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March 16, 2006
Mr. Robert H. Brust
Chief Financial Officer, and
Executive Vice President
Eastman Kodak Company
343 State Street
Rochester, NY 14650
Re: Eastman Kodak Company
Form 10-K for the year ended December 31, 2004
File No. 1-87
Dear Mr. Brust:
We have evaluated the methodology you describe in your
August 9,
2005 letter, and considered the information provided in subsequent
telephone calls, for assessing the materiality of the monetary
accounting errors identified in that letter. As more fully
articulated below, we do not believe that the methodology Kodak`s
management used to assess the materiality of the identified
monetary
errors will necessarily identify all monetary errors that might be
considered material to users of Kodak`s financial statements. We
also
do not believe it is appropriate to present the net cumulative
impact
of multiple unrelated uncorrected errors that Kodak`s management
deemed to be immaterial as a charge to a single line item,
selling,
general and administrative expenses. While we express below our
views
on the methodology employed by Kodak`s management to assess the
materiality of the errors they identified, we have not and do not
express a view as to either the appropriateness of the materiality
conclusions reached by Kodak`s management or, as you requested on
page
5 of your August 9th letter, on your belief as to the "inadvertent
nature, randomness and appropriateness of each adjustment" you
identify.
Kodak management`s methodology
On page 16 and in Schedule J of your August 9th letter you
appear
to indicate that Kodak management`s methodology for assessing the
materiality of multiple monetary errors is premised on the belief
that
the quantified effects of an individual monetary error on net
income
need not be considered if the aggregate impact of all monetary
errors
is not material to either income from continuing operations or any
one
pre-tax or tax line item within the income statement and the
illustrative qualitative considerations provided in SAB 99 are not
applicable. While not clear from your letter, the analysis
provided
suggests that the methodology is similarly premised for gross
profit,
total assets, and total liabilities; that is under Kodak
management`s
methodology only the quantitative significance of the aggregate,
rather than the individual, monetary errors need be assessed
relative
to these subtotals and totals in order to reach an appropriate
conclusion as to the materiality of an individual monetary error.
If
our understanding is correct, the effect of this methodology
appears
to be that a quantitatively significant individual monetary error
would, under Kodak management`s methodology, be considered
immaterial
if it was offset by an unrelated monetary error of comparable
magnitude. We do not believe that this methodology is
appropriate.
We believe that each error must be evaluated individually in
order
to assess whether it causes the financial statements to be
materially
misstated. We also believe that the evaluation of the materiality
of
an individual error must not be obfuscated by the offsetting
effects
of other identified errors and must not be limited to a subset of
the
financial statements such as individual line items, but not
subtotals
and totals. Rather, the analysis of each error must be made in
the
context of the financial statements taken as whole. If an
individual
error causes the financial statements taken as a whole to be
materially misstated, those financial statements are required to
be
restated in accordance with the requirements for reporting the
correction of an error. These points are explained in SAB 99.
The requirement to assess the materiality of individual errors
in
the context of the financial statements taken as a whole does not
obviate the requirement to assess each error separately. A
quantitatively significant error can be material even if it is
offset
by an unrelated error of equal amount. For example, one of the
objectives of financial reporting identified in FASB Statement of
Financial Accounting Concepts No. 1 is to provide information
about
how management of an enterprise has discharged its stewardship
responsibility to stockholders for the use of the enterprise
resources
entrusted to it. Earnings information is often used to assess
management`s stewardship or accountability. However, when two or
more
unrelated errors happen to offset, earnings information that
ignores
the errors will likely be insufficient for investors to make such
assessments. In these circumstances, the need to report the
correction of a quantitatively significant error, notwithstanding
the
offsetting effects of unrelated errors, can be paramount because
without such reporting stockholders may be unable to assess
management`s stewardship or accountability.
The requirement to consider the total mix of information does
not
obviate the requirement to assess each error separately. Certain
statements in your letter, for example on pages 7 and 16-17,
suggest
that Kodak`s management may believe that the consideration of the
total mix of information is incremental to the consideration of
quantitative and qualitative factors. As SAB 99 explains, the
consideration of quantitative and qualitative factors is shorthand
for
the consideration of the total mix of information; that is, these
concepts are not mutually exclusive, but the same. In this
context,
consideration of the total mix of information requires that
Kodak`s
management consider errors separately because to do otherwise
would
fail to recognize Kodak`s surrounding circumstances. Kodak did
not
have a single quantitatively small error as your methodology,
which
only considers the aggregate quantitative effects of monetary
errors
on subtotals and totals, appears to suggest. Kodak had multiple
monetary errors. The requirement to consider the total mix is not
a
veil to ignore the quantitative significance of a monetary error
even
if it is offset by a large number of quantitatively small monetary
errors because to do so ignores the surrounding circumstances -
the
fact that certain individual monetary errors had a quantitatively
significant impact on Kodak`s financial statement subtotals and
totals, such as net income.
