October 1, 2003 — International Financial Reporting & Disclosure Issues

In Financial Reporting Release 62 (March 18, 2002), the Commission adopted temporary reporting rules and accommodations for audit clients of Andersen. These rules and accommodations are applicable to foreign private issuers. On April 1, 2002, the staff published Application of Requirements for Arthur Andersen Auditing Clients—Frequently Asked Questions which provides additional guidance about the rules and accommodations.

As foreign issuers plan to list or offer securities in the United States, management may identify many procedural or substantive compliance questions. Issuers are encouraged to contact the staff of the Commission to discuss these questions when they arise. The Commission staff also has implemented procedures to review foreign issuers' initial disclosure documents in draft form, if requested by the issuer. Companies are encouraged to contact Paul Dudek, Chief of the Office of International Corporate Finance (202-942-2990), early in their planning process to answer questions, arrange meetings, or discuss the timing of a confidential review.

A first-time registrant must reconcile its home-country GAAP financial statements for only the two most recently completed fiscal years plus interim periods, rather than all three of the years for which complete financial statements must be included. The transition reconciliation requirements do not affect the basic financial statements that are required. Statements of cash or funds flow and shareholders' equity are required for all periods for which an income statement is presented in the primary financial statements.

A foreign private issuer that presents US GAAP financial statements as its primary financial statements in its initial registration statement may include those audited income statements and cash flow statements for two years, without furnishing complete audited financial for the earlier of the three years. In this case, the registrant may present the 5 years of selected financial data required in the registration statement on the basis of its home-country GAAP, rather than 5 years of US GAAP selected financial data.

Some foreign registrants have concluded that it is not feasible to obtain the actuarial information necessary to implement FASB Statement 87 as of the effective date specified in the standard, which was January 1, 1989 for foreign plans with a calendar year-end. The staff will not object if a foreign registrant that cannot implement FAS 87 as of that effective date due to the unavailability of actuarial data adopts the standard as of a later date. However, the standard must be adopted as of a date no later than the beginning of the first period for which US GAAP reconciled data is required in a Commission filing.

The SEC's review of filings by public companies is generally transparent to the public and usually involves the public filing of amendments to remedy disclosure deficiencies identified by staff reviewers. The SEC staff recognizes that a foreign registrant often has special concerns about that transparency. This is particularly true when a foreign registrant's securities trade publicly in its home market, and the company will be making new and different disclosure as a result of its registration with the SEC. To address these concerns, the SEC staff often reviews and screens draft submissions of foreign registrants on a non-public basis. In 2001, however, the staff revised its practice in this area. The staff generally will continue to accept draft submissions in connection with an issuer's initial registration with the SEC. Except in unusual circumstances, however, once a foreign issuer has registered a transaction under the Securities Act or a class of securities under the Exchange Act, the staff will no longer accept from that issuer additional draft submissions and will not review or screen a registration statement until it is publicly filed. The timing and scope of staff review of these draft registration statements is generally the same as for publicly filed registration statements. Foreign companies are encouraged to contact the Office of International Corporate Finance (202-942-2990) to discuss the availability of any relief or accommodation early in the planning stages of a transaction or listing.

The time period required for the staff to review, comment on, and ultimately declare effective a registration statement depends upon the completeness of the draft registration statement and degree of compliance with the disclosure requirements. Draft registration statements must be complete in all material respects at the time of first submission, unless special arrangements have been agreed in advance with the Office of International Corporation Finance. Common examples of incompleteness include missing or partial US GAAP reconciliations, missing or partial US GAAP disclosure under Item 18, missing annual or interim periods, missing Industry Guide data, and missing financial statements of acquirees and investees. The staff will defer the review of an incomplete or deficient draft registration statement.

The staff will expect the auditor's report to be signed and dated at the time the draft registration statement is first submitted, unless special arrangements have been agreed in advance with the Office of International Corporation Finance.

