venture treat the joint venture as a separate entity, with its own profi margin constraint.

(6) Divestitures and Discontinued Operations:

A firm must restate BPPM for divestitures and discontinued oper ations as prescribed in the instructions to Schedule R of Form CLC-* and 6 CFR 150.171 (c).

(c) Spin Offs:

A spin off is a transfer by a corporation of a portion of its asset to its stockholders by creating a new corporation, whose stock is then distributed to the original firm's stockholders; or the distribution by a corporation to its shareholders of the controlling stock of another corporation.

Generally accepted accounting principles require restatement of a firm's financial statements to reflect spin offs. Since the restatement can affect the firm's base period profit margin, ensure that net sales and operating income are restated when necessary.

(d) Change in Accounting Method or Policy:

A firm may restate net sales and operating income for changes i accounting methods and policies only as set forth in APBO #20. (e) Interests and Bad Debt Expense:

All interest (short and long-term) and provision for doubtfu accounts and notes are included in the computation of operating income. The analyst should be aware of the following:

(i) Some firm's net income and expense and report the net figure in financial statements. Some firms report short term in terest as an operating expense and long-term interest as other expense. In either case the analyst must determine the total interest expense of the firm and ensure that the total amount has been included in the calculation of operating income.

(ii) Bad debt expense may be reported as an offset to net sales as an operating expense or as other expense in the financial statements. Also bad debt expense may contain non-operating bad debts (for example, loss on loan of funds to another firm or loss on investment). In either case the analyst must ensure that bad debts are included as an operating expense and that only bad debts from operations (i.e. sales on account) are included in the computation.

(f) Purchase Discounts, Returns and Allowances:

(1) Financial statements may show purchase discounts, returns and allowances as either a reduction of purchases or as other income. Regu lation S-X, Rule 5-03, 1A indicates that the sales figure is "Gross sales less discounts, returns and allowances." Regulation S-X, Rule 5–3 2A states: "State the amount of cost of goods sold as regularly com puted under the system of accounting followed."

(2) Generally accepted accounting principles allow a firm to report sales discounts and purchase discounts as other income and expense items even though this is not the preferred method. However, the firm must be consistent in the application. Since sales discounts, returns and allowances are defined as reductions of gross sales, the firm should offset purchase discounts, returns and allowances against purchases to be consistent.

(3) Ensure that gross sales are reduced by appropriate discounts. returns and allowances and that cost of goods is adjusted for purchase discounts, returns and allowances.

(g) Consolidation Policy:

(1) Generally, direct or indirect ownership of over fifty percent of voting interest of one firm by another firm constitutes ownership purposes of consolidation. However, there are exceptions:

(a) a subsidiary should not be consolidated where control is likely to be temporary or where control does not rest with the majority owners (as for instance legal reorganization or bankruptcy);

(b) when the parent and its subsidiaries are engaged in manufacturing, mechandising, or other non-financial activities as well as financial activities, the subsidaries involved in the less significant type of operations (financial or non-financial) should not be consolidated with the operations of the major group.

(2) A difference in fiscal periods of a parent and a subsidiary does t in itself justify exclusion of the subsidiary from consolidation. rdinarily, the subsidiary will be able to prepare statements for a riod which corresponds with or closely approaches the fiscal period the parent. Where difference in year ends is less than three months, is acceptable to use the subsidaries' statements for its fiscal period. (3) Determine if the firm's consolidation policy is in accordance ith:

(a) Article 4; Consolidated and Combined Statements, Regulation -z; Securities and Exchange Commission; (b) Amendment dated 23/72 to the above; (c) Accounting Research Bulletin No. 51; and 1) Accounting Research Bulletin No. 43.

(4) Unconsolidated companies have their own profit margin limitaons and should be verified separately.

