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Alliance of Concerned InvestorsJane Adams

Jack Ciesielski

Rebecca McEnally

Janet Pegg

Lynn Turner

_________________________________________________________________________

September 22, 2021

Technical Director

File Reference No. 2021-004

FASB

401 Merritt 7

PO Box 5116

Norwalk, CT 06856-5116

The Alliance of Concerned Investors is pleased to respond to the FASB’s Invitation to Comment on its Agenda

Consultation. We note that the last such invitation was extended in 2016, and we hope that the FASB will make

this kind of outreach more frequently than every five years.

We are a collection of individuals who have worked in the capital markets for multiple decades. Most of us were

original members of the Investors Technical Advisory Committee of the Financial Accounting Standards Board.

Our functional roles have been as buy-side and sell-side research analysts, accounting standard-setters and

regulators, or accounting academics. All of us have one experience in common: we are fundamental investors

who believe that all investors are empowered to make useful investment decisions only when they are provided

with robust and timely financial information. We joined together because our common beliefs and interests in

financial reporting and market regulation led us to bring voice to concerns, we share about the current state of

financial reporting and the financial reporting regulators.

Before we address our suggestions for the FASB’s allocation of its resources, we strongly urge the addition of

more investors on the Board and the inclusion of more investors in the standard-setting process. We understand

the FASB includes two members with investment backgrounds, but their views and votes are eclipsed by the

presence of the accounting, auditing, and preparer complex. Furthermore, the Private Company Council has

exerted great influence on the FASB’s agenda since its inception, with no equally powerful counterpart for

investors. We see no direct benefit to investors from FASB’s effort in the last eight years to simplify of accounting

standards; in fact, we believe it has prevented the FASB from addressing projects that would be more beneficial

to investors, such as the ones we address in this letter. In that regard, we recommend that the FASB abandon its

efforts proposed in Chapter 3, “Reduction of Unnecessary Complexity in Current GAAP.” At the very least, it

should be the lowest priority of all. Consider this a global response to Questions 20 through 24.

We would like to address Question 2, which is the most important question in the entire document: Which topics

in this ITC should be a top priority for the Board? We reference later questions within in our priority listing of

projects. Our answers are presented in descending order of priority.

• Key Performance Indicators (Questions 14 & 15). We believe that the time is well past for the inclusion

of key performance indicators (KPIs) in the financial statements. This was recommended by the Jenkins

Committee of the AICPA in 1994. There has been no forward motion on the recommendation in almost

thirty years.

2021-004 Comment Letter No. 64

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We recommend that the Board develop a standard for the presentation of KPIs relevant to the company

and its management, rather than develop specific metrics that all companies must adopt, or a series of

industry-specific KPIs. Managers of companies focus on the value drivers of a business, and they manage

these value drivers to maximize shareholder returns. Yet they do not inform shareholders of these critical

priorities. We believe that a successful project for KPI disclosure would be more beneficial for investors

than searching for ways to prod managers into disclosing more segments.

• Digital Assets (Questions 10 - 12). While we recognize that digital assets are not commonly found on

corporate balance sheets, the spread of this new currency form has been breathtaking and shows no signs

of abating. For instance, there are “almost 100 cryptocurrency tokens that use the moniker or ticker

“doge,” according to the Wall Street Journal.1 For the companies currently placing investment in digital

assets such as bitcoin and other variants, we suggest a fair value option for balance sheet reporting, with

fair value changes reflected in earnings. We also suggest disclosure requirements that include

management’s intention for making such investments: are they merely speculations? Are they hedging

instruments, and if so, what is the hedged item? Over what term are such assets expected to be controlled?

While these changes could be made quickly, they are only stopgap measures. As digital assets and their

uses evolve, more tailored accounting for them is likely to become necessary. They do not fit neatly into

the current accounting framework and “accounting by analogy” in the field may not produce consistent or

meaningful reporting. We recommend that the FASB begin a project on accounting for digital assets

immediately; waiting until they become pervasive in financial reporting may put the FASB so far behind,

they may never catch up.

• Statement of Cash Flows & Statement of Comprehensive Income (Questions 6 - 8). We recommend

that the Board address the statement of cash flows in a comprehensive manner, including the statement of

comprehensive income. First, the statement of cash flows: when Statement 95 was issued in 1987, the

direct method of cash flows was designated as the preferable presentation and the indirect method was

merely allowed. Thirty-five years later, evolution has made the direct method almost as extinct as

dinosaurs.

We recommend the Board require the use of the direct method rather than leaving as a preferred method

of presentation that companies choose to ignore. Elements of a cash flow statement presented on a direct

basis would include cash collected from customers, cash paid to employees, cash paid to suppliers,

interest and dividends received, interest paid, and income taxes paid. Such a presentation would show

operating cash receipts and payments – information that would keenly interest investors and analysts. The

indirect method is simply not robust enough to provide all of this information. The 2008 FASB Discussion

Paper (No. 1630-100): Preliminary Views on Financial Statement Presentation, provides an excellent

example of a direct method cash flow statement once suggested by the FASB. See Exhibit 1.

Always important, cash flow analysis has become a mainstay of the investor toolkit. The accounting

failures around the turn of the century have only made investors more conscious of the importance of cash

flow within a company, and we challenge the Board to find a credible analyst or investor who doesn’t

examine cash flows. Yet there has been no major project to improve the cash flow statement since its

inception.

1 “Dogecoin Copycats? Trademark Fight Erupts Over Joke Crypto Worth Billions”, by Caitlin Ostroff, Wall Street Journal, 9/15/2021, located at https://www.wsj.com/articles/dogecoin-copycats-trademark-fight-erupts-over-joke-crypto-worth-billions-11631638106?st=725ckw28xrwvehx&reflink=desktopwebshare_permalink

2021-004 Comment Letter No. 64

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We understand that after the 2008 Discussion Paper was issued, preparers responded that there was no

particular benefit to be gained from mandating the direct method. We disagree heartily. Investors want

cash flow information and they use cash flow information. Liquidity matters, especially in a downturn,

and a direct method presentation facilitates liquidity analysis. Preparers also responded that companies

could not conceivably change their accounting systems to accommodate the direct method. We find that

reason very counter-intuitive in an age where software has only improved and expanded the information

processing capabilities of management. Consider this: if a firm’s chief operating decision maker

demanded to see a cash flow statement every week prepared on the direct method, would the chief

information officer refuse on the grounds that it couldn’t be done? We doubt it. Furthermore, the extensive

system changes required by ASU No. 2014-09, Revenue from Contracts with Customers, seem to have

been handled quite well by companies. We believe they would be able to do so once more if a direct

method cash flow statement was required.