Accounting firms that routinely audit financial statements that are prepared in accordance with US GAAP and filed with the Commission can be expected to be most knowledgeable about current US accounting practices and interpretations. Because of the importance of the reconciliation to US GAAP in filings with the Commission, registrants and their accountants should assure that appropriate competence is brought to that disclosure before materials are filed or submitted.

Foreign audit firms whose audit reports are included in SEC filings are required to be registered with the PCAOB by April 19, 2004. The PCAOB has proposed that the deadline for registration be extended to July 19, 2004. Under Section 102 of the Sarbanes-Oxley Act of 2002, it will be unlawful, after the registration deadline, for any audit firm that is not registered to prepare, issue, or participate in the preparation or issuance of any audit report with respect to any issuer.

The staff has received several requests to accept audit report qualifications in circumstances where a foreign registrant has deviated from home-country GAAP or IFRS to facilitate a position taken for tax purposes, to produce an accounting effect similar to that of a particular accounting principle generally accepted in a different country, or for other purposes. Home-country law or regulation did not require these deviations, although the home-country securities or industry regulator may have approved them at the registrant's request. The deviations might have continuing effects on reported results of future periods, and might be applicable to similar transactions occurring in future periods.

Under Rule 3-05 of Regulation S-X, the period for which audited financial statements must be presented for a recently acquired business varies from one to three years depending upon its significance to the registrant. Some systems of GAAP, such as IFRS, specifically require prior year comparative financial statements to be presented when the most recent fiscal year is presented.

Item 10.G of Form 20-F requires an accountant's consent to be filed when an audit report is included in the filing. Instruction 1 to that Item clarifies that a consent need not be filed in annual reports on Form 20-F. However, the consent is required in an Exchange Act registration statement on Form 20-F. For example, the consent would be required in the registration statement for a listing on the NYSE. The consent should be dated as close as practicable to the effective date of the registration statement on Form 20-F, in the same manner as a 1933 Act registration statement.

General Instruction D of Form 40-F requires an accountant's consent to be filed when an audit report is included in the filing. Form 40-F is used for Exchange Act registration and annual reports by Canadian registrants under the MJDS system. In this case, the Form specifically requires the consent to be provided for the annual report. Because an annual report has no effective date, the staff will not object as long as the consent is dated on or after the date of the audit report.

Article 2 of Regulation S-X requires that an independent accountant be licensed and in good standing under the laws of the place of the accountant's residence or principal office. The rule does not address whether the accountant's state or country of licensure must coincide with the location of the registrant's corporate offices or place where the registrant conducts its principal operations.

The staff ordinarily will not object if a foreign private issuer is audited by a foreign accountant that meets the requirements of Article 2 and has demonstrated sufficient knowledge and experience in applying US GAAP, US GAAS, SEC financial reporting rules, and SEC independence requirements. See Section IV.B. The staff may question the location from which the audit report was rendered if there does not appear to be a logical relationship between that location and the location of the registrant's corporate offices or place where the registrant conducts its principal operations.

The Staff interprets Article 2 to require the audit report on the financial statements of a registrant that is not a foreign private issuer to be rendered ordinarily by an auditor licensed in the US. This includes both US-incorporated registrants and foreign-incorporated registrants that do not meet the foreign private issuer definition. However, certain of these registrants may be headquartered, conduct their principal operations, or have most of their assets, outside the US. In these circumstances, the staff encourages registrants and their auditors to consult the staff prior to filing. The staff will consider all relevant factors in evaluating the appropriateness of the location from which the audit report was rendered. The following factors are likely to be significant in most situations:

• Are the majority of the registrant's assets, revenues, and operations located outside the US?
• Are the majority of the registrant's assets, revenues, and operations located in the country where the auditor resides?
• Are the registrant's management and accounting records located in the country where the auditor resides?
• The majority of the audit work conducted outside the US?