(h) Business Combinations:

1. Generally, there are two kinds of business combinations. These are cquisitions (purchases) and pooling of interests. Take care to ensure he firm has accounted for business combinations correctly.

f

2. During Phases II and III, if the business combination was an quisition, the net sales and operating income of the aquiring corporaon included the operations of the acquired company from the date f acquisition. Prior year financial statements were not restated. 3. During Phase IV, however, an acquisition including the purchase a separate accounting entity, such as a company or division, requires djustments to financial data for purposes of this part if such an acuisition would require restatement or disclosure in a filing with the SEC, or if the acquisition is of a similar type but such restatement or lisclosure is not required because the firm does not file reports with the SEC.

14. Generally, the acquired entities assets are revalued and accountng methods and policies changed to conform with those of the acquiring company. Determine if:

(a) base period years have been restated to include the acquired entity,

(b) the acquired entities prior year operations were restated to conform with the current period prior to combination with the acquiring firm.

5. If the business combination is a pooling of interest, the net sales and operating incomes of the constituents are combined and restated as income of the combined corporations for all applicable periods.

6. A more detailed discussion of business combinations can be fou in:

Section 14. Reconcile 10-K, 10-Q, or Financial Statement to Form

.01 Examine the firm's reconciliation of its financial statements: 10-K to the figures shown in Parts II and III of Form CLC-22. D termine the validity of the adjustments and pursuant to the reviend the firm's underlying data determine if the adjustments are adequar in the circumstances.

.02 Keep in mind that adjustments of prior years and/or inclusie of previously excluded joint venture operations requires restateme of both net sales and operating income.

.03 Verify math calculations in Parts II and III and ensure the figures from either reconciliations or financial statements have bee transcribed properly.

Section 15. Part VI Price/Cost Information

Part VI is used to report adjustments in the selling prices product and service lines. Price adjustments made by means of chang in quantity, quality, specifications or characteristics must be taken int account when reporting price adjustments. The price of an item in ventory may be increased only to reflect cost increases incurred in th production of that item.

.02 Specifically, Part VI summarizes price information and relates such price information to cost justification. The analyst must:

(a) Ensure that percentage in column (d) and (e) does n exceed cost justification or that the firm has submitted appropr ate explanation of why it has not cost justified.

(b) Reconcile descriptions in column (a) and percent in umn (f) to appropriate Schedule C.

(c) Determine if the maximum price increase (col (g)) * within prescribed limits.

(d) Verify mathematical calculations, and

(e) Ensure that sales and revenues or price adjustments relsting to Items 27-38 are not included in Item 24.

.03 If CLC-22 is used to prenotify price increases reconcile the dates of the period used to determine current costs on a Schedule Co the reporting period dates Items 23, Part VI. The ending date of the period cannot be a date later than the date prenotification is submitted .04 If CLC-22 is used as a quarterly report verify that the begin ning and ending dates of the fiscal quarter to which the CLC-22 p plies have been entered.

.05 All sales of the entity must be listed in Line (1)-(33) of this part by the appropriate SIC code except sales or revenues derived

from Items 27-38.

.06 The maximum price which may be charged may not exceed the

sum of:

(a) The greater of either the base price or the adjusted freer price of the item, plus

(b) 10% of "a", plus

(c) The percentage from Column (f) of cost justification at: tributable to the product line which includes the item times "a .07 Item 24, Column (a) lists product or service lines, Column (b) identifies the applicable 4-digit SIC and Column (c) shows sales for each product line for the period for which CLC-22 is being filed.

Weighted Average Price Increase Above Base Price (Columns (e)).

The base price is the weighted average price of a product comd for the firm's last fiscal quarter ended prior to January 11, 1973. xample:

rm "A" FYE is November 30, 1972, therefore, the base price od is the fiscal quarter ended November 30, 1972. uring that period product B sold as follows:

TE.-Base price is: Sales $425 over units sold, 400 equals $1.06.

$100

105

220

425

. The weighted average percentage price increase above base price uested by a firm when prenotifying a price increase for a product service line will be in Column (d). For reporting purposes, this umn should be left blank.