A reconciliation of cash flows to comprehensive income would greatly improve investors’ ability to

evaluate the quality of reported earnings. We consider this to be equally important as the direct method of

cash flow reporting. Exhibit 2 is drawn from page 78 of the 2008 FASB Discussion Paper and we

recommend that it be included in the notes to the financial statements.

We recommend that the Board also make the statement of cash flows more relevant for financial

institutions as well, by applying the format prescribed in the 2008 Preliminary Views document. See

Exhibit 3, drawn from page 88 of the Preliminary Views document.

Essentially, we are recommending that the Board completely overhaul the presentation of financial

statements. To that end, we recommend that the Board approach the income statement as it did in the 2008

Discussion paper: as a statement of comprehensive income that meshes with the statement of cash flows

prepared on the direct method. See Exhibit 4, drawn from page 71 of that document.

• Intangible Assets (Questions 18 & 19). We believe that the time is well past for the FASB to pursue

exploration of the presentation of internally developed intangible assets. We believe it is also well past

the time for the FASB to revisit the accounting for internally-developed software, though we do not

support reckless capitalization of all such costs. We caution the Board to learn from the failures of previous

standards, which in practice allowed the widespread capitalization of R&D and software expenditures

without convincing proof of future benefit. This cannot be allowed to happen again, yet the Board needs

to address the information vacuum created by the current treatment and its utter lack of useful disclosure.

The project should be added with the goal of developing recognition and measurement of a firm’s

intangible assets such as research and development, but the project should start by requiring qualitative

and quantitative disclosures about intangible assets, such as disclosures about research and

development efforts.

For example, disclosures could include the amount of revenues generated each year from new products

being introduced, related to historical dollars spent on R&D. This would enable investors to see how long

it takes R&D efforts to produce revenues. Similar historical information about patents and revenues would

be useful for investors to assess the efficacy of patent development. Information about the number of R&D

employees and labor costs would help investors better understand a company’s competitive position in

the market for scientific minds and hearts. Other disclosures could include discussion and description of

the intangible assets that are the subject of management’s focus. This relates to our very first priority, the

disclosures regarding key performance indicators. Putting these disclosures into the hands of investors

could yield useful information to the FASB about what is the most relevant information for investors and

might enable the Board to better develop standards for recognition and measurement.

2021-004 Comment Letter No. 64

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• ESG-related Transactions (Question 13). We find the framing of this question—limiting it to

transactions—to be peculiar. The discussion in the document seems to say that disclosure is the territory

of the SEC or others and is not the subject of financial reporting. There are climate-related components of

assets on the balance sheet whose dimensions should be disclosed to investors—either because a firm

would be restricted from using that asset or because its value would be diminished. As addressed by one

of our members in a previous agenda request (Exhibit 5), we believe this is a financial standard setting

issue worthy of FASB’s attention.

We understand that the skill set of the FASB staff does not currently include the requisite expertise to

develop these kinds of standards. While it would be necessary to develop the right kind of staff to work

in this area, we believe a project should begin with an overhaul of ASC 275, “Risks and Uncertainties.”

Updating it to include the disclosure of risks and uncertainties for a company, with a realistic time horizon

for the risks and uncertainties described, would be a step in the right direction. In addition, the FASB

needs to require disclosure of how the risks and certainties are being managed, and their potential impact,

including:

o The magnitude of the firm’s carbon footprint

o The impact of carbon-owned assets on the operations, liquidity and financial condition of the

company.

o An assessment of potential impairment of assets as a result of the size of the carbon footprint and

required or potentially required reductions in the size of the carbon footprint.

* * * * * * * * * * * * * * *

Thank you for your consideration. We welcome the opportunity to discuss these matters further. Please direct any

correspondence to us at AllianceOfConcernedInvestors@gmail.com. Very truly yours, /s/ Jane B. Adams

/s/ Jack Ciesielski

/s/ Rebecca McEnally

/s/ Janet Pegg

/s/ Lynn E. Turner

This letter is an expression of the individual views of the signers and not the views of our organizations or affiliates.

cc: Andreas Barckow, Chair, IASB

Susan Lloyd, IASB

2021-004 Comment Letter No. 64

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Exhibit 1. Direct Method Cash Flow Statement - Example from FASB Discussion Paper No. 1630-100: Preliminary Views on Financial Statement Presentation, page 73.

Illustration 1A: ToolCo Financial Statements (Proposed Format)

STATEMENT OF CASH FLOWS

BUSINESS

Operating

Cash received from wholesale customers

Cash received from retail customers

Total cash collected from customers

Cash paid for goods

Materials purchases

Labour

Overhead—transport

Pension

Overhead—other

Total cash paid for goods

Cash paid for selling activities

Advertising

Wages, salaries, and benefits

Other

Total cash paid for selling activities

Cash paid for general and administrative activities

Wages, salaries, and benefits

Contributions to pension plan

Capital expenditures

Lease payments

Research and development

Settlement of share-based remuneration

Other

Total cash paid for general and administrative activities

Cash flow before other operating activities

Cash from other operating activities

Disposal of property, plant, and equipment

Investment in associate A

Sale of receivable

Settlement of cash flow hedge

Total cash received (paid) for other operating activities

Net cash from operating activities

Investing

Purchase of available-for-sale financial assets

Sale of available-for-sale financial assets

Dividends received

Net cash from investing activities

NET CASH FROM BUSINESS ACTIVITIES

FINANCING

Interest received on cash

Total cash from financing assets

Proceeds from issue of short-term debt

Proceeds from issue of long-term debt

Interest paid

Dividends paid

Total cash from financing liabilities

NET CASH FROM FINANCING ACTIVITIES

Change in cash from continuing operations before taxes and equity

INCOME TAXES

Cash taxes paid

Change in cash before discontinued operations and equity

DISCONTINUED OPERATIONS

Cash paid from discontinued operations

NET CASH FROM DISCONTINUED OPERATIONS

Change in cash before equity

EQUITY

Proceeds from reissue of treasury stock

NET CASH FROM EQUITY

Effect of foreign exchange rates on cash

CHANGE IN CASH

Beginning cash

Ending cash

For the year ended

31 December 2010 2009

2,108,754

703,988

1,928,798

643,275

2,812,742

(935,544)