Generally, financial statements filed with the SEC are required to be presented in, or reconciled to, US GAAP as if the financial statements had always been prepared in accordance with US GAAP. An entity applying US GAAP for the first time must account for derivative instruments and hedging activities in accordance with Statement 133 in all fiscal years beginning after June 15, 2000. Statement 133 provides that, upon its adoption by a company, all hedging relationships must be designated anew and documented pursuant to the provisions of Statement 133. Thereafter, companies may use hedge accounting for those hedging relationships that, at inception of the hedging relationship, were documented and designated as hedges in a manner that would satisfy the requirements of Statement 133.

FAS 130 defines the required presentation of comprehensive income as a new basic financial statement, rather than an item of disclosure. Therefore, a statement of comprehensive income or its equivalent is required under both Item 17 and Item 18 of Form 20-F. A foreign registrant may present the statement of comprehensive income in any format permitted by FAS 130. It may be prepared using either US GAAP or home-country GAAP amounts. In the later case, reconciliation to comprehensive income measured on a US GAAP basis is encouraged, but not required.

The applicability of FAS 123 to foreign registrants depends on whether the financial statements are prepared in accordance with Item 17 or Item 18 of Form 20-F. Registrants filing under Item 18 should comply with the disclosure and pro forma measurement principles of FAS 123 in the same manner as a US company. If a foreign registrant elects not to use the fair value method of accounting for stock based compensation in the reconciliation to US GAAP, the pro forma disclosures of net income and earnings per share, along with all of the other disclosures required by FAS 123, should be provided in the annual financial statements. Foreign registrants filing under Item 17 would not be required to provide pro forma net income and earnings per share or any of the other disclosures specified by FAS 123. However, the registrant should disclose the method of accounting that is followed for purposes of complying with US GAAP. Foreign registrants that follow APB Opinion 25 are reminded that recently issued FASB Interpretation 44 provides significant guidance regarding the application of APB 25.

FAS 109 states that deferred tax assets and liabilities should be adjusted for the effects of a change in tax law or rates in the period that includes the enactment date. In the US, enactment date is considered to be the date that the President of the United States signs the legislation and it becomes law.

In some cases there may be pervasive differences between the accounting for business combinations under home-country GAAP and US GAAP. For example: The combination is accounted for as a merger (pooling of interests) in the primary financial statements but as a purchase business combination under US GAAP. The combination is accounted for as an acquisition (purchase) by the legal issuer in the primary financial statements but as a reverse acquisition under US GAAP, or visa versa.

Paragraph 48 of FASB Statement 141 specifies the date that a purchase business combination should be recognized in the financial statements under US GAAP. Ordinarily that is the date assets of the acquired business are received in exchange for consideration from the acquirer. A purchase business combination should not be recognized as of an earlier date unless a written agreement provides that effective control is transferred to the acquirer at an earlier date without restrictions except those required to protect the stockholders of the acquired company.

A number of foreign companies have obtained a listing in the US by merging into a nonoperating US public shell company whose securities are already registered with the Commission. The transaction is typically accounted for as a "reverse recapitalization." Notwithstanding that substantially all of the registrant's operations after the merger will be conducted outside of the US, the registrant is not a foreign private issuer and must comply with the rules applicable to US public companies. Accordingly, the registrant must file a Form 8-K containing financial statements of the foreign company within 75 days of the merger. To facilitate the initial filing of the foreign company's statements, the staff will not object if the financial statements included in the 8-K are prepared in accordance with a foreign GAAP, but reconciled to US GAAP in accordance with Item 18 of Form 20-F. However, the first Form 10-K following the merger, and any registration statement, should include financial statements prepared in accordance with US GAAP for all periods presented, including those periods prior to consummation of the reverse recapitalization. Financial statements in a foreign GAAP reconciled to US GAAP would not be acceptable.

The age of the pro forma financial information included in a registration statement should be based on the age of financial statements requirement applicable to the registrant. If a foreign private issuer files a Form F-4 and the target company is a US domestic registrant, the age of the pro forma information may be determined by reference to Item 8 of Form 20-F. That is, the pro forma information need only be as current as the most recent balance sheet date required for the registrant, which could be as much as 9 months old at the time of effectiveness. By contrast, if a US domestic registrant files a Form S-4 and the target company is a foreign private issuer, the age of the pro forma information must be determined by reference to Rule 3-12 of Regulation S-X. That is, the pro forma information would generally need to be current within 135 days at the time of effectiveness.

