SEC Material — Supplement — International Practices Task Force: May 19, 2021, Meeting Highlights

International Practices Task Force — May 19, 2021

NOTICE:

The Center for Audit Quality (CAQ) SEC Regulations Committee and its International Practices Task Force (the Task Force or IPTF) meet periodically with the staff of the SEC (the SEC staff or staff) to discuss emerging financial reporting issues relating to SEC rules and regulations. The purpose of the following highlights is to summarize the issues discussed at the meetings. These highlights have not been considered or acted on by senior technical committees of the AICPA and do not represent an official position of the AICPA or the CAQ. As with all other documentsissued by the CAQ, these highlights are not authoritative and users are urged to refer directly to applicable authoritative pronouncements for the text of the technical literature. These highlights do not purport to be applicable or sufficient to the circumstances of any work performed by practitioners. They are not intended to be a substitute for professional judgment applied by practitioners.

These highlights were prepared by a representative of the CAQ who attended the meeting and do not purport to be a transcript of the matters discussed. The views attributed to the SEC staff are informal views of one or more of the staff members present, do not constitute an official statement of the views of the Commission or of the staff of the Commission and should not be relied upon as authoritative. Users are urged to refer directly to applicable authoritative pronouncements for the text of the technical literature. As available on this website, highlights of Joint Meetings of the SEC Regulations Committee and its International Practices Task Force and the SEC staff are not updated for the subsequent issuance of technical pronouncements or positions taken by the SEC staff, nor are they deleted when they are superseded by the issuance of subsequent highlights or authoritative accounting or auditing literature. As a result, the information, commentary or guidance contained herein may not be current or accurate and the CAQ is under no obligation to update such information. Readers are therefore urged to refer to current authoritative or source material.

I. Attendance

Task Force Members	Observers	Guests
Timothy Brown, Chair (KPMG) Scott Ruggiero, Vice-Chair (GT) Renaud Cambet (KPMG) Wayne Carnall (PwC) Rich Davisson (RSM-US) Judy Freeman (KPMG) Steven Jacobs (EY) Grace Li (BDO) Kathleen Malone (Deloitte) Paul Manos (KPMG) Alan Millings (EY) Ignacio Perez Zaldivar (Deloitte) Guilaine Saroul (PwC) Julie Valpey (BDO)	SEC staff from the Division of Corporation Finance and Office of the Chief Accountant Annette Schumacher Barr (CAQ staff) Carolyn Hall (CAQ staff)	Cindy Williams (GT)

II. Task Force and Staff Updates

The Task Force’s new Chair and Vice-Chair are Timothy Brown and Scott Ruggiero, respectively, succeeding DJ Gannon and Judy Freeman. The Task Force thanked DJ and Judy for their years of dedicated service in leading the Task Force.

The SEC staff provided an update of the following developments in the Division:

Patrick Gilmore is leaving the Commission.
Ryan Milne and Todd Hardiman will serve as Acting Deputy Chief Accountants in the interim.
Sarah Lowe will be joining the Commission this summer as a Deputy Chief Accountant.

The staff is addressing the surge of capital formation activity that continues in 2021, noting the number of SPAC filings thus far in 2021 have far exceeded those in 2020, and the number of IPOs that are not SPAC-related have also increased significantly. This volume of filings has not been seen in a long time. While the staff is working hard and employing all resources, the review process may slow down compared to the last few years given the record number of filings.

In order to facilitate an efficient review process, the staff will review only those draft or initial registration statements that are substantially complete when they are submitted/filed. For example, the staff will not review a filing that does not include an audit report from a PCAOB-registered firm stating that the audit was performed in accordance with PCAOB standards.

III. Updating annual financial statements for retrospective accounting that is first reflected in interim financial statements or interim financial information

Item 8.A.5 of Form 20-F provides the requirements for timeliness of financial statements of FPIs when filing a new registration statement. If a registration statement (other than a Form S-8) is dated more than nine months after the end of the last audited fiscal year, it should contain consolidated interim financial statements covering at least the first six months of the fiscal year, on a comparative basis. Item 8.A.5 also requires that when an FPI publishes interim financial information in its home jurisdiction that covers a more current period than otherwise is required to meet the timeliness of financial statement requirements, the company must include the more current interim financial information in the registration statement (referred to as “more current interim financial information”).

Furthermore, in new registration statements FPIs often include or incorporate by reference partial financial information for a more current period than what is required under Item 8.A.5 that does not constitute complete interim financial statements under ASC 270 (if US GAAP reporting), IAS 34 (if IFRS\u0002IASB reporting) or home country GAAP.

