comment letter no. 64 alliance of concerned investors
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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
2021-004 Comment Letter No. 64
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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
2021-004 Comment Letter No. 64
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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
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