Companies are required to disclose the accounting principles used in the preparation of their financial statements. That disclosure should include the consolidation principles applied. In some circumstances, the staff has noted instances where majority-owned subsidiaries were not consolidated, yet disclosure of the reasons for non-consolidation was not made. The staff has objected to the use of boilerplate disclosures regarding an enterprise's consolidation policy when majority owned subsidiaries are appropriately excluded from consolidation. The disclosure should allow an investor to clearly understand why the registrant does not control the subsidiary.

Issuers that use proportional consolidation under home country GAAP for investments in joint ventures that would be equity method investees under US GAAP may omit reconciling differences related to classification or display, and instead provide summarized footnote disclosure of the amounts proportionately consolidated. Equity investee financial statements would not be required under Rule 3-09 as the joint venture is included in the registrant's consolidated financial statements. The accommodation is available only if the joint venture is an operating entity, the significant financial operating policies of which are, by contractual arrangement, ,jointly controlled by all parties having an equity interest in the entity. The accommodation does not apply to situations in which the "joint venture" would be consolidated under US GAAP.

Generally, financial statements of foreign private issuers prepared using a comprehensive basis of accounting but containing a departure from that basis with respect to a material item are not acceptable in Commission filings. However, in limited circumstances the staff has not challenged presentations financial statements using US GAAP except that investments in joint ventures are reported using the proportionate consolidation method. This is consistent with the accommodation in Form 20-F that permits registrants to not reconcile classification and display differences of proportionately consolidated joint ventures to the equity method.

Foreign registrants with significant subsidiaries that are consolidated under home-country GAAP, but would be accounted for using the equity method under US GAAP, are encouraged to discuss with the staff the information that should be disclosed in the US GAAP reconciliation. At a minimum, the staff would expect disclosure of the following information: 1) condensed information of the equity investee required by Rule 4-08(g) of Regulation S-X, and 2) a sufficiently detailed reconciliation to allow an investor to reconstruct financial statements prepared in accordance with US GAAP and Regulation S-X. Based on the specific facts and circumstances, the staff may request additional disclosure either in the financial statements or MD&A as well as financial statements of the investee pursuant to Rule 3-09 of Regulation S-X.

Rule 3-20 requires the financial information for all periods presented in a filing to be stated in the same reporting currency. If an issuer elects to change its reporting currency, financial information for previous periods should be recast into the new reporting currency using a methodology consistent with FAS 52. The objective of this procedure is to present financial statements as if the issuer had always used the new reporting currency. This means that an issuer should translate income statements from the old reporting currency into the new reporting currency using weighted average exchange rates for the applicable period, and the balance sheets should be similarly translated using the applicable period end exchange rates. The methodology used should produce the same results as though the respective consolidating functional currency statements had been translated directly into the new reporting currency.

Rule 3-20 of Regulation S-X requires that the financial statements should be stated in the same currency for all periods presented. This requirement applies to financial statements of a predecessor as well as those of the registrant. That is, the reporting currency used in financial statements of the predecessor should be the same as that of the registrant.

Under the present rules, it would be necessary for a registrant that had previously reported under home-country GAAP or US GAAP and decided to change their primary financial statements to IFRS in their SEC filings to file IFRS financial statements for all periods presented. The registrant would be required to provide a reconciliation to US GAAP for all periods presented, in accordance with Item 17 or Item 18 as applicable.

Under the present rules, a registrant may change the basis of presentation of its primary financial statements from US GAAP to home-country GAAP in their filings with the SEC. However, the Staff would be troubled if a registrant filed an initial registration statement under US GAAP and then immediately thereafter, for the purpose of their periodic reporting requirements, changed their primary GAAP.

