SEC Material — Supplement — International Practices Task Force: May 25, 2022, Meeting Highlights

International Practices Task Force — May 25, 2022

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 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.

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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) 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) Joey Bailey (CAQ staff)	Cindy Williams (GT)

II. Staff and Task Force Announcements

The staff announced that Jill Davis has accepted a position in the Office of Chief Accountants (OCA) International Group. The Task Force thanked Jill for her many years of involvement with issues discussed by the IPTF. Tricia Armelin with Craig Olinger, Senior Advisor to the Chief Accountant and Melissa Rocha, Deputy Chief Accountant, will be the liaisons between the staff and the Task Force, and for Foreign Private Issuer (FPI) matters.

The Task Force noted that Julie Valpey will be retiring from BDO at the end of June; the Task Force thanked Julie for her years of service to the Task Force.

III. Applicability of FRM 2200.8 in a merger transaction on Form F-4 when the target is a non-accelerated domestic registrant

The Task Force and staff discussed a scenario in which an FPI (“F”) files an F-4 for the acquisition of a domestic registrant (“D”). Neither entity is a Special Purpose Acquisition Company (“SPAC”) or a shell company. Both entities have calendar year ends and D is a non-accelerated filer. The Task Force asked whether D would be required to update their financial statements to include the audited financial statements for the most recently completed year end if the registration statement will be filed/declared effective more than 45 days after D’s year end.

The Task Force noted that FRM 2200.8, which addresses the updating requirements for a target (both reporting and non-reporting target companies) in a merger transaction, refers only to Form S-4 and indicates that the targets determination is based on the registrant’s obligation to update under S-X 3-12 (with a cross reference to FRM 2045.5). The Task Force also considered the updating requirements in S-X 3-12(f) for an FPI which references to the requirements of Item 8A of Form 20-F. S-X 3-12(f) also notes that foreign business financial statements filed pursuant to Rules 3-05 and 3-09 may also apply the requirements of Item 8A of Form 20-F, but does not explicitly address target company financial statements. In addition, the Task Force also considered FRM 6220.4 which states that the age of financial statements requirements in Item 8 of Form 20-F apply to….(b) foreign target businesses required in a Form S-4 or F-4, but does not address this fact pattern where the target is not a foreign business in a Form F-4.

Item 17(a) of Form F-4 indicates that a company that is not F-3 eligible but is subject to reporting requirements under Section 13(a) or 15(d) should furnish the information that would be required if the securities of such entity were being registered. While the Task Force noted that D would be required to include audited financial statements for the most recently completed year in any registration statement it filed more than 45 days after its year end (unless it met the criteria under S-X 3-01(c)), the Task Force also considered whether updated interim financial information of a target which is more current than that of the registrant provides relevant information necessary for investors to make a decision. The Task Force noted that the registration statement will not include pro forma financial information for the more current period which may limit the relevance of the more current interim financial information of the target. As such, the Task Force would like to seek the staff’s views as to whether it is reasonable to apply FRM 2200.8 to Form F-4. As noted above, in accordance with S-K 512(f), F is not required to update its financial statements to include the most recently completed year end unless the filing is made more than 3 months after its year end. As such, if F were able to apply FRM 2200.8 to the financial statement requirements of its target, D would not be required to update its financial statements until the earlier of the filing of its 10-k or 3 months after its year end.

The Task Force noted that if the D was being acquired by a Domestic Registrant that met the criteria under 3-01(c), following the guidance of FRM 2200.8 they would not be required to update their financial statements to include the most recently completed fiscal year end until the earlier of 90 days after its year end or the date on which it files its 10-k.

While the fact pattern discussed involved a non-accelerated domestic registrant target, the Task Force asked whether the staff considers it appropriate to apply FRM 2200.8 to any target financial statements in an F-4, notwithstanding the statement in FRM 6220.4 which appears to limit the ability to apply Item 8 of Form 20-F to target foreign businesses.

The staff indicated it would consider the issue. In the interim, registrants are encouraged to consult with the staff with live fact patterns that mirror this scenario.

IV. Age of financial statements of an acquiree that is not a foreign business in the filing of a Foreign Private Issuer (FPI)

The Task Force observed that Item 4(b) of Form F-1, Item 5(b)(1) of Form F-3 and Item 10(c)(1) et al of Form F-4 require the inclusion of financial statements required by Rule 3-05 of Regulation S-X (“Rule 3-05”) for certain periods specified if consummation of a business acquisition has occurred or is probable during the most recent fiscal year or subsequent interim period for which a balance sheet is required or after the date of the most recent balance sheet filed. Rule 3-05(b)(2) requires financial statements of a business acquired to be filed for specific periods determined by using the conditions specified in the definition of “significant subsidiary” in Rule 1-02(w) of Regulation S-X.