The November 24, 2009 IPTF Highlights document the staff’s view that reflecting a retrospective accounting change in complete interim financial statements that satisfy the age requirements of a new registration statement would trigger recasting of the annual audited financial statements that are included or incorporated by reference in the same registration statement. This recasting is needed in order to meet the requirements of Item 5 of Form F-3 that the prospectus must include or incorporate by reference “restated financial statements if there has been a change in accounting principles…where such changes…requires a material retrospective restatement of financial statements.”

At the May 17, 2016 meeting the IPTF requested the SEC staff to consider whether the inclusion of interim information in the registration statement that is more current than is necessary to comply with the nine month rule regarding age of interim financial statements and reflects a retrospective accounting change should trigger recasting of the annual audited financial statements.

The Task Force and staff discussed whether any of the following should be considered triggering events for recasting the annual audited financial statements for purposes of a new or amended registration statement of an FPI when a registration statement includes more current interim financial information to comply with the requirements of Item 8.A.5 of Form 20-F. Incomplete interim financial information that is included or incorporated by reference in the registration statement from a Form 6-K (e.g., an earnings release originally furnished on Form 6-K that contains less than full financial statements).
Complete interim financial statements prepared in accordance with IAS 34 or ASC 270, as applicable, when the "more current financial information" is not included in the same document as the audited financial statements.

The staff indicated that in either scenario, the SEC rules requiring retrospective revision to the annual financial statements would not be triggered. In these circumstances, the staff recommends registrants consider the need to provide incremental disclosure in the registration statement to serve as a bridge between the annual statements and the interim financial information. The objective of this incremental disclosure is to allow the reader to understand the impact the change will have on the annual financial statements at the time updating is required by Item 8.A.5. This may be accomplished through qualitative or quantitative disclosures included either inside or outside the financial statements.

IV. IFRS 1 adoption at the beginning of the one-year only financial statements in a confidential IPO submission (DRS)

A foreign private issuer (FPI) that qualifies as an Emerging Growth Company (EGC) with a December 31 fiscal year-end is planning on submitting an F-1 IPO Draft Registration Statement (DRS) before December 31, 2021. In the initial confidential submission, the company is planning on furnishing one-year of annual financial statements for the year ended 2020 as permitted under the Jobs Act. The company is adopting IFRS in 2021 with a date of transition of January 1, 2020 from local GAAP, and as such the financial statements for 2020 will include the balance sheets for December 31, 2020 and January 1, 2020 and the transition disclosure and the statements of comprehensive income, shareholders’ equity and cash flows for the year ended 2020. The public filing will include a full set of financial statements (including transition disclosures) with three balance sheets December 31, 2021, December 31, 2020 and January 1, 2020 and statements of total comprehensive income, shareholders equity and cash flows for the fiscal years ended 2021 and 2020.

The DRS excludes 2021 financial statements that will be required in the public filing. While the submission of a DRS with one year of financial statements is permissible, it constitutes a departure from IFRS 1. There are situations in which the SEC Staff has not objected to a departure from IAS 1 for the lack of comparative financial statements when the financial statements that are omitted are for the oldest year. In this situation, however, the financial statements that are omitted will be for the current year. Accordingly, it is understood that the staff does not believe qualifying language in the audit report(i.e. “except for lacking comparative financial statements”) would be appropriate in this circumstance.

To address this situation and to allow the company to submit a DRS before the company can provide audited financial statements for the fiscal year ended 2021, the Task Force and staff discussed whether a “to be issued report” (a.k.a. “preamble report” or “legend report”) as described in Section 4700 of the Division of Corporation Finance’s Financial Reporting Manual would be appropriate. The staff indicated that they would not object to such a report in this fact pattern. The Staff would expect that 1) all IFRS standards that would be effective for the full set of annual financial statements, including those standards applicable in 2021, be reflected as of the date of the IFRS transition (i.e., January 1, 2020 in the example) and 2) the registrant provides a transmittal letter to the filing highlighting that the report will be updated once the comparative period is included in the filing to facilitate the review process.

V. Missing comparative for interim period when interim financial information is voluntary in a confidential IPO submission (DRS)

On August 17, 2017, the SEC’s Division of Corporation Finance issued two Compliance and Disclosure Interpretations (C&DIs) that permit interim financial information to be omitted in from a draft registration statement submitted for confidential review.1 Under this guidance:

An issuer that is not an EGC may omit from the DRS interim financial information it reasonably believes will not be required to be separately presented at the time it publicly files its registration statement.
An issuer that is an EGC may omit interim information from the DRS that it does not believe will be required at the time of the contemplated offering.