Foreign banks will frequently have difficulty obtaining certain information to comply with the statistical disclosure requirements of Industry Guide 3. The staff recognizes that the categories and classifications specified by Guide 3 are heavily influenced by US banking regulation, and that some categories and classifications may not be the most relevant in understanding a foreign bank's operations. The staff will generally accept alternative classifications and presentation formats that provide an information content substantially similar to that specified by Guide 3, and may grant accommodations on the number of periods to be presented in certain circumstances. However, the staff believes that a robust presentation about loan quality and loss reserving is critical to an investor's understanding, and will pay particular attention to the completeness and meaningfulness of the information provided in response to Items III and IV of the Guide.

US oil and gas companies are required to file quarterly reports containing full cost ceiling tests under Rule 4-10(c) of Regulation S-X. Foreign registrants generally are not required to file quarterly reports. As a result, the staff does not object to foreign registrants limiting the application of the full cost ceiling test to the periods in which US GAAP balances are provided. In the event that comparative interim information is included in a registration statement for a period that was not previously presented, the full cost write-down for the interim period would be the lesser of the write-down for the year, or the excess over the ceiling amount at the end of the interim period. Foreign registrants should disclose the frequency with which the ceiling test is performed and the date of the latest test.

Mining companies should provide explicit disclosure of the types of reserves that are included in the base used for computing depletion—proven and probable reserves. The SEC staff has indicated in Industry Guide 7 that disclosure of reserve information is limited to proven and probable reserves. As disclosure of possible reserves is prohibited, the base of depletion should also not include such amounts. Excluding possible reserves from the base may result in a difference from home-country GAAP that needs to be addressed in the reconciliation to US GAAP.

In certain circumstances, the unusual nature or highly significant amount of a particular US GAAP reconciling item warrants further MD&A disclosure based on the guidance in Staff Accounting Bulletin 88. In these situations, the following factors may indicate the need for additional MD&A disclosure:

• Significant differences in key financial indicators highlighted in the home-country GAAP disclosures but not ordinarily required to be reconciled, such as revenues or operating income.
• Differences resulting in a significant divergence of trends between key home-country GAAP and US GAAP amounts.
• Differences that are likely to grow significantly in future periods because they relate to outstanding long-term contracts with fixed terms.
• Differences related to specialized industry accounting that may be unfamiliar to US investors, particularly where home-country GAAP would not ordinarily be expected to produce significant differences.
• Significant differences reflected in the separate financial statements of a recently acquired business that are not yet fully reflected in the registrant's financial statements.
• Differences reflected in the separate financial statements of an equity method investee, whose effects are not fully apparent in the registrant's financial statements.

In August 1998 the Commission issued a cease and desist order against Sony Corporation. The Commission found that Sony violated the periodic reporting requirements of the Exchange Act of 1934. The Commission issued a similar order against Sony's Director of Investor Relations who was found to be a cause of the violations.

Various countries that have experienced high rates of inflation require or permit financial statements to comprehensively include the effects of price level changes under home-country GAAP. In some countries, that reporting continues to apply even though the cumulative three-year inflation rate may be below 100%. The most commonly used approach is historical cost/constant currency, which recasts comparative period amounts into equivalent units of current purchasing power using a general price-level index. In some countries, a current (replacement) cost approach may be used. Form 20-F permits the inclusion of comprehensive price-level adjusted financial statements in SEC filings where that reporting is required or permitted by home-country GAAP.

Foreign private issuers operating in a highly inflationary environment that would like to prepare their primary financial statements in accordance with US GAAP can apply APB Statement No. 3, Financial Statements Restated for General Price-Level Changes (APS 3). The effects of the application of price level accounting do not have to be quantified in the reconciliation to US GAAP, as APS 3 is US GAAP. The staff has addressed several issues regarding the application of APS 3 including the acceptability of netting certain costs, discounting of trade receivables and payables and capitalization of interest. The definition of "highly inflationary" in FAS 52 and Rule 3-20 of Regulation S-X should be used when applying APS 3.