(418,966)

(128,640)

(170,100)

(32,160)

2,572,073

(785,000)

(475,313)

(108,000)

(157,500)

(27,000) (1,685,409)

(65,000)

(58,655)

(13,500)

(1,552,813)

(75,000)

(55,453)

(12,500) (137,155)

(332,379)

(170,100)

(54,000)

(50,000)

(8,478)

(3,602)

(12,960)

(142,953)

(314,234)

(157,500)

(50,000)

-

(7,850)

(3,335)

(12,000) (631,519)

358,657

37,650

-

8,000

3,402

(544,919)

331,388

-

(120,000)

10,000

3,150 49,052

407,709

-

56,100

54,000

(106,850)

224,538

(130,000)

51,000

50,000 110,100

517,809

8,619

(29,000)

195,538

5,500 8,619

162,000

-

(83,514)

(86,400)

5,500

150,000

250,000

(82,688)

(80,000) (7,914)

705

518,514

(281,221)

237,312

242,812

438,350

(193,786) 237,293

(12,582)

244,564

(11,650) (12,582)

224,711

84,240

(11,650)

232,914

78,000 84,240

3,209

78,000

1,027 312,161

861,941

311,941

550,000 1,174,102 861,941

2021-004 Comment Letter No. 64

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Exhibit 2. Reconciliation of Cash Flows to Comprehensive Income - Example from FASB Discussion Paper No. 1630-100: Preliminary Views on Financial Statement Presentation, page 78.

Illustration 1A: ToolCo Financial Statements

(Proposed Format)

RECONCILIATION OF CASH FLOWS TO COMPREHENSIVE INCOME

For the year ended 31 December 2010

Changes in Assets and Liabilities, Excluding Transactions with Owners

Not from Remeasurements From Remeasurements Statement of Comprehensive Income

Accruals, Recurring Comprehensive

Allocations, Valuation Income

Caption in Statement of Cash Flows Cash Flows and Other Adjustments All Other (B+C+D+E) Caption in Statement of Comprehensive Income

BUSINESS BUSINESS

Operating Operating

Cash received from wholesale customers 2,108,754 681,326 2,790,080 Sales—wholesale

Cash received from retail customers 703,988 (6,467) 697,520 Sales—retail

Total cash collected from customers 2,812,742 674,859 3,487,600 Total revenue

Cash paid for goods Cost of goods sold

Materials purchases (935,544) (107,556) (1,043,100) Materials

Labour (418,966) 13,966 (405,000) Labour

Pension (170,100) 109,125 9,000 (51,975) Pension

(219,300) (219,300) Overhead—depreciation

Overhead—transport (128,640) (128,640) Overhead—transport

Overhead—other (32,160) (32,160) Overhead—other (60,250) (60,250) Change in inventory

(29,000) (29,000) Loss on obsolete and damaged inventory

Total cash paid for goods (1,685,409) (264,016) 9,000 (29,000) (1,969,425) Total cost of goods sold

1,127,333 410,843 9,000 (29,000) 1,518,175 Gross profit

Cash paid for selling activities Selling expenses

Advertising (65,000) 5,000 (60,000) Advertising

Wages, salaries, and benefits (58,655) 1,955 (56,700) Wages, salaries, and benefits

(23,068) (23,068) Bad debt

Other (13,500) (13,500) Other

Total cash paid for selling activities (137,155) (16,112) (153,268) Total selling expenses

Cash paid for general and administrative activities General and administrative expenses

Wages, salaries, and benefits (332,379) 11,079 (321,300) Wages, salaries, and benefits

Contributions to pension plan (170,100) 109,125 9,000 (51,975) Pension

Capital expenditures (54,000) 54,000

(59,820) (59,820) Depreciation

Settlement of share-based remuneration (3,602) (12,171) (6,250) (22,023) Share-based remuneration

Lease payments (50,000) 35,175 (14,825) Interest on lease liability

Research and development (8,478) (8,478) Research and development

Other (12,960) (2,808) (15,768) Other

Total cash paid for general and admin. activities (631,519) 134,580 2,750 (494,189) Total general and administrative expenses

Cash flow before other operating activities 358,657 529,311 11,750 (29,000) 870,718 Income before other operating items

Cash from other operating activities Other operating income (expense)

Disposal of property, plant, and equipment 37,650 (15,000) 22,650 Gain on disposal of property, plant, and equipment

Investment in associate A 23,760 23,760 Share of profit of associate A

Settlement of cash flow hedge 3,402 (594) 1,188 3,996 Realized gain on cash flow hedge

Sale of receivable 8,000 (8,000) (4,987) (4,987) Loss on sale of receivable

Total cash received from other operating activities 49,052 (23,594) 1,188 18,773 45,419 Total other operating income

Net cash from operating activities 407,709 505,717 12,938 (10,227) 916,137 Total operating income

Investing Investing

Dividends received 54,000 54,000 Dividend income

Sale of available-for-sale financial assets 56,100 (37,850) 18,250 Realized gain on available-for-sale financial assets

7,500 7,500 Share of profit of associate B

Net cash from investing activities 110,100 (37,850) 7,500 79,750 Total investing income

