INTERNATIONAL PRACTICES TASK FORCE — May 21, 2019
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
issued 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by the SEC staff, nor are they deleted when they are superseded by the issuance of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
D.J. Gannon, Chair (Deloitte)
Judith Freeman, Vice-Chair (KPMG)
Greg Bakeis (PwC)
Tim Brown (KPMG)
Rich Davisson (RSM-US)
Steven Jacobs (EY)
Kathleen Malone (Deloitte)
Alan Millings (EY)
Victor Oliveira (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 Office of Chief
Accountant
Annette Schumacher Barr (CAQ staff)
Guests
David Oldham (KPMG)
II. Reporting on certain types of financial statements prepared using IFRS, as issued by the IASB
Certain SEC regulations and/or accommodations do not require the presentation of
a complete set of financial statements, unlike IFRS as issued by the IASB
(herein referred to as “IFRS”). Presented below are examples where a complete
set of financial statements are not required by SEC regulations and/or
accommodations granted under Rule 3-13 of Regulation S-X (“S-X 3-13”), even
though IFRS has a requirement for a complete set of financial statements, along
with related Task Force and staff observations about the examples.
A. Omission of Comparative Financial Statements included in an SEC Filing for S-X Rule 3-09 purposes
A foreign private issuer (“FPI”) (that does not qualify as an Emerging Growth
Company (“EGC”)) with a December 31 year-end plans to submit a draft
registration statement to conduct an Initial Public Offering (“IPO”) in May
2019. The registrant acquired an equity method investment (i.e., a foreign
business using IFRS, but not considered a first-time adopter) in mid-April
2018, where the investment met the income significance test under Rule 3-09
of Regulation S-X (“S-X 3-09”) (greater than 20%) in 2018. For purposes of
this example, the evaluation under Rule 3-05 of Regulation S-X (“S-X 3-05”)
did not result in any requirement to present the investee’s financial
statements for any period.
Financial Reporting Manual (“FRM”) 2405.4 states that “for purposes of S-X
3-09, the investee’s separate annual financial statements should only depict
the period of the fiscal year in which it was accounted for by the equity
method.” As a result, separate audited financial statements of the investee
for the period from mid-April 2018 to December 31, 2018 (stub period) are
required.
SX Rule 3-09 requires the presentation of the 2018 stub period, and does
not permit the presentation of the comparative period prior to the date
it was acquired and accounted for under the equity method. The
presentation of financial statements without a comparative period would
not comply with paragraph 38 of IAS 1.The Task Force asked the staff
whether they would object to an audit report containing a qualified
opinion with respect to the lack of comparative information similar to
that as discussed in Appendix A. An example of the qualification is
presented below:
Reference to IAS 1
As discussed in Note [X], the accompanying
[consolidated] financial statements are not presented in accordance with
International Accounting Standard 1, Presentation of Financial Statements,
as they do not include comparative figures, which constitute a departure
from International Financial Reporting Standards as issued by the
International Accounting Standards Board
B. Reporting on a Statement of Assets Acquired and Liabilities Assumed and Revenue and Direct Expenses of a segment of a business or a product line acquired (i.e., abbreviated financial statements)
In certain circumstances abbreviated financial statements may be used to
satisfy the requirements of S-X 3-05 in lieu of full carve-out financial
statements and are tailored to the informational needs determined by the
SEC, based on compliance with SEC requirements or practices. In addition,
the basis of presentation note would include:
- A statement describing the regulatory purpose of such financial statements
- A statement that they are not intended to represent a complete presentation of the financial position or results of operations and the related footnotes of the acquired business
- A statement that the financial statements are prepared on a basis that is “in accordance with IFRS as issued by the IASB relevant to such financial statements”
- A description of the basis for determining the assets and liabilities to be included
- An explanation as to why a complete set of financial statements is not available and cannot be prepared
- A statement that the financial statements have been derived from the accounting records of the entity from which it was acquired and
- Additional disclosures necessary to understanding the abbreviated financial statements
The Task Force asked the staff if they would object to an audit report that
includes the following:
- A statement describing the regulatory purpose of such financial statements
- A statement that they are not intended to represent a complete presentation of the financial position or results of operations of the acquired business
- A statement that the financial statements are prepared on a basis that is “in accordance with IFRS as issued by the IASB relevant to such financial statements”
The staff indicated that they would not object to the approach outlined in
the bullets above for those circumstances where the staff did not object to
the use of abbreviated financial statements prepared using IFRS to satisfy
S-X 3-05. Refer to Appendix B for a Report example and related Basis of
Presentation Note example.