All price level adjusted financial information in a foreign private issuer's registration statement should be presented in equivalent purchasing power units of the reporting currency. That is, all measurements are restated retroactively to the purchasing power unit at the date of the most recent balance sheet in the filing. If a company updates to include interim financial information, the prior annual financial information must be recast in equivalent purchasing power units. A company that incorporates by reference a prior annual report on Form 20-F need not amend the prior filing, but must file restated financial statements in the registration statement or under cover of a Form 6-K that is incorporated by reference.

FASB Statement 95 and Form 20-F do not address the presentation of the statement of cash flows by registrants that prepare price-level adjusted financial statements in filings with the SEC.

Like all foreign private issuers, registrants based in countries with highly inflationary economies are permitted by Form 20-F to present US GAAP financial statements in US dollars. The amounts presented for non-monetary assets and liabilities as well as total stockholders' equity should not be materially different than if the US dollar had always been used as the reporting currency, and thus the currency for measurement, during the period that the economy is highly inflationary as defined by FAS 52. Under US GAAP it is not acceptable to use price level adjusted financial statements expressed in local currency and then translate those amounts into US dollars.

As specified in Form 20-F, foreign registrants that account for operations in a highly inflationary economy in a manner consistent with IAS 21, using the historical cost/constant currency method, need not quantify differences in the translation methodology compared to US GAAP. FAS 52 requires financial statements of an entity in a highly inflationary economy to be remeasured as if the functional currency were the reporting currency. Under IAS 21, the financial statements of the entity in the highly inflationary economy would first be adjusted for inflation and then translated into the reporting currency using the period end exchange rate.

Under the Multijurisdictional Disclosure System, Form F-10 for Canadian issuers requires any financial statements included in the registration statement to be reconciled to US GAAP using Item 18 of Form 20-F. A literal application of the instructions would result in MJDS filers reconciling interim information on a more current basis than Canadian or other foreign private issuers filing on the regular system. The staff will not object if a MJDS issuer reconciles to US GAAP only those periods that would be required if the filing was made on a regular foreign form. That is, the issuer may apply the age of financial statement requirements in Item 8 of Form 20-F.

Small Canadian exploration stage companies typically issue "flow through shares." The shares permit the investor to claim deductions for tax purposes related to expenditures incurred by the issuer. The issuer explicitly renounces the right to claim these deductions. The investor's tax basis is reduced by the amount of deductions taken.

Canadian issuers that elect to change reporting currency are encouraged strongly to discuss their particular facts and circumstances with the staff. Rule 3-20 of Regulation S-X states that the primary financial statements should be recast as if the new reporting currency had always been used. This method differs from the Canadian GAAP method, which uses a convenience translation to recast prior periods. The level of additional information that will be necessary to comply with the Commission's requirements will depend on the differences in exchange rates that would be used to recast prior periods. The additional information could range from addressing differences in the methodology as part of the reconciliation to US GAAP to complete restatement of prior year financial statements using the methodology required by Rule 3-20. Additional information in MD&A using the US GAAP balances also may be necessary.

Bulletin D-3 addresses pension accounting under Mexican GAAP. The guidance is generally similar to FASB Statement 87. Bulletin D-3 specifies the use of real (net of inflation) rates in determining plan assumptions. For purposes of reconciling to US GAAP, Mexican registrants should use real rates and treat the pension plan liability/asset as non-monetary.

Prior to issuance of Bulletin D-4 in Mexico effective January 1, 2000, two methodologies for accounting for deferred profit sharing were in use in Mexico. Some registrants use an accrual methodology and others use a balance sheet methodology. Under the accrual methodology, a liability is recognized for deferred employee profit sharing purposes on timing differences between income for financial reporting purposes and income for purposes of computing the current amount of the employee profit sharing payment. The balance sheet methodology determines the liability based on the difference between assets and liabilities in the financial statements and assets and liabilities determined in accordance with the law relating to the employee's profit sharing. This methodology is conceptually consistent with FAS 109.