NET CASH FROM BUSINESS ACTIVITIES 517,809 467,867 12,938 (2,727) 995,887 TOTAL BUSINESS INCOME

FINANCING FINANCING

Interest received on cash 8,619 8,619 Interest income on cash

Total cash from financing assets 8,619 8,619 Total financing asset income

Dividends paid (86,400) 86,400

Interest paid (83,514) (27,838) (111,352) Interest expense

Proceeds from issuance of short-term debt 162,000 (162,000)

Total cash from financing liabilities (7,914) (103,438) (111,352) Total financing liability expense

NET CASH FROM FINANCING ACTIVITIES 705 (103,438) (102,733) TOTAL NET FINANCING EXPENSE

Change in cash from continuing operations Profit from continuing operations

before taxes and equity 518,514 364,429 12,938 (2,727) 893,154 before taxes and other comprehensive income

INCOME TAXES INCOME TAXES

Cash taxes paid (281,221) (52,404) (333,625) Income tax expense

Change in cash before discontinued operations and equity 237,293 312,025 12,938 (2,727) 559,529 Net profit from continuing operations

DISCONTINUED OPERATIONS DISCONTINUED OPERATIONS

Cash paid from discontinued operations (12,582) (19,818) (32,400) Loss on discontinued operations

11,340 11,340 Tax benefit

NET CASH FROM DISCONTINUED OPERATIONS (12,582) 11,340 (19,818) (21,060) NET LOSS FROM DISCONTINUED

OPERATIONS

Change in cash before equity 224,711 323,365 12,938 (22,545) 538,469 NET PROFIT

OTHER COMPREHENSIVE INCOME (after tax)

17,193 17,193 Unrealized gain on available-for-sale securities

1,825 1,825 Unrealized gain on cash flow hedge

2,094 2,094 Foreign currency translation adjust—consolidated sub.

(1,404) (1,404) Foreign currency translation adjust—associate A

3,653 3,653 Revaluation surplus

22,671 690 23,361 TOTAL OTHER COMPREHENSIVE NCOME

Change in cash before equity 224,711 323,365 35,609 (21,855) 561,830 TOTAL COMPRIEHENSIVE INCOME

2021-004 Comment Letter No. 64

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Exhibit 3. Proposed Financial Institution Statement of Cash Flows - Example from FASB Discussion Paper

No. 1630-100: Preliminary Views on Financial Statement Presentation, page 88.

Illustration 2A: Bank Corp Financial Statements

(Proposed Format) STATEMENT OF CASH FLOWS

BUSINESS

Operating

Cash received from deposits, net

Savings deposits

Time deposits

Noninterest-bearing deposits

Interest checking deposits

Cash received from loans

Interest

Principal

Cash interest received from available-for-sale securities

Cash received from trading securities

Cash paid for loan originations

Cash paid for advances and loans to banks, net

Total cash from lending and deposits

Cash received from (paid for) noninterest operating activities

Sale (purchase) of available-for-sale securities

Service charges on deposits

Sale of loans

Mortgage banking revenue

Other nondeposit fees and commissions

Other noninterest income

Settlement of derivatives

Wages, salaries, and benefits

Purchase of equipment

Transaction processing expense

Occupancy expense

Other noninterest expense

Investment in affiliate A

Total cash from noninterest operating activities

Net cash from operating activities

Investing

Cash dividends received from investment in company B

Net cash from investing activities

NET CASH FROM BUSINESS ACTIVITIES

FINANCING

Cash provided for federal funds sold

Total cash from financing assets

Cash received from federal funds purchased, net

Proceeds from issuance of long-term debt

Cash paid for borrowings

Cash dividends paid

Total cash from financing liabilities

NET CASH FROM FINANCING ACTIVITIES

Change in cash before taxes and equity

INCOME TAXES

Cash taxes paid

Change in cash before equity

EQUITY

Proceeds from reissuance of treasury stock

NET CASH FROM EQUITY

CHANGE IN CASH

Beginning cash

Ending cash

For the year ended

December 31, 2010 2009

38,000

36,000

24,500

6,126

118,750

86,400

11,875

2,375

(103,680)

(4,924)

40,000

30,000

25,000

5,620

125,000

80,000

12,500

2,500

(96,000)

(406)

215,422

55,080

32,079

8,000

7,907

3,000

1,500

340

(35,000)

(25,000)

(24,000)

(6,860)

(1,800)

-

224,214

(79,000)

31,033

10,000

8,931

2,000

1,000

315

(30,000)

(25,000)

(25,000)

(7,000)

(1,200)

(12,000) 15,246

230,668

2,700

(125,921)

98,293

2,500 2,700

233,368

(7,128)

2,500

100,793

(6,600) (7,128)

9,180

-

(150,000)

(86,400)

(6,600)

8,500

135,780

(150,000)

(80,000) (227,220)

(234,348)

(980)

(10,566)

(85,720)

(92,320)

8,473

(15,667) (11,546)

8,424

(7,194)

7,800 8,424 7,800

(3,122)

25,993

606

25,387 22,871 25,993

2021-004 Comment Letter No. 64

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Exhibit 4. Statement of Comprehensive Income - Example from FASB Discussion Paper No. 1630-100:

Preliminary Views on Financial Statement Presentation, page 71.

Illustration 1A: ToolCo Financial Statements (Proposed Format)

STATEMENT OF COMPREHENSIVE INCOME

BUSINESS

Operating

Sales—wholesale

Sales—retail

Total revenue

Cost of goods sold

Materials

Labour

Overhead—depreciation

Overhead—transport

Overhead—other

Change in inventory

Pension

Loss on obsolete and damaged inventory

Total cost of goods sold

Gross profit

Selling expenses

Advertising

Wages, salaries, and benefits

Bad debt

Other

Total selling expenses

General and administrative expenses

Wages, salaries, and benefits

Depreciation

Pension

Share-based remuneration

Interest on lease liability

Research and development

Other

Total general and administrative expenses

Income before other operating items

Other operating income (expense)

Share of profit of associate A

Gain on disposal of property, plant, and equipment

Realized gain on cash flow hedge

Loss on sale of receivables

Impairment loss on goodwill

Total other operating income (expense)