A company that will present one year of audited financial statements in the DRS may want to voluntarily submit interim financial statement for the most recent period to assist the Staff’s review of current developments even though the company is not required under the above guidance and the company expects to include financial statements for a more current interim or annual period in a later amendment. Since the interim period financial statements will be removed prior to the public filing, comparative information required by IAS 34 would not be provided.

At the November 2017 IPTF meeting, the Staff indicated that they would not object to an FPI omitting interim financial statements from a DRS when such interim statements would be required to meet the timeliness requirements, if those financial statements will be superseded by interim financial statements for a subsequent interim period (including the comparative interim period) in the first public filing.

If an interim financial report complies with all the requirements of IFRS, IAS 34 requires disclosure of that fact in an interim financial report. If only the most recent period is presented for the interim financial statements under IAS 34, without the prior comparative period a company in the basis of preparation of the interim financial statements disclosure could not include a compliance statement under IAS 34.. The Task Force and staff discussed whether it would it be appropriate for an issuer to include “except for” the lack of comparative information language in the notes to the financial statements included in a DRS document consistent with the approach taken for annual financial statements lacking a comparative period under IAS 1. The “except for” language would not be in the notes to the interim financial statements in the publicly filed registration statement(s) because the subsequent interim period (including the comparative interim period) would be included.

The staff indicated it is considering the question and affected issuers may contact CF-OCA to discuss their particular fact pattern

VI. Risk factor disclosure in an existing registration statement and in a new registration statement

Endnote 12 in the recent rules on the Modernization of Regulation S-K Items 101, 103 and 105 states that Regulation S-K Items 101 and 103 affect only domestic registrants. It also states that S-K 105 will impact FPIs, including those that file registration statements on the F-Forms, because Forms F-1, F-3 and F-4 refer to S-K 105, which requires a summary of the risk factors if the risk factor section exceeds 15 pages. Form 20-F requires disclosure of risk factors under Part I, Item 3(D), and it does not refer to S-K 105.

Assume the Form 20-F contains over 15 pages of risk factors and the Form 20-F will be incorporated into a (i) a new registration statement on Forms F-1, F-3 or F-4 and (ii) an effective registration statement. Assume further that in both situations the base prospectus and prospectus supplement have less than 15 pages in total of risk factors - excluding the risk factors that are incorporated by reference as part of the Form 20-F.

Regarding a New Registration Statement: There is a view that the requirement to provide a summary of the risk factors only applies when the 15 pages of risk factors is exceeded on a document basis – i.e., when the prospectus has 15 pages of risk factors. This view does not believe the pages that are incorporated by reference from the Form 20-F count towards the 15-page limit. If the base prospectus had 10 pages and the prospectus supplement had 7 pages, this view believes that a summary would be required because the prospectus in total exceeded 15 pages. There is nothing in the reg text or the release that indicates that the pages that are incorporated into the prospectus should be added to the pages in the prospectus to determine if a summary is required.

Regarding an Existing Registration Statement: There is a view that once a registration is effective that a company only needs to comply with the undertaking requirements of Item 512 of Regulation S-K to keep the registration statement current. Item 512 discusses keeping information current vs an obligation to provide new information. There are significant differences in the reporting requirements for a new registration statement compared to using an existing registration statement. Once effective, a registrant has no specific obligation to update the prospectus except as stipulated by 1933 Act Section 10(a)(3) and S-K 512(a). This issue was previously discussed by the Task Force on November 27, 2018 and September 27, 2004. Assuming a summary of the risk factors is not a fundamental change, it would not appear that it would be necessary to provide a summary of risk factors in the prospectus supplement when such summary is not required in the Form 20-F or the original registration statement.

The Task Force and staff discussed whether the risk factors included in the Form 20-F that is incorporated by reference should be included in determining the number of pages of risk factors in either (i) the (base) prospectus/registration statement or (ii) the prospectus supplement to an existing registration statement. The staff is considering the question.

VII. FPI Transactions involving SPACs

The Task Force and staff discussed various reporting implications involving a foreign operating company and domestic SPAC. This included a discussion of the use of a foreign holding company (which may be referred to as a “Double Dummy Structure”) to complete the de-SPAC transaction.

The staff indicated that the reporting implications are based on the specific facts and circumstances. The staff emphasized that the FPI determination date is set by rule and not subject to interpretation. Registrants may consult with the staff to discuss individual fact patterns.

VIII. Next meeting

The next meeting of the Task Force has been set for November 3, 2021.

Footnotes

See C&DI 101.05 — Securities Act Forms — with respect to a non-EGC and Question 1 to Fixing America's Surface Transportation (FAST) Act with respect to an EGC.