behalf of the registrant)
and not returned to the counterparty, except in exchange for their
approximate market value in a separate transaction.
- Accounting policies for certain derivative instruments. Disclosures
regarding accounting policies shall include descriptions of the accounting
policies used for derivative financial instruments and derivative commodity
instruments and the methods of applying those policies that materially affect
the determination of financial position, cash flows, or results of operation.
This description shall include, to the extent material, each of the following
- A discussion of each method used to account
for derivative financial instruments and derivative commodity instruments;
- The types of derivative financial instruments
and derivative commodity instruments accounted for under each method;
- The criteria required to be met for each
accounting method used, including a discussion of the criteria required
to be met for hedge or deferral accounting and accrual or settlement accounting
(e.g., whether and how risk reduction, correlation, designation, and effectiveness
tests are applied);
- The accounting method used if the criteria specified
in paragraph (n)(3) of this section are not met;
- The method used to account for terminations
of derivatives designated as hedges or derivatives used to affect directly
or indirectly the terms, fair values, or cash flows of a designated item;
- The method used to account for derivatives
when the designated item matures, is sold, is extinguished, or is terminated.
In addition, the method used to account for derivatives designated to
an anticipated transaction, when the anticipated transaction is no longer
likely to occur; and
- Where and when derivative financial instruments
and derivative commodity instruments, and their related gains and losses,
are reported in the statements of financial position, cash flows, and
results of operations.
Instructions to Paragraph (n)
- For purposes of this paragraph (n), derivative
financial instruments and derivative commodity instruments (collectively
referred to as "derivatives") are defined as follows:
- Derivative financial instruments
have the same meaning as defined by generally accepted accounting
principles (see, e.g., Financial Accounting Standards Board ("FASB"),
Statement of Financial Accounting Standards No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments,"
("FAS 119") paragraphs 5-7, (October 1994)), and include futures,
forwards, swaps, options, and other financial instruments with similar
- Derivative commodity instruments
include, to the extent such instruments are not derivative financial
instruments, commodity futures, commodity forwards, commodity swaps,
commodity options, and other commodity instruments with similar characteristics
that are permitted by contract or business custom to be settled in
cash or with another financial instrument. For purposes of this paragraph,
settlement in cash includes settlement in cash of the net change in
value of the derivative commodity instrument (e.g., net cash settlement
based on changes in the price of the underlying commodity).
- For purposes of paragraphs (n)(2), (n)(3), (n)(4),
and (n)(7), the required disclosures should address separately derivatives entered
into for trading purposes and derivatives entered into for purposes other than
trading. For purposes of this paragraph, trading purposes has the same meaning
as defined by generally accepted accounting principles (see, e.g., FAS 119, paragraph
9a (October 1994)).
- For purposes of paragraph (n)(6), anticipated transactions
means transactions (other than transactions involving existing assets or liabilities
or transactions necessitated by existing firm commitments) an enterprise expects,
but is not obligated, to carry out in the normal course of business (see, e.g.,
FASB, Statement of Financial Accounting Standards No. 80, "Accounting for Futures
Contracts," paragraph 9, (August 1984)).
- Registrants should provide disclosures required
under paragraph (n) in filings with the Commission that include financial
statements of fiscal periods ending after June 15, 1997.
45 FR 63669, Sept. 25, 1980, as amended at 46 FR 56179, Nov. 16, 1981; 50 FR 25215,
June 18, 1985; 50 FR 49532, Dec. 3, 1985; 51 FR 3770, Jan. 30, 1986; 57 FR 45293,
Oct. 1, 1992; 59 FR 65636, Dec. 20, 1994; 62 FR 6044, 6063, Feb. 10, 1997; TBA FR Apr. 2009
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