Total operating income

Investing

Dividend income

Realized gain on available-for-sale securities

Share of profit of associate B

Total investing income

TOTAL BUSINESS INCOME

FINANCING

Interest income on cash

Total financing asset income

Interest expense

Total financing liability expense

TOTAL NET FINANCING EXPENSE

Profit from continuing operations

before taxes and other comprehensive income

INCOME TAXES

Income tax expense

Net profit from continuing operations

DISCONTINUED OPERATIONS

Loss on discontinued operations

Tax benefit

NET LOSS FROM DISCONTINUED OPERATIONS

NET PROFIT

OTHER COMPREHENSIVE INCOME (after tax)

Unrealized gain on available-for-sale securities (investing)

Revaluation surplus (operating)

Foreign currency translation adjust—consolidated subsidiary

Unrealized gain on cash flow hedge (operating)

Foreign currency translation adjust—associate A (operating)

TOTAL OTHER COMPREHENSIVE INCOME

TOTAL COMPREHENSIVE INCOME

Basic earnings per share

Diluted earnings per share

For the year ended

31 December 2010 2009

2,790,080

697,520

2,591,400

647,850

3,487,600

(1,043,100)

(405,000)

(219,300)

(128,640)

(32,160)

(60,250)

(51,975)

(29,000)

3,239,250

(925,000)

(450,000)

(215,000)

(108,000)

(27,000)

(46,853)

(47,250)

(9,500) (1,969,425)

1,518,175

(60,000)

(56,700)

(23,068)

(13,500)

(1,828,603)

1,410,647

(50,000)

(52,500)

(15,034)

(12,500) (153,268)

(321,300)

(59,820)

(51,975)

(22,023)

(14,825)

(8,478)

(15,768)

(130,034)

(297,500)

(58,500)

(47,250)

(17,000)

(16,500)

(7,850)

(14,600) (494,189)

870,718

23,760

22,650

3,996

(4,987)

-

(459,200)

821,413

22,000

-

3,700

(2,025)

(35,033) 45,419

916,137

54,000

18,250

7,500

(11,358)

810,055

50,000

7,500

3,250 79,750

995,887

8,619

60,750

870,805

5,500 8,619

(111,352)

5,500

(110,250) (111,352)

(102,733)

893,154

(333,625)

(110,250)

(104,750)

766,055

(295,266) 559,529

(32,400)

11,340

470,789

(35,000)

12,250 (21,060) (22,750) 538,469 448,039 17,193

3,653

2,094

1,825

(1,404)

15,275

-

(1,492)

1,690

(1,300)

23,361 14,173 561,830 462,212

7.07

6.85

6.14

5.96

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Exhibit 5. Agenda Request: Carbon Content of Fossil Reserves.

December 10, 2013

Mr. Russell Golden Chairman Financial Accounting Standards Board 401 Merritt 7 PO Box 5116 Norwalk, CT 06856

Carbon Content of Fossil Fuel Reserves

Dear Mr. Golden:

Carbon content is a key financial element of fossil fuel reserves.1 2 We hereby submit that financial disclosure of

carbon content should be required for companies with significant fossil fuel reserves.

Inherent in disclosing the existence of these reserves is the presumption that they will be sold into the marketplace and,

inevitably, release carbon dioxide into the atmosphere upon their consumption. As such, the value of these current

and future assets is inextricably bound up with the consumer’s right to burn them.

Fossil fuels may not be infinitely burnable. As astute observers recognize3, there is an increasing probability that some

governments will embark on regulatory action to limit carbon dioxide release. Such action could have a major impact

on the value of fossil fuel reserves as well as the capital investment in exploring and developing reserves. In our view,

investors would benefit from sensitivity analyses against low demand or price scenarios that could capture the future

potential emissions constraints and their potential impact on the quantity and the net present value of reserves.

We are not requesting that the Financial Accounting Standards Board pass judgment on the future viability of fossil

fuel reserves. Rather, we urge the FASB to recognize the need for

disclosure sufficient to permit investors to make this determination for themselves.

1 HSBC (2012) Coal and carbon – Stranded assets: assessing the risk. Not available online. 2 We are using the term “reserves” as defined by the SEC in Release Number 33-8895 and in Guide 7. As such, reserves include proved or proven, probable and possible reserves of fossil fuel companies. 3 Carbon Tracker (2011), Unburnable carbon – Are the world’s financial markets carrying a carbon bubble? (Available at: http://www.carbontracker.org/carbonbubble).

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Our analysis addresses how the requested disclosure:

improves the usefulness of financial reporting by providing relevant and faithfully

represented financial information;

alleviates a significant deficiency in current financial reporting;

improves the quality of disclosure with verifiable, timely, and understandable financial

information that incorporates the increasing risk to fossil fuel reserve valuation; and

provides benefits to users of financial information that far outweigh the cost of

collection and disclosure.

If you would consider it helpful in considering this petition, we would be pleased to meet with

you and your staff. We can be contacted at the following: Bevis Longstreth at

blongstreth@mindspring.com, Jane Adams at jba@janebadams.com, and James Leaton at

jleaton@carbontracker.org

Very truly yours,

Bevis Longstreth Former SEC Commissioner

Jane B. Adams Former SEC and FASB Staff

James Leaton Research Director, Carbon Tracker

cc: Sue Cosper, FASB Director of Research and Technical Activities

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Globally, governments recognize the need to reduce carbon, rendering

reserves less valuable Scientists are increasingly unequivocal: anthropogenic climate change poses an existential

threat to our planet.4 Policymakers have taken notice: governments agreed at Cancun in 20105

that greenhouse gas (“GHG”) emissions should be reduced so as to avoid a rise in global average

temperature of more than 2°C above pre-industrial levels. The combustion of fossil fuels is the

largest contributor to GHG emissions.