In telephone conferences with us, Kodak`s management questioned
what Kodak would restate for if an individual monetary error were
deemed to be material, but it was offset by an unrelated monetary
error of equal amount. They noted that the amounts on the face of
the
financial statement as originally reported would not differ
significantly from the amounts in an as restated presentation. We
do
not believe that the manner of reporting a correction of a
monetary
error is determinative to the evaluation of whether a monetary
error
is material. Similarly, we do not believe that if two or more
unrelated monetary errors happen to offset that the diminishing
effects of unrelated monetary errors provides a sufficient basis
to
assert that a quantitatively significant monetary error is
nonetheless
immaterial. In fact, the existence of a large number of
offsetting
monetary errors may itself be material and require disclosure of
the
nature and number of the errors notwithstanding their offsetting
effects.
Finally, we would like to highlight our belief that a
quantitatively significant monetary error is not immaterial simply
because the illustrative qualitative considerations provided in
SAB 99
are not demonstrated. Those illustrative qualitative
considerations
were provided to facilitate the materiality analysis of a
quantitatively small monetary error and therefore their
inapplicability is not necessarily determinative as to the
materiality
of a quantitatively significant monetary error.
SAB Topic 5:F and Charge to Selling General and Administrative
Expenses
We are unable to concur with the analysis on page 20 in your
August 9th letter that SAB Topic 5:F provides by analogy an
acceptable
basis for presenting the net cumulative effect of all uncorrected
errors for reporting periods prior to the quarter ended March 31,
2003
as a charge to selling, general and administrative expenses. On
the
contrary, we believe that a cumulative effect adjustment is not
acceptable and that SAB Topic 5:F, in the context to which it
relates,
comes to a similar conclusion. We also are unable to concur that
APB
20, paragraph 13 provides an acceptable basis by analogy to use
the
accounting treatment for an accounting change to report an error
correction.
SAB Topic 5:F does not address the correction of an error in
previously issued financial statements. Rather, it addresses a
particular question stemming from the reporting of a change in
accounting principle. It references "the cumulative effect" of
the
change to clarify that no portion of the change may be reflected
as a
charge to beginning retained earnings. In this context, SAB Topic
5:F
explains that the effect of the accounting change should not be
reported either as an adjustment to beginning retained earnings of
the
period of change or as a cumulative effect adjustment. Rather,
amounts should be presented on the income statement line items to
which they relate.
The reference in APB 20, paragraph 13 that "reporting a
correction of an error in previously issued financial statements
concerns factors similar to those relating to reporting an
accounting
change," which you cite on page 16 of your August 9th letter, does
not
provide income statement classification guidance for error
corrections. That reference relates primarily to whether
accounting
changes and error corrections should be reported by means of a
restatement of prior periods. As the Opinion paragraphs in APB 20
make clear, the reporting for an error correction differs from the
reporting for an accounting change.
In Kodak`s facts and circumstances, we believe that the
prior
period errors that were corrected in the quarter ended March 31,
2003
should have been presented on the income statement line item to
which
each error relates. Kodak management`s conclusion that such
errors
could not be presented on the income statement line items to which
each error relates because to do so "could be potentially
distortive,
especially in light of the fact that such impacts do not belong in
Q1
2003" (see page 20 of your August 9th letter) and "would have been
material to pre-tax earnings from continuing operations and the
tax
provision for continuing operations, but immaterial to all other
individual line items in the first quarter of 2003" (see page 13
of
your Restatement Memo of April 2005) calls into question , rather
than
justifies, the appropriateness of Kodak management`s conclusion
that
recording such prior period errors was not material to the first
quarter and the full year of 2003.
* * * * *
Since the registrant and management are in possession of all
facts with respect to the matters addressed above, they are
responsible for the accuracy and adequacy of the financial
statements
and disclosures made notwithstanding the staff`s comments, and
your
independent registered accountant is responsible for its report on
the
financial statements. All persons who are responsible for the
accuracy and adequacy of the disclosure in the company`s Exchange
Act
or Securities Act filing are urged to be certain that all
information
required for investors to make informed decisions is provided. If
you
have any questions concerning this letter, please call me at
202.551.3516 or Carol A. Stacey, Chief Accountant, Division of
Corporation Finance at 202.551.3405.
Sincerely,
Todd E. Hardiman
Associate Chief Accountant
Mr. Robert H. Brust
Chief Financial Officer, and
Executive Vice President
Eastman Kodak Company
March 16, 2006
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