C. Omission of Balance Sheet of Financial Statements included in an SEC filing for S-X 3-05 purposes
Generally, in an IPO, the SEC has accepted a combination of pre and
post-acquisition financial statements of an acquired business to satisfy the
requirements under S-X 3-05 provided there are no gaps in audited periods.
In such cases, the pre-acquisition financial statements are generally not
required to include the balance sheet at the date of acquisition.
Example:
Registrant A acquires Business B on September 1, 20X1.
Business B is significant to A at the 20-40% level and therefore, audited
financial statements for only the most recent fiscal year are required.
Registrant A is required to include audited financial statements for the
years ended 20X0 and 20X1 (assume EGC IPO of common equity securities) in
its Form F-1.
Registrant A may satisfy the requirement for 1 year of
financial statements of B by providing audited financial statements for the
8 months ended August 31, 20X1 along with the 4 months of post-acquisition
results of B included in A’s financial statements for the year ended
December 31, 20X1. Since B’s assets and liabilities acquired are included in
the audited balance sheet of A as of December 31, 20X1, the balance sheet of
B as of August 31 20X1 is not required by SEC Rules.
The Task Force asked the staff whether they would object to an audit report
containing a qualified opinion with respect to the omission of a balance
sheet, at acquisition date, under IFRS when pre and post-acquisition
financial statements of an acquired business are used to satisfy S-X 3-05.
An example of the audit report containing the qualified opinion is presented
below:
Reference to IAS 1
As discussed in Note [X], the accompanying
[consolidated] financial statements are not presented in accordance with
International Accounting Standard 1, Presentation of Financial Statements,
as they do not include a balance sheet and related notes, which constitute a
departure from International Financial Reporting Standards as issued by the
International Accounting Standards Board.
The staff indicated that they would not object to the inclusion of an audit
report containing a qualified opinion with respect to the omission of a
balance sheet at acquisition date under IFRS when pre and post-acquisition
financial statements of an acquired business are used to satisfy S-X 3-05 as
described above.
D. Omission of Opening Balance Sheet for a Carve out under IFRS 1 included in an SEC filing for S-X 3-05 purposes
Assume a domestic company acquires a foreign business (“Foreign Business”)
and that the financial statements of the Foreign Business will be prepared
in accordance with IFRS. Based on the significance tests under S-X 3-05, one
year of financial statements will be required by S-X 3-05 for the year ended
December 31, 2018.
The financial statements of the Foreign Business will be a carve-out of a
parent company that prepares financial statements under IFRS. Financial
statements of the Foreign Business, which will have the same basis as its
parent, have never been prepared. Accordingly, the Foreign Business would be
subject to the disclosure requirements of IFRS 1.
As a first-time adopter of IFRS, the Foreign Business should provide a
balance sheet at January 1, 2017, December 31, 2017 and December 31, 2018
and an income statement and cash flow statement for the two years ended
December 31, 2018 under IFRS 1. In this fact pattern, S-X 3-05 only required
financial statements at and for the year ended December 31, 2018 (i.e. one
year).
The Task Force notes that if this company was not a first-time adopter of
IFRS it could simply exclude the financial statements at and for the year
ended December 31, 2017 and the audit report would have noted the departure
from IAS 1 in not providing comparatives financial statements as discussed
in Section II.A.
The Task Force asked the staff whether they would object to an audit report
containing a qualified opinion for noncompliance with IFRS 1 with respect to
the exclusion of the opening and comparative period balance sheet, which in
this case is the opening balance sheet at January 1, 2017 and for the year
ended December 31, 2017 that would be provided for a first-time adopter of
IFRS. Similar to the accommodation discussed in Appendix A. An example of
the explanation in the audit report containing the qualified opinion is
presented below:
Reference to IFRS 1
As discussed in Note [X], the accompanying
[consolidated] financial statements are not presented in accordance with
International Financial Reporting Standard 1, First-time adoption of
International Financial Reporting Standards, as they do not include
comparative figures, which constitute a departure from International
Financial Reporting Standards as issued by the International Accounting
Standards Board.
The staff indicated that they would not object to the inclusion of an audit
report containing a qualified opinion with respect to the exclusion of the
opening balance sheet and comparative balance sheet under IFRS 1 as
described above.
III. Issues related to S-X 3-13 relief
A. Reporting requirements under S-X 3-05 for a private U.S. domestic entity (“Domestic Business”) that is acquired by a FPI where the application of the rules would indicate the Domestic Business would be required to present more years and periods of financial statements than the registrant
The Task Force and SEC staff discussed S-X 3-05 reporting requirements for a
non-EGC FPI that prepares its financial statements for an IPO on Form F-1 in
accordance with U.S. GAAP and presents registrant financial statements for
only two years as allowed by Instruction 3 to Item 8.A.2 of Form 20-F. The
FPI acquired a Domestic Business that is significant at a level in excess of
50% using the tests in S-X 3-05, and as such three years of financial
statements would be required for the Domestic Business.
