[Code of Federal Regulations]
[Title 17, Volume 2]
[Revised as of April 1, 2001]
From the U.S. Government Printing Office via GPO Access
[CITE: 17CFR210.4-08]

[Page 251-256]
 
              TITLE 17--COMMODITY AND SECURITIES EXCHANGES
 
             CHAPTER II--SECURITIES AND EXCHANGE COMMISSION
 
PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL STATEMENTS,
 
Sec. 210.4-08  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 paragraphs (b), (c), (d), (e) and (f) shall be 
provided as of the most recent audited balance sheet being filed and for 
paragraph (j) as specified therein. When specific statements are 
presented separately, the pertinent notes shall accompany such 
statements unless cross-referencing is appropriate.
    (a) Principles of consolidation or combination. With regard to 
consolidated or combined financial statements, refer to Secs. 210.3A-01 
to 3A-08 for requirements for supplemental information in notes to the 
financial statements.
    (b) 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.
    (c) 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

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most recent balance sheet being filed, state the amount of the 
obligation and the period of the waiver.
    (d) Preferred shares. (1) Aggregate preferences on involuntary 
liquidation, if other than par or stated value, shall be shown 
parenthetically in the equity section of the balance sheet.
    (2) 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.
    (e) Restrictions which limit the payment of dividends by the 
registrant. (1) 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.
    (2) Disclose the amount of consolidated retained earnings which 
represents undistributed earnings of 50 percent or less owned persons 
accounted for by the equity method.
    (3) The disclosures in paragraphs (e)(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 (Sec. 210.5-02.28) and minority 
interests shall be deducted in computing net assets for purposes of this 
test.
    (i) 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.).
    (ii) 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.
    (f) 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.
    (g) Summarized financial information of subsidiaries not 
consolidated and 50 percent or less owned persons. (1) The summarized 
information as to assets, liabilities and results of operations as

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detailed in Sec. 210.1-02(bb) shall be presented in notes to the 
financial statements on an individual or group basis for:
    (i) Subsidiaries not consolidated; or
    (ii) 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 Sec. 210.1-02(w) for a significant subsidiary are met:
    (A) Individually by any subsidiary not consolidated or any 50% or 
less owned person; or
    (B) On an aggregated basis by any combination of such subsidiaries 
and persons.
    (2) 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 Sec. 210.1-02(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.
    (h) Income tax expense. (1) Disclosure shall be made in the income 
statement or a note thereto, of (i) the components of income (loss) 
before income tax expense (benefit) as either domestic or foreign; (ii) 
the components of income tax expense, including (A) taxes currently 
payable and (B) 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.)
    Note: 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.

    (2) 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.
    (3) 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 109, Accounting for 
Income Taxes.
    (i) The disclosures required by paragraph (h)(1)(ii) of this section 
and by the parenthetical instruction at the end of paragraph (h)(1) of 
this section and by the introductory sentence of paragraph (h)(2) of 
this section shall not apply.
    (ii) The instructional note between paragraphs (h) (1) and (2) of 
this section and the balance of the requirements of paragraphs (h) (1) 
and (2) of this section shall continue to apply.

[[Page 254]]

    (i) 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:
    (1) Title of issue of securities called for by warrants or rights.
    (2) Aggregate amount of securities called for by warrants or rights 
outstanding.
    (3) Date from which warrants or rights are exercisable.
    (4) Price at which warrant or right is exercisable.
    (j) [Reserved]
    (k) Related party transactions which affect the financial 
statements. (1) Related party transactions should be identified and the 
amounts stated on the face of the balance sheet, income statement, or 
statement of cash flows.
    (2) 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 (i) eliminated and (ii) not 
eliminated. Also, any intercompany profits or losses resulting from 
transactions with related parties and not eliminated and the effects 
thereof shall be disclosed.
    (l) [Reserved]
    (m) Repurchase and reverse repurchase agreements--(1) Repurchase 
agreements (assets sold under agreements to repurchase). (i) 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.
    (ii)(A) 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 paragraph (m)(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 paragraph (m)(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:
    (i) The 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
    (ii) The repurchase liability associated with such transaction or 
group of transactions and the interest rate(s) thereon.
    (B) For purposes of paragraph (m)(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.
    (iii) 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.)

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    (2) Reverse repurchase agreements (assets purchased under agreements 
to resell). (i) 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: (A) Disclose separately such amount in the balance sheet; 
and (B) disclose in an appropriately captioned footnote: (1) The 
registrant's policy with regard to taking possession of securities or 
other assets purchased under agreements to resell; and (2) 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.
    (ii) If, as of the most recent balance sheet date, the amount at 
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, exept in exchange for their approximate market value in a 
separate transaction.
    (n) 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 items:
    (1) A discussion of each method used to account for derivative 
financial instruments and derivative commodity instruments;
    (2) The types of derivative financial instruments and derivative 
commodity instruments accounted for under each method; (3) 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);
    (4) The accounting method used if the criteria specified in 
paragraph (n)(3) of this section are not met;
    (5) 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;
    (6) 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
    (7) 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): 1. For purposes of this paragraph (n), 
derivative financial instruments and derivative commodity instruments 
(collectively referred to as ``derivatives'') are defined as follows:
    (i) 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 characteristics.
    (ii) 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

[[Page 256]]

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).
    2. 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)).
    3. 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)).
    4. 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 
6063, Feb. 10, 1997]