. In Column (e) the weighted average percentage price above base ce already charged by the firm. This column must be filled in for reports, whether as a prenotification or report.

t. Column (f) is the cost justification for price increases implented or prenotified by the firm. NOTE: Columns (d), (e), and (f) › cumulative. Each time a price is increased on a product or product e, the percentages in Columns (d), (e), and (f) will change to lect the current position of prices (Columns (d) and (e)) and cost stification (Column (f)) in relation to base prices and base costs. 5. Column (g) is used to show the maximum price increases for a oduct/service within a product service line.

ction 16. Processing of Merchandise Pricing Plans

.01 Subpart K Regulations, Section 150.304 states that Price Cate›ry I and II retailers may not increase the price of any item above the ljusted freeze price for that item, until they submit a merchandise icing plan as required by Section 150.306.

.02 These plans are considered submitted when date stamped. Howver, the plans must be submitted to the IRS District Office, not to the ost of Living Council.

.03 Plans submitted to the Cost of Living Council will be rejected nd the firm will be considered a non-filer until the plan is re-mailed r hand-carried to the appropriate IRS Key District Office.

.04 Firms which have filed the plan with the Cost of Living Counl, or which are not able to prove they filed the required plan, must ollback all increased prices to their adjusted freeze price. No refunds r penalties will be required in these situations.

05 Firms which have raised prices but have not filed the required lan are in violation. In addition to rollbacks, refunds and sanctions nay be imposed.

06 Technical Personnel are responsible for reviewing and deternining the adequacy of merchandise pricing plans. Since these plans ave not been required in previous Phases of the Stabilization Program, we have developed a desk audit checksheet (exhibit 2-i) to assist you in reviewing them. The checklist questions are self-explanatory.

A "no" answer to any question on this checksheet signals a pro area which must be corrected. We have keyed each "no" answer "Action Code" on the checksheet which will direct you to take a spe action to correct or supplement the plan prior to approval.

0.7 In reviewing the plans, pay particular attention to checks question 6. If the merchandise categories shown do not substanti conform to those listed in Appendix A of Subpart K, we have to on your judgment as to whether the substitute categories appear jus fied and reasonable.

.08 If you feel the company's plan meets all the regulation requ ments, you should date and initial the checksheet and forward the with your recommendation for approval to the Technical Supers

.09 Should you find it necessary to reject a firm's pricing pl: they should be so notified by letter (within 60 days of receipt of t plan) of the reason for rejection.

.10 We have enclosed three (3) form letters (exhibits 2-n, o. 2 p) for your use. In using any of these letters, you should be as exp as possible in explaining to the firm the reason for the rejection.

.11 Please note that two (2) of the sample letters contain a cho of paragraphs advising the firm whether or not they may implemen any further price increases until a revised plan has been submitte You have the option of deciding whether the company may cont to implement increases depending on your judgment as to the series ness of the deficiencies in the plan.

.12 Forward the case file with your recommendation and samp letter to the Technical Supervisor for his review and signature. Section 17. Schedule T Processing

.01 Schedule T will normally be filed as an attachment to For CLC-22. There are two exceptions.

(a) Initial filing of the Merchandise Pricing Plan. A complete Schedule T for each pricing entity setting forth merchandise cate gories and CIPM's or gross margins for the pricing base period a each fiscal quarter of the pricing base period is a required part of th merchandise pricing plan.

(b) Resubmissions of an incomplete or inaccurate Schedule T. any resubmission the firm must complete all items on Schedule I However, they need not complete a new Form CLC-22.

.02 When received in the District, Schedule T will be screened a analyzed by Technical Personnel to determine whether further infor mation or data should be required from a firm. An effective and ther ough analysis is necessary to assure full compliance with the Stabiliz tion Program objectives.

.03 Initially, Schedule T should be visually screened for proper reporting periods, pricing entity, address, and timeliness of filing (a) The reporting periods should be firm's fiscal quarter or fis

year.

(b) Each retailing and wholesaling division, subsidiary or othe major organizational unit must prepare a separate form and be properly identified in Item 2.

(c) Schedule T must be filed not more than 45 days after each of the firm's first three fiscal quarters, and not more than 90 days after the fourth fiscal quarter.