A “carbon budget” quantifies the cumulative emissions over time and provides a probability of

remaining within the globally recognized constraint of 2°C. Carbon Tracker, the London based

non-profit organization devoted to aligning capital markets with the climate change policy

agenda, estimates that the available budget between 2013 and 2050 is approximately 900 billion

tonnes (Gt) of carbon dioxide (CO2) (at an 80% probability level).6

Experts can also calculate the total potential emissions that would result from the combustion

of the world’s proven fossil fuel reserves. According to the World Energy Outlook 2012, the total

CO2 potential of the Earth’s proved reserves is 2,860 Gt of CO2.7 In other words, the world’s

current stock of proved fossil fuel reserves alone, if burned between now and 2050, would

vastly exceed the carbon budget that the world’s governments insist we must maintain.8

Disclose carbon content of reserves to assess the risk to company balance

sheets and future cash flows If governments are to achieve their stated intent, it follows that not all of this carbon may be

released – that is, some of it must be rendered unburnable. Given that fossil fuel reserves

do not, by and large, have alternative uses, such a scenario would eliminate nearly all of the

economic value of these reserves. Compounding this risk to their balance sheets and their

future cash flows, fossil fuel companies are investing over half a trillion dollars annually9 to

find and develop yet more fossil fuel reserves.

Given that governments are likely to target carbon emissions, not reserves, per se, it follows

that the risk to company balance sheets and future cash flows is proportionate to the carbon

content of their reserves. Without disclosure of the latter, investors are left to guess at the

former.

4 IPCC (2013), Climate change 2013: The physical science basis – Summary for policymakers (Available at: http://www.climatechange2013.org/images/uploads/WGIAR5-SPM_Approved27Sep2013.pdf). 5 United Nations Framework on Climate Change (UNFCCC) (2010) The Cancun Agreements (Available at: http://cancun.unfccc.int/cancun-agreements/main-objectives-of-the-agreements/#c33). 6 Carbon Tracker & The Grantham Institute (2013) Unburnable Carbon 2013: Wasted capital and stranded assets, p. 4. (Available at http://www.carbontracker.org/wastedcapital). 7 International Energy Agency (2012) World energy outlook 2012 (Available at: http://www.worldenergyoutlook.org/ ) 8 This, without taking into account any other form of carbon release, such as deforestation. 9 Carbon Tracker & The Grantham Institute (2013) Unburnable Carbon 2013: Wasted capital and stranded assets , p. 16. (Available at: http://www.carbontracker.org/wastedcapital).

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Disclosure of the carbon content is relevant and critical information for

users The carbon budget has a direct and negative impact on a fossil fuel company’s potential future

ability to monetize its current reserves, not to mention the investments being made to discover

and develop additional reserves. In turn, the carbon budget significantly impacts a company’s

ability to generate future net cash inflows. Again, because the likely regulatory target is

carbon not the reserves themselves, the threat faced is proportionate to the carbon content of

the reserves. As such, the disclosure of the carbon content is not only relevant but also

essential information for investors, financial intermediaries and all other users of financial

information and clearly meets the underlying concepts of financial reporting.10

1. Disclosures Requested Meet the Objectives of Financial Reporting

Statement of Financial Accounting Concepts No. 8, Chapter 1, The Objective of General Purpose Financial Reporting, and Chapter 3, Qualitative Characteristics of Useful Financial Information (Concepts Statement No. 8), lays out the objectives of financial reporting:

OB2. The objective of general purpose financial reporting [footnote reference omitted] is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling, or holding equity and debt instruments and providing or settling loans and other forms of credit.

OB3. Decisions by existing and potential investors about buying, selling, or holding equity and debt instruments depend on the returns that they expect from an investment in those instruments; for example, dividends, principal and interest payments, or market price increases. Similarly, decisions by existing and potential lenders and other creditors about providing or settling loans and other forms of credit depend on the principal and interest payments or other returns that they expect. Investors’, lenders’, and other creditors’ expectations about returns depend on their assessment of the amount, timing, and uncertainty of (the prospects for) future net cash inflows to the entity. Consequently, existing and potential investors, lenders, and other creditors need information to help them assess the prospects for future net cash inflows to an entity.

OB4. To assess an entity’s prospects for future net cash inflows, existing and potential investors, lenders, and other creditors need information about the resources of the entity, claims against the entity, and how efficiently and effectively the entity’s management and governing board [footnote reference omitted] have discharged their responsibilities to use the entity’s resources. Examples of such responsibilities include protecting the entity’s resources from unfavorable effects of economic factors such as price and technological changes and ensuring that the entity complies with applicable laws, regulations, and contractual provisions. Information about management’s discharge of its responsibilities also is useful for decisions by existing investors, lenders, and other creditors who have the right to vote on or otherwise influence management’s actions.

Some initial analysis has shown that the implications of economies shifting to a lower carbon

energy base will have relevance to these objectives. This could result from increasing

competition between energy sources impacting demand and prices, (e.g., shale gas versus coal),

increased regulation of emissions, (e.g., US Environmental Protection Agency measures on

10 Ceres. (2013). Investors ask fossil fuel companies to assess how business plans fare in low-carbon future [Press Release]. Retrieved from http://www.ceres.org/press/press-releases/investors-ask-fossil-fuel-companies-to-assess-how-business-plans-fare-in- low-carbon-future.

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Mercury emissions and further proposed coal measures), and improved technology (e.g.,

cheaper renewables, improved vehicle fuel economy). A reduced demand scenario with the

corresponding lower fossil fuel prices will:

impact the predicted cash flows for extractive companies, lowering the valuation of

equities;

affect the creditworthiness of extractives companies and their ability to refinance or

service debt;

restrict the entity’s ability to maintain dividend payments; and

mean any company management which continues to invest the entity’s resources in

developing more reserves in an oversupplied market will depress prices further,

devaluing assets and further reducing revenues.

Consequently, disclosure of the carbon content of a company’s reserves is essential for investors

to “assess the prospects for future cash inflows to an entity.” Similarly, the disclosure is

necessary to assess the ability of a company to monetize its current reserves and is necessary for

“lenders, and other creditors in making decisions about providing resources to an entity.” As

such, our request fits squarely within the objectives of financial reporting articulated by

Statement of Financial Accounting Concepts No. 8.

2. Recommended Disclosures are Relevant

Concepts Statement No. 8 discusses relevance as follows:

QC 7. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value, or both.

