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PA Bulletin, Doc. No. 03-1106

NOTICES

SECURITIES COMMISSION

Classification of Reinvested Interest Amounts in Cash Flow Statements of Certain Issuers Offering Debt Securities in Pennsylvania

[33 Pa.B. 2730]

   Whereas, Section 609(c) of the Pennsylvania Securities Act of 1972 (the 1972 Act), 70 P. S. § 1-609(c), authorizes the Pennsylvania Securities Commission (Commission) by regulation or order to prescribe the kind, form and content of financial statements required under the 1972 Act and other requirements the Commission deems necessary for financial statement presentation purposes; and

   Whereas, Section 609(c) of the 1972 Act requires that all financial statements required to be filed under that section shall be prepared reflecting conformity with generally accepted accounting principles in the United States consistently applied (GAAP); and

   Whereas, Commission Regulation 609.034(b), 64 Pa. Code § 609.034(b), requires issuers proposing to register securities for sale in Pennsylvania under Section 206 of the 1972 Act, 70 P. S. § 1-206, to file audited statements of cash flows; and

   Whereas, Annually, issuers file registration statements with the Commission to register notes, bonds and other evidences of indebtedness (Debt Securities) for sale in Pennsylvania under Section 206 of the 1972 Act in reliance upon the exemptions afforded by Sections 3(a)(4) and 3(a)(11) of the federal Securities Act of 1933, 15 U.S.C. §§ 77c(a)(4) and (11); and

   Whereas, These Debt Securities represent the issuer's promise to pay investors a stated rate of interest due on specified dates and frequently permit investors to elect to have interest compounded or reinvested; and

   Whereas, Compounded or reinvested interest becomes a liability of the issuer incurred in connection with the issuance of Debt Securities, in that it is added to the principal amount of the Debt Securities, thereby increasing the principal amount for purposes of computing the amount of the next interest payment and the amount of repayment at the end of the investment term if interest is paid at maturity; and

   Whereas, Statement of Accounting Standards Number 95, ''Statements of Cash Flows,'' defines cash flows from financing activities to include proceeds from issuing bonds, notes and other short- or long-term borrowing; and

   Whereas, Generally accepted accounting principles do not prescribe how amounts of compounded or reinvested interest must be presented on statements of cash flows; and, consequently, some issuers present compounded or reinvested interest as cash flows from financing activities and some issuers present compounded or reinvested interest as cash flows from operating activities or as an adjustment to reconcile change in net assets to cash provided by operating activities in the statements of cash flows; and

   Whereas, An issuer's presenting compounded or reinvested interest as cash flows from operating activities or as an adjustment to reconcile change in net assets to cash provided by operating activities results in an increase in that issuer's net cash provided by operating activities and may cause the issuer's net cash from operating activities to be positive rather than negative; and

   Whereas, An issuer's presenting compounded or reinvested interest as cash flows from operating activities or as an adjustment to reconcile change in net assets to cash provided by operating activities may mislead investors as to the issuer's financial condition;

   Now Therefore, the Commission, on this 25th day of March 2003, pursuant to Section 609(c) of the Pennsylvania Securities Act of 1972, 70 P. S. § 1-609(c), hereby ORDERS that a registration statement filed by an issuer to register notes, bonds or other evidences of indebtedness for sale in Pennsylvania under Section 206 of the Pennsylvania Securities Act of 1972 in reliance upon the exemptions afforded by Sections 3(a)(4) and 3(a)(11) of the federal Securities Act of 1933, 15 U.S.C. §§ 77c(a)(4) and (11), containing audited financial statements for a fiscal year ending after July 1, 2003, is required to present compounded or reinvested interest on those notes, bonds or other evidences of indebtedness in one of the following ways:

   1.  In a segregated schedule of noncash financing activities in the issuer's statements of cash flows; or

   2.  As cash flows from financing activities in the body of the issuer's statements of cash flows.

   Alternate formats of this document may be available on request. Call (717) 787-1165 or TDD users via AT&T Relay Center 1-800-654-5984.

M. JOANNA CUMMINGS,   
Secretary

[Pa.B. Doc. No. 03-1106. Filed for public inspection June 6, 2003, 9:00 a.m.]


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