Mexican Accounting Principles Commission Bulletin B-15 requires Mexican companies to report the assets and operations of consolidated foreign (non-Mexican) subsidiaries by price-level adjusting the accounts based on the inflation rate in the foreign country, then translating into pesos using the year-end exchange rate. For example, a Mexican registrant with a US subsidiary would price-level adjust that subsidiary by the US inflation rate, not the Mexican inflation rate. This method applies to all comparative periods presented. Thus the unit of measure (reporting currency) for the financial statements is impacted over time by the location and relative size of a Mexican registrant's foreign subsidiaries. The Bulletin B-15 method differs from the approach in virtually all other countries that permit or require price-level adjusted accounting.

The method permitted by the Fifth Amendment to Bulletin B-10 for restating fixed assets of foreign origin is not consistent with a comprehensive basis of price-level adjusted accounting. The staff has concluded that a reconciling difference should be reported based on the amount using the Mexican consumer price index.

For periods beginning after December 31, 1996, Mexico was considered a highly inflationary economy. For periods beginning after December 31, 1998, Mexico is no longer considered highly inflationary.

Price Level Index

Translation of foreign subsidiaries

As of January 1, 1992, Columbia began using price level accounting on a prospective basis. The effects of inflation not recognized in periods prior to 1992 when Columbia was hyperinflationary would result in a US GAAP difference. When presenting comparative financial statements in the US, Rule 3-20 of Regulation S-X requires all financial statements be retroactively restated to reflect constant currency as of the balance sheet date. Under Columbian GAAP, prior year financial statements are not restated. The requirement regarding the use of a constant currency of equivalent purchasing power must be applied in the primary financial statements. That is, it cannot be "corrected" in the reconciliation to US GAAP.

In most of Latin America, within the equity accounts is a "Restatement" account which represents the effect of restating capital stock to constant currency. There may also be designated reserve accounts and other accounts, such as "Results of Holding Non-Monetary Assets" in Mexico, which represent differences in appraisal values and indexation for inflation. It is not uncommon to transfer these reserves to capital stock and issue new shares to existing holders on a pro rata basis. These transactions are most similar to a stock split or stock dividend, since each holder's pro rata ownership and total shareholders' equity remains unchanged. Therefore, these issuances should be treated as if they were outstanding for all periods presented for basic and diluted earnings per share, as required under FASB 128, paragraph 54.

Presentation of Comparative Periods in Euros

Item 18 Disclosures

Israel has a tax incentive program for "approved enterprise zones." Under the alternative system of tax benefits, a company has a tax holiday for a specified period provided the profits generated during the exempt period are retained. If those profits subsequently are distributed, the company generally would owe taxes at the applicable rate.

A typical Israeli retirement arrangement contains elements of both defined contribution and defined benefit plans. The arrangement includes deferred vested benefits that supplement primary benefits provided by the Government. While companies are not obligated to pre-fund the liability, many pre-fund it through managers' insurance and/or mutual funds. There is no legal defeasance, since the sponsor typically is the beneficiary of the funding arrangement.

The Office of the Chief Scientist provides grants for research and development efforts. Under Israeli law, royalties on the revenues derived from products and services developed using such grants are payable to the Israeli Government. Royalties payable are capped at a percentage of the grants received on grants received before 1999. Royalties payable with respect to grants received under programs approved after January 1, 1999 are subject to interest on the dollar-linked value of the total grants received at an annual rate of LIBOR applicable to dollar deposits.

Most Israeli registrants derive a significant portion of their revenues outside Israel and report in US dollars. However, some registrants that operate largely within Israel report financial results in New Israeli shekels. Israeli GAAP allows companies to price level adjust financial statements prepared in New Israeli Shekels based on either (i) inflation as measured by the consumer price index or (ii) the devaluation of the Shekel to the US dollar. The staff believes the devaluation method does not reflect the change in the value of the currency in the primary economic environment and may be misleading in some circumstances if not supplemented with additional information relating to performance, liquidity and financial condition on a basis adjusted for changes in the consumer price index.