QC8. Financial information has predictive value if it can be used as an input to processes employed by users to predict future outcomes. Financial information need not be a prediction or forecast to have predictive value. Financial information with predictive value is employed by users in making their own predictions.

Given the potential for a reduced demand and price scenario, it would seem appropriate to

conduct a sensitivity analysis of the reserves and their valuation. Previous modernization of the

reserves’ reporting rules has indicated a preference for consistency of approach to enable

comparison.11 This could still be maintained if the rules prescribed a consistent range of

sensitivity to be applied. For example, the reserves quantity and a 10-year Net Present Value

are currently calculated on an average 12-month price. Varying this price by standardized

percentages (e.g., -25% or -50%) could provide investors with comparable information on the

exposure of different entities to a low price, low demand scenario. A 50% price drop scenario

11 SEC (2008) Modernization of Oil and Gas Reporting: Final Rule (Available at: http://www.sec.gov/rules/final/2009/33- 8995fr.pdf).

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does not seem unreasonable given that both coal and oil have shown the capacity to vary by this

amount in the past. We also note that this is consistent with the FASB view expressed in ASC932

that adjusting reserves based on future market prices and costs could be a more appropriate

basis for estimation of value, and that the Final Rule permits an entity to provide sensitivity

information about reserve estimates.12

The requested disclosure of carbon content has predictive value for investors, given that

fossil fuel reserves may be rendered unburnable by future regulatory action. (Unburnable

assets are sometimes referred to in the literature as “stranded”.)13 Carbon content is a critical

input for analyzing the risk that these current and future assets will become impaired in the

future.

3. Recommended Disclosures Have Representational Faithfulness

Concepts Statement No. 8 also discusses the characteristic of faithful representation, including

ability to estimate:

QC13. A complete depiction includes all information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanations. For example, a complete depiction of a group of assets would include, at a minimum, a description of the nature of the assets in the group, a numerical depiction of all of the assets in the group, and a description of what the numerical depiction represents (for example, original cost, adjusted cost, or fair value). For some items, a complete depiction also may entail explanations of significant facts about the quality and nature of the items, factors and circumstances that might affect their quality and nature, and the process used to determine the numerical depiction.

QC15. Faithful representation does not mean accurate in all respects. Free from error means there are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process. In this context, free from error does not mean perfectly accurate in all respects. For example, an estimate of an unobservable price or value cannot be determined to be accurate or inaccurate. However, a representation of that estimate can be faithful if the amount is described clearly and accurately as being an estimate, the nature and limitations of the estimating process are explained, and no errors have been made in selecting and applying an appropriate process for developing the estimate.

Companies could apply some simple arithmetic to provide an estimate of the potential carbon

emissions that will result from the use of their products. This estimate would use recognized

conversion factors produced by the IPCC14 to translate different types of hydrocarbon reserves

into emissions. This process is already used on an annual basis by countries reporting to the

United Nations under the Kyoto Protocol for example. It should be noted that this method is a

calculation even for historical emissions, rather than requiring actual monitoring of emissions

by the entity. A similar approach is applied by corporations to their direct emissions already,

12 FASB (Financial Accounting Standards Board) (2010) Extractive Activities – Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures, p. 45 (Available at: http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820075990&blobhead er=application/pdf). 13 Carbon Tracker & The Grantham Institute (2013) Unburnable Carbon 2013: Wasted capital and stranded assets, p.16. (Available at: http://www.carbontracker.org/wastedcapital). 14 IPCC (2007). IV Units, Conversion Factors, and GDP Deflators (Available at: http://www.ipcc.ch/ipccreports/tar/wg3/index.php?idp=477).

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and these figures are in some cases audited by the large accounting firms and appear in annual

filings. The Greenhouse Gas Protocol has been established by the World Business Council for

Sustainable Development and the World Resources Institute to provide a standard for reporting

emissions.15 It already provides tools which could easily be adapted to calculate the potential

emissions from reserves. Some extractive companies already provide estimates of the

emissions for their products but have not extended this to their reserves.16 This would appear

a reasonable method for estimating the emissions that the validity of the reserves and

associated revenues are predicated on, provided the underlying assumptions are clearly stated.

Oil, gas, and mining companies are currently required by the SEC to provide substantial

information about their reserves, including a numerical depiction of value. Given the serious

and foreseeable risk that the carbon budget poses for a fossil fuel company’s reserves, a

complete and faithful depiction of the value of those reserves must include their carbon content,

thus allowing investors to assess the carbon budget risks. This carbon content is measurable

and estimable to a reasonable degree of certainty. Current disclosures such as those required

by the SEC’s supplemental disclosures about Oil and Gas Producing Activities are not at a

sufficiently disaggregated level to permit investors to perform the calculations themselves.

4. Recommended Disclosures Will Enhance Comparability and Other Qualitative

Characteristics

QC19. Comparability, verifiability, timeliness, and understandability are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented. The enhancing qualitative characteristics also may help determine which of two ways should be used to depict a phenomenon if both are considered equally relevant and faithfully represented.

The disclosure of carbon content qualifies as one that will enhance the quality and improve the

usefulness of financial statements. A measure of the carbon content of reserves would be

comparable across companies and industries. It is as verifiable and timely as are the underlying

fossil fuels recorded or disclosed as reserves. And it is essential information for investors seeking

to estimate the regulatory risks posed by governmental responses to the carbon budget.

5. Benefits to Investors and Users Exceed the Costs to Preparers

Paragraph QC 35 of Concepts Statement No. 8 reminds us that it is important that the costs of

disclosure be justified by the benefits of reporting the information.

QC35. Cost is a pervasive constraint on the information that can be provided by financial reporting. Reporting financial information imposes costs, and it is important that those costs are justified by the benefits of reporting that information.

15 GHG Protocol (2012) All tools (Available at: http://www.ghgprotocol.org/calculation-tools/all-tools). 16 For example, BHP Billiton provides ‘scope 3’ greenhouse gas emissions data for use of its sold coal and petroleum products in its 2012 sustainability report (p. 45), which is assured by KPMG. (Available at http://www.bhpbilliton.com/home/aboutus/sustainability/reports/Documents/2012/BHPBillitonSustainabilityReport2012_interactive .pdf#page=45).

