International Practices Task Force — July 16, 2020
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 documents
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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.
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members present, do not constitute an official statement of the views of the
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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
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I. Attendance
Task Force Members
D.J. Gannon, Chair (Deloitte)
Judith Freeman, Vice-Chair (KPMG)
Greg Bakeis (PwC)
Timothy Brown (KPMG)
Rich Davisson (RSM-US)
Steven Jacobs (EY)
Kathleen Malone (Deloitte)
Alan Millings (EY)
Ignacio Perez Zaldivar (Deloitte)
Scott Ruggiero (Grant Thornton)
Guilaine Saroul (PwC)
Julie Valpey (BDO)
Observers
SEC staff from the Division of Corporation Finance, and the Office of
the Chief Accountant
Annette Schumacher Barr (CAQ staff)
Carolyn Hall (CAQ staff)
II. Issues relating to consents, including requirements for consents to be signed by individual partners when they are named (explicitly or via permit number) in the audit report, and the impact of other practical issues
In some foreign jurisdictions, the PCAOB audit report is required under local law
or regulation to include, in addition to the firm name, either the name of the
audit partner(s) or other means of identification of that partner (e.g., by
inclusion of the partner’s local license or permit number). This identification
may be included in various ways, for example, by adding a footnote reference
marker or number after the name of the accounting firm issuing the audit report,
where it appears as a conformed signature in the audit report.
Experts, including those that have signed audit reports, are required to consent
to the inclusion of such report in registration statements or when annual
reports on Form 40-F, Form 20-F or Form 10-K are included in or incorporated by
reference in registration statements filed under the Securities Act.
The Task Force and staff discussed whether an audit partner who is named in the
audit report (explicitly or via permit number) must provide a consent if that
audit report is included or incorporated by reference into a registration
statement. The staff referred to Section 7 of the Securities Act of 1933 which
states:
“If any accountant, engineer or appraiser, or any person whose
profession gives authority to a statement made by him, is named as
having prepared or certified any part of the registration statement, or
is named as having prepared or certified a report or valuation for use
in connection with the registration statement, the written consent of
such person shall be filed with the registration statement.”
Consistent with this requirement, the staff stated that if an audit partner,
through name or identification number, is named in an SEC filing by virtue of
their association with an audit report, both the firm and individual partner
would need to provide written consent.
If two audit reports are issued:
- one in the home country that is not filed with the SEC; and
- a separate PCAOB-compliant audit report (that would exclude the audit partner’s identification) that is filed with the SEC,
a separate consent from the audit partner would not be required where only the
PCAOB audit report is incorporated by reference into a registration
statement.
If a circumstance arises that named partners retire or leave the firm, and a
consent is required from that individual, the staff is willing to discuss
alternatives.
III. Application of IAS 29 in new registration statements that include financial statements
The Task Force and staff considered the following hypothetical scenario:
Company A (the Company) is an Argentinian Foreign Private
Issuer (FPI), with a June 30th fiscal year end, filing on Form 20-F. The Company
uses International Financial Reporting Standards, as issued by the IASB (IFRS),
and has been applying IAS 29, Financial reporting in Hyperinflationary
economies (IAS 29), since July 1, 2018. The Company is planning to file
a registration statement on Form F-3 during April 2020 as part of a plan to
refinance some of its existing debt.
On the initial F-3 filing, the Company expects that the
following financial statements will be included or incorporated by
reference into the Form F-3
- June 30, 2019 audited annual financial statements
- December 31, 2019 unaudited interim financial statements (to comply with timeliness requirements)
Also, if the Company files an amendment to the F-3 after May
10th, it expects that the March 31, 2020 interim financial statements will be
required in accordance with Item 5 (b)(2) of form F-3 (that requires registrants
to include financial statements to comply with the requirements of Item 8.A.5
under Form 20-F or “more current information”). Such financial statements are
expected to be filed with the local regulator by May 10th and furnished via a
6-K with the SEC. Therefore, such financial statements will represent more
current information of the Company for any filing made after May 10th that would
be required to be incorporated by reference into the Form F-3. Assume there are
no other changes triggering restatement of the audited financial statements.
The Task Force and staff discussed whether, in connection with the initial Form
F-3 filing, the June 30, 2019, previously-issued audited annual financial
statements should be recast/restated to the current measurement unit used to
prepare the December 31, 2019, interim financial statements that are included to
fulfill timeliness requirements.
It was noted that IFRS does not address the recasting/restatement of previously
issued annual financial statements in the fact pattern above. The comparative
interim financial statements for the six-months ended December 2018, would be
adjusted for the IAS 29 impact as part of the interim financial statements as of
and for the period ended December 31, 2019.
The SEC staff noted that Rule 3-20(c) of Regulation S-X would require a company
reporting in a currency of a highly inflationary environment to recast/restate
the prior year financial statements included or incorporated by reference into a
registration statement.
Where recently published information is included in the registration statement,
the SEC staff noted that it would consider a supplemental disclosure to bridge
that information to the historical financial statements in lieu of a full
recast/restatement of the prior annual and interim financial statements. The SEC
staff noted that registrants in those circumstances may wish to consult with the
staff and an alternative approach may require a request under Rule 3-13 of
Regulation S-X.
IV. Impact of the changes to Rule 3-05 on financial statement requirements for a target in Forms S-4/F-4
In the Amendments to Financial Disclosures about Acquired and Disposed Businesses
(Final Rule Release), changes have been made to Rule
3-05(c), which enable FPIs that prepare their financial statements using IFRS as
issued by the IASB to present financial statements of an acquired foreign
business prepared using home country GAAP with a reconciliation to IFRS rather
than US GAAP. Further, Rule 3-05(d) has been added to enable an acquired entity
that does not meet the definition of a foreign business, but would qualify as an
FPI if it were a registrant, to present financial statements using IFRS without
reconciliation or to present home country GAAP financial statements reconciled
to IFRS, if the registrant is an FPI that prepares its financial statements
using IFRS. While these changes will facilitate the financial statement
presentation requirements for many acquired foreign entities, the changes are to
Rule 3-05 itself and corresponding changes were not made to Forms S-4 and F-4,
so the Task Force discussed how those changes impacted the financial statement
requirements for a target in a Merger filing on Form S-4 or F-4.
The Task Force noted that if the registrant is an FPI that prepares its financial
statements using IFRS and the target is not a foreign business, but would meet
the definition of an FPI that prepares financial statements in accordance with
home country GAAP, then the financial statements required for the Merger
Registration Statement could be different than those that will be required under
Rule 3-05.
In accordance with Rule 3-05(d), since the target would meet the definition of an
FPI and the registrant is an FPI that prepares its financial statements in IFRS,
the financial statements of the acquired business under that rule may be
presented in home country GAAP with a reconciliation to IFRS. However, Rule 3-
05(d) does not apply to Merger Registration Statements and the
instructions to Item 17(b)(5) of Form F\u00024 indicate that if the target’s
financial statements are prepared on a comprehensive basis of GAAP other than US
GAAP or IFRS as issued by the IASB, then a reconciliation to US GAAP should be
provided unless a reconciliation is not available and cannot be provided without
unreasonable cost or effort.
The SEC staff is open to registrants in those circumstances consulting with the
staff on the financial statement requirements and the SEC staff may consider
requests to present a reconciliation of Home Country GAAP to IFRS under Rule
3-13 of Regulation S-X.
The staff observed that 3-05(c) and (d) wouldn’t apply to situations where the
target will become the predecessor, such as de-SPAC.
V. Next meeting
The next meeting of the Task Force has been set for November 10, 2020.