The currency of measurement, or functional currency, is the US dollar for many entities in Israel and certain other countries with price-indexed tax systems. The provisions of paragraph 9(f) of FAS 109 are applicable unless the registrant has elected to pay its taxes based on US dollar amounts. Paragraph 9(f) is an exception to the liability approach and stipulates that the effects of changes in exchange rates and indexing for inflation are excluded from the temporary differences in determining the deferred tax balances. The staff has been advised that a similar concept does not exist under Israeli GAAP. The staff has also concluded that the Israeli Inflationary Taxation System has the same effect as indexing. This issue may also arise for registrants that use IAS. While similar to FAS 109 in most respects, IAS 12 does not contain an exception comparable to paragraph 9(f). Registrants are encouraged to clearly describe how deferred taxes are determined, and if appropriate, address the provisions of paragraph 9(f) in the reconciliation to US GAAP.

Consolidation of Joint Ventures

Under Taiwan GAAP, employee bonuses and remuneration to directors and supervisors are paid in accordance with a company's articles of incorporation subsequent to year-end and are subject to shareholder approval. The bonuses may be settled in either cash or stock depending on the provisions of the articles of incorporation. In many cases, the bonuses are settled in stock. For local valuation purposes, only the par value of the stock is considered. As a result, it is common in Taiwan for shares to be issued whose value would significantly exceed the amount of the cash compensation. Some believe that for US GAAP purposes, the fair value of the shares should, at a minimum, be accrued at December 31, with the difference between that amount and the amount ultimately paid (based on the value at the shareholders' meeting) charged to income in a subsequent period. The staff places significant weight on shareholder approval. Accordingly, absent unusual facts and circumstances, the fair value of the stock issued should be recorded at the date of shareholder approval.

Accommodation for Method of Accounting under IAS 22

Under IAS 28, Accounting for Investments in Associates, an entity is presumed to have significant influence if it acquires 20% or more of the voting power of an investee. This presumption may be overcome in exceptional circumstances where it is demonstrated clearly that such influence does not exist.

IAS 27, Consolidated Financial Statements and Accounting for Investments in Subsidiaries requires consolidation of all subsidiaries. Control is presumed to exist when the parent owns, directly or indirectly, more than one half of the voting power of an enterprise unless, in rare and exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Paragraph 13 of IAS 27 outlines the circumstances whereby an enterprise would exclude a subsidiary from consolidation. These exceptions relate to instances where (i) the parent has acquired the subsidiary with the view to sell it in the near future or (ii) there are severe long-term restrictions which significantly impair the subsidiary's ability to transfer funds to the parent.

A registrant may establish special purpose entities (SPEs) to conduct research and development or other activities in the areas in which an enterprise and its affiliates are active. While the SPE may have its own governing body, the original sponsor may have the right of first refusal regarding the purchase of intellectual property rights developed by the SPE.

IAS 14 is effective for periods beginning on or after July 1, 1998. IAS 14 defines a business segment as a distinguishable component of an enterprise that is engaged in providing an individual product or service (or a group of related products or services) and that is subject to risks and returns that are different from those of other business segments. Similarly, geographical segments are defined as a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments.

IAS 38 is effective for periods beginning on or after July 1, 1999. Intangible assets are to be amortized on a systematic basis over the best estimate of the intangible's useful life. There is a rebuttable presumption that the useful life of an intangible asset would not exceed 20 years from the date when the asset is available for use.

IAS 1 allows an enterprise to present an analysis of expenses using a classification based on either the nature of expenses or their function within the enterprise. Under the nature of expense method, expenses are aggregated in the income statement according to their type (e.g., depreciation, purchases of materials, salaries, advertising, etc.) and are not reallocated among the various functions within the enterprise. On the other hand, the functional or "cost of sales" method classifies expenses according to their function as part of cost of sales, distribution, or administrative activities, for example. The functional method is generally required under Regulation S-X. In cases where expenses are classified based on their nature, sufficient disclosure about functional expense classifications should be presented as part of the US GAAP reconciliation to provide an information content substantially similar to an income statement presentation under US GAAP and Regulation S-X. This disclosure would be required both for Item 17 and Item 18 filers.