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That threshold is easily met in this case. The benefits to investors and users of companies

providing this information are high. Many companies have a large portion of their current and

future net cash flows represented by fossil fuel reserves that may prove unburnable if

governments act to implement the carbon budget. Investors have an interest in estimating this

risk, based on the carbon content of each fossil fuel company’s reserves compared to the carbon

budget then available.

We believe that the incremental cost to companies of collecting and disclosing this information

is relatively low. The methodology is not novel and New York’s Attorney General has already

required the disclosure of greenhouse gas emissions for three large industrial emitters.17

“Carbon accounting”18 is a fast developing field and it should not prove difficult for companies

to estimate this type of information. In addition, fossil fuel companies already incur the costs

necessary to develop reliable disclosures of their reserves; the extra step of estimating their

carbon content is hardly an onerous incremental burden. Plainly, the cost to preparers of

collecting and reporting this information is significantly less than the benefits to end users who

would receive access to this information.

In addition, the carbon content of a fossil fuel company’s reserves is not feasible for investors to

determine. Carbon content varies according to its source. The company exploring for and

developing these reserves is by far in the best position to efficiently determine and reliably

report this information.

17 Kerschner, S. (2009). Power companies agree to expanded disclosure of climate change risk in landmark settlements with New York Attorney General, Environmental Disclosure Committee Newsletter, 6(1) pp. 2-4 (Available at: http://www.shearman.com/files/Publication/c7b7483d-88ec-4f92-b78a- ab31eaf03cb4/Presentation/PublicationAttachment/199f1d08-ff59-4b99-8c26-acabd319b17b/ENV-040709-Power-Companies- Agree-to-Expanded-Disclosure-of-Climate-Change-Risk-in-La.pdf). 18 ACCA for example - ACCA (2010). Accounting for carbon (Available at:

http://www.accaglobal.org.uk/content/dam/acca/global/PDF-technical/climate-change/rr-122-001.pdf).

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US Disclosure Rulemaking Precedents Support the Recommendation

1. FASB Statement No. 33, Financial Reporting and Changing Prices

FASB Statement 33, Financial Reporting and Changing Prices, was issued in 1979 to address the

need for information on current costs given the rampant inflation of the time. In its summary,

below, FASB considered the consequences of not having reliable access to such information. If

we replace the highlighted words “changing prices” or “inflation” with “carbon emission

restrictions”, that summary paragraph would apply to the constraints of the carbon

budget that affect us today.

The Board believes that this Statement meets an urgent need for information about the effects of changing prices. If that information is not provided: Resources may be allocated inefficiently; investors' and creditors' understanding of the past performance of an enterprise and their ability to assess future cash flows may be severely limited; and people in government who participate in decisions on economic policy may lack important information about the implications of their decisions. The requirements of the Statement are expected to promote a better understanding by the general public of the problems caused by inflation: Statements by business managers about those problems are unlikely to have sufficient credibility until financial reports provide quantitative information about the effects of inflation.

Therefore, there is precedent for requiring supplementary information - even extensive

supplementary information - to more accurately depict a rapidly changing economic

environment. The logic of this FASB statement applies with equal vigor to the rapidly growing

and increasingly recognized global threats of anthropogenic climate change.

Without benefit of information concerning the carbon content of fossil fuel reserves, investors

are deprived of key information having a direct impact on a company’s exposure to the risks of

the carbon budget and, thus, on its ability to create and sustain value. Carbon disclosures

represent information about events and conditions that are not yet recognized in financial

statements but that affect the company’s future net cash inflows. As FASB Statement No. 33

wisely forewarned, insufficiently complete information risks the misallocation of resources. This

risk is especially true for the many fossil fuel companies that, following long outdated business

models, continue to expend vast amounts of corporate wealth - on which shareholders hold the

residual claim - in searching for new fossil fuel reserves, despite the severe limits the

carbon budget will, if implemented, impose on existing reserves.19

19Carbon Tracker & The Grantham Institute (2013) Unburnable Carbon 2013: Wasted capital and stranded assets, p.16. (Available at: http://www.carbontracker.org/wastedcapital).

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2. SEC Interpretive Release: Disclosure of Year 2000 Issues and Consequences by Public Companies,

Investment Advisers, Investment Companies, and Municipal Securities Issuers

As the SEC discussed in its background section of its Y2K Interpretive Release “As the end of this century nears, there is

worldwide concern that Year 2000 technology problems may wreak havoc on global economies. No country,

government, business, or person is immune from the potential far-reaching effects of Year 2000 problems.” A similar

statement can be made about climate change and the effect that reduced emissions can be expected to have on global

economies. While the focus on Y2K issues and disclosures occurred within about a 5-year time frame from the

impending January 1, 2000 consequences, we view the widespread implications of the Y2K event on a company’s

business and business model to be no different than the approaching deadline for attaining the limits to carbon

emissions. The consumption of fossil fuels cannot continue unabated just as the effects of Y2K on a business could not

be ignored. This is especially true given the following remarkable statistic, which highlights the fast-closing window of

opportunity for nations to address the carbon problem: Despite the 1992 United Nations Framework Convention on

Climate Change, wherein over 170 nations agreed on the need to limit fossil fuel emissions, the global growth rate of

emissions doubled from 1.5%/year

during 1980-2000 to 3%/year during 2000-2012.20

20 BP Statistical Review of World Energy 2012. (Available at (http://www.bp.com); Boden TA, Marland G, Andres RJ (2012) Global, Regional, and National Fossil-

Fuel CO2 Emissions. Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory, U.S. Department of Energy, Oak Ridge, Tenn., U.S.A. doi 10.3334/CDIAC/00001_V2012; Hansen J, Kharecha P, Sato M, Masson-Delmotte V, Ackerman F, et al. (2013) Assessing “Dangerous Climate Change”: Required Reduction of Carbon Emissions to Protect Young People, Future Generations and Nature. PLoS ONE 8 (12): e81648. doi: 10.1371/journal.pone.0081648.

2021-004 Comment Letter No. 64