The Task Force noted that it is generally expected that an acquired business
should follow the requirements applicable to that type of entity (e.g., a
domestic acquiree would follow those of a domestic entity, and a FPI or
foreign business would follow those of a FPI regardless of the filer status
of the registrant).
The staff noted that the guidance in Section 10220.5 of the FRM, (which
indicates that if the registrant is an EGC, only two years of financial
statements under S-X 3-05 are required) should not be applied by analogy in
this scenario. As such, the staff confirmed that in this fact pattern,
absent other specific relief, three years of the Domestic Business’s
financial statements would be required.
The Task Force and the staff also discussed the reporting requirement if the
FPI was a first-time adopter of IFRS such that, similar to the above fact
pattern, only two years of registrant financial statements are required,
noting that this would not change the requirement for three years of the
Domestic Business’s financial statements.
The Task Force and the staff also discussed reporting requirements for
interim financial statements of the Domestic Business and whether interim
financial statements of the Domestic Business would be required if no such
interim financials are required for the FPI registrant (e.g., for a
registration statement filed more than 135 days after the end of the fiscal
year of the Domestic Business such that interim financial statements of the
Domestic Business would be required, but before nine months after the end of
the fiscal year of the FPI registrant).
Under the same guidance noted above, interim financial statements of the
Domestic Business would be required where interim financial statements of
the FPI registrant would not.
Registrants may contact the staff to discuss their facts and circumstances if
they believe relief should be considered under S-X 3-13.
B. Acceptance of IFRS financial statements without reconciliation for a non-foreign business equity method investee when registrant uses IFRS
The Task Force noted that FPIs often have significant equity method
investments in foreign entities that do not qualify as foreign businesses.
It was noted that financial statements provided under S-X 3-09 in this
scenario would be required to be prepared using U.S.GAAP or contain an Item
18 reconciliation to U.S. GAAP, but that such presentation may be less
relevant for investors when the registrant prepares its financial statements
using IFRS.
Registrants may contact the staff to discuss their facts and circumstances if
they believe relief under S-X 3-13 should be considered to allow the S-X
3-09 financial statements under IFRS instead of U.S. GAAP or with an Item 18
reconciliation to U.S. GAAP.
IV. Requirements for FASB ASC 932 disclosures in financial statements of a foreign target that uses IFRS
U.S. GAAP (FASB ASC 932-235-50) requires supplemental disclosures about oil and
gas reserves, changes in such reserves during the reporting period, capitalized
costs related to oil and gas producing activities and standardized measures of
future net cash flows (“the supplemental U.S. GAAP oil & gas disclosures”).
When the SEC eliminated the reconciliation requirement for financial statements
prepared in accordance with IFRS, it amended Item 18 of Form 20-F to require the
supplemental U.S. GAAP oil & gas disclosures for all “issuers” filing
financial statements under Item 18 irrespective of the basis of accounting on
which they prepare their financial statements filed with the SEC (Instruction
2).
Item 18(b) of Form 20-F specifically exempts IFRS basis financial statements
prepared to comply with S-X 3-05 and 3-09 from providing other information
required by U.S. GAAP or Regulation S-X. Given that exemption, it is unclear how
to apply Instruction 2 in the context of IFRS-basis financial statements of
non-issuers such as significant acquirees or equity method investees
(“IFRS-basis non-issuers”). Unlike the financial statements of an issuer, such
IFRS-basis non-issuer financial statements may have already been prepared and
issued outside the U.S. without such disclosures and in the case of S-X 3-05,
may be filed by the SEC issuer only once.
FRM 2065.12 and Question 1 of Staff Accounting Bulletin Topic 2.D. Financial
Statements of Oil and Gas Exchange Offers both require only a portion of
the disclosures in ASC 932-235-50 for each full year of operations when they
might not have otherwise been required; however, both appear to be written in
the context of financial statements for an acquired oil and gas operation
prepared under U.S. GAAP.
Considering the discussion above, the Task Force and SEC staff discussed whether
financial statements prepared under IFRS provided to satisfy S-X 3-05 would be
required to include the disclosures required by ASC 932-235-50 similar to what
an FPI would be required to disclose if they use IFRS.
The SEC staff would expect such disclosures to be included. Registrants with
acquisitions unable to provide all of the disclosures required by ASC
932-235-50 may contact the SEC staff to discuss.
V. Audit reports by a government auditor
Rule 2-03 of Regulation S-X (“S-X 2-03”) states that “Notwithstanding any
requirements as to examination by independent accountants, the financial
statements of any foreign governmental agency may be examined by the regular
and customary auditing staff of the respective government if public
financial statements of such governmental agency are customarily examined by
such auditing staff.”
An agency, or business unit, of a foreign government, (“foreign government
entity”), where the government auditing staff was the appointed auditor may be
acquired by an issuer. The government auditing staff is not an auditor
registered with the PCAOB and the audit of the foreign government entity had not
been performed in accordance with PCAOB or US GAAS auditing standards. In such a
situation, audited financial statements may be required for that foreign
government entity either as predecessor financial statements or as required by
S-X 3-05.
The Task Force asked the staff for their views on how S-X 2-03 may apply in these
instances and whether a registration statement may include financial statements
audited by the government auditing staff.
The SEC staff noted that registrants looking to present such financial statements
should discuss their specific facts and circumstances with the staff prior to
submission.
VI. Monitoring inflation in certain countries
The summary of inflation data collected by the members of the IPTF can be found
on the CAQ website at https://www.thecaq.org/resources/publications.
VII. Next meeting
The next meeting of the Task Force has been set for November 19, 2019.
Appendix A – Excerpt from International Reporting and Disclosure Issues in the Division of Corporation Finance
Rule 3-05
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.
In situations where only one year is required by Rule 3-05, the staff would not
object if the audit report includes a qualification under IFRS or home-country
GAAP solely for the absence of comparative prior year financial statements.
Appendix B – Report Example
Independent Auditor’s Report
To the Management of ABC Company
We have audited the accompanying combined financial statements of the Global XXX
Business and Certain Other Assets of ABC Company, which comprise the combined
statements of net assets acquired as of December 31, 20X7 and 20X6, and the
related combined statements of revenues and direct expenses for each of the
three years in the period ended December 31, 20X7.
Management’s Responsibility for the Special Purpose Combined Financial
Statements
Management is responsible for the preparation and fair presentation of the
combined financial statements in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board
relevant to such financial statements; this includes the
design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of special purpose combined financial
statements that are free from material misstatement, whether due to fraud or
error.
Auditor’s Responsibility
Our responsibility is to express an opinion on the combined financial statements
based on our audits. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the combined financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the special purpose combined financial statements.
The procedures selected depend on our judgment, including the assessment of the
risks of material misstatement of the combined financial statements, whether due
to fraud or error. In making those risk assessments, we consider internal
control relevant to the entity’s preparation and fair presentation of the
combined financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal control. Accordingly, we
express no such opinion. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of significant accounting
estimates made by management, as well as evaluating the overall presentation of
the combined financial statements. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Global XXX
Business and Certain Other Assets of ABC Company as of December 31, 20X7 and
December 31, 20X6, and the results of their revenues and direct expenses for
each of the three years in the period ended December 31, 2017, in accordance
with International Financial Reporting Standards as issued by the International
Accounting Standards Board relevant to such financial statements.
Emphasis of Matter
The accompanying combined financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in the Current Report on Form 8-K of XYZ Industries
Ltd. as described in Note 1 and are not intended to be a complete presentation
of the financial position or results of operations of the Global XXX Business
and Certain Other Assets of ABC Company in accordance with International
Financial Reporting Standards as issued by the International Accounting
Standards Board. Our opinion is not modified with respect to this matter.
**********
Basis of Presentation Note Example
The accompanying Combined Financial Statements (the “Financial Statements”) are
prepared in accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board (“IFRS”) relevant to such
financial statements. These Financial Statements are prepared by management in
consideration of the terms and conditions of the Purchase Agreement and the
relevant guidance under SEC Rule 3-05, Significant Acquisition Carve-out
Financial Statement Reporting Requirements. These combined financial statements
are not intended to be a complete presentation of financial position, results of
operations, or cash flows of the Global XXX Business in conformity with IFRS.
Due to the extent to which the Global XXX Business has been integrated into ABC
Company during the periods required to be covered by the Financial Statements,
the presentation of full or carve-out financial statements for the Business in
accordance with the Securities and Exchange Commission’s Regulation S-X,
including a reasonable and appropriate allocation of corporate overhead,
interest and taxes, is impracticable. Thus, Statements of Net Assets Acquired
and Statements of Revenues and Direct Expenses have been prepared. The Financial
Statements have been derived from the accounting records of ABC Company using
historical results of operations and financial position and only present the net
assets acquired and the associated revenues and direct expenses, including
certain allocated expenses, of the Business. The net assets acquired include
legal entities transferred and assets specifically identified in the Purchase
Agreement. All significant intercompany accounts and transactions within the
Business have been eliminated.