The Task Force also observed that Section 6220.7(a) of the Division of Corporation Finance’s Financial Reporting Manual (“FRM”) provides that “financial statements of acquired and to be acquired foreign businesses required under S-X 3-05 must comply with the age of financial statement requirements at the time the registration statement is declared effective.”

When a domestic issuer acquires an entity that is a foreign business as defined by Rule 1-02(l) of Regulation S-X, the age of financial statements for the acquiree follow the guidance for a foreign private issuer - Item 8.A. of Form 20-F. When a domestic entity acquires an entity that is not a foreign business, the age of financial statements for the acquiree of a domestic issuer follow the guidance of a domestic issuer - Rule 3-12 of Regulation S-X (“Rule 3-12”). The guidance on age of financial statements is not clear when a foreign private issuer filing on foreign forms acquires an entity that is not a foreign business.

In evaluating this issue, the following considerations were also discussed:

The term foreign business was created in Securities Act Release No. 7118. When the Commission adopted the definition of a foreign business and provided various accommodations to a foreign business it was designed for the acquisition and investees of domestic issuers. The title of Securities Act Release No. 7118 was FINANCIAL STATEMENTS OF SIGNIFICANT FOREIGN EQUITY INVESTEES AND ACQUIRED FOREIGN BUSINESSES OF DOMESTIC ISSUERS AND FINANCIAL SCHEDULES. With respect to age of financial statements, the Release stated the following:

“Accordingly, under the amendments adopted today, the financial statements of significant foreign equity investees and acquired foreign businesses furnished in filings by domestic issuers can be updated on the same time schedule as foreign private issuers.”

Prior to the adoption of this rule, the age of financial statements of acquirees would follow the form on which they were included. That is, the financial statements of a foreign acquiree included in the filing of a domestic entity would follow the age of financial statements of a domestic issuer. In implementing this rule, it was intended to provide an accommodation for domestic issuers and allow them to update the financial statements for a defined class of companies using the age of financial statements for FPIs – Item 8.A. of Form 20-F. It would not appear the rule was designed to apply the inverse scenario – that is, it does not appear that the rule was intended to require financial statements of an acquiree that is not a foreign business to follow the age of financial statements of a domestic issuer in a filing by a foreign private issuer on foreign forms.

The Task Force noted that:

Item 8.A of Form 20-F that addresses age of financial statements would not require the company to follow the guidance in Rule 3-12.
Rule 3-12(f) states: “Any foreign private issuer may file financial statements whose age is specified in Item 8.A. of Form 20-F.” It does not specify the nature of those statements – i.e., 3-01, 3-05, 3-09, 3-10, etc. It simply states follow Item 8.A. of Form 20-F.
If an FPI was required to follow the age of financial statements for a domestic issuer for a business that is not a foreign business – Rule 3-12 and not Item 8.A. of Form 20-F – the financial statements of acquiree would be updated on a more current basis than the financial statements of the registrant.

Given these considerations, the Task Force asked the staff whether the term foreign business as defined by Rule 1-02(l) of Regulation S-X applies to a filing by an FPI filing on foreign forms. Specifically, if an FPI acquires an entity that is not a foreign business, do the age of financial statements of that entity need to comply with Rule 3-12 or Item 8.A. of Form 20-F?

The staff indicated it would consider the issue. In the interim, registrants are encouraged to consult with the staff with live fact patterns that mirror this scenario.

V. Can FPI's apply FRM 1370 as a basis for preparing a combined annual report on Form 20-F?

The Task Force observed that FRM 1370 addresses combined reporting of parent/subsidiary in a Form 10-K and 10-Q. The Task Force noted the following C&DI:

Question 110.06

Question: May a wholly-owned subsidiary of a foreign private issuer omit certain information from its Form 20-F annual report in the same manner that a wholly-owned subsidiary required to file a Form 10-K may omit information if it meets the requirements set forth in General Instruction I to that form?

Answer: Yes, so long as the registrant includes a prominent statement on the cover page of the Form 20-F that it meets the conditions set forth in General Instruction I(1)(a) and (b) to Form 10-K and is therefore filing the form with the reduced disclosure format. If so, the registrant may omit comparable information enumerated in General Instruction I(2) that would apply to a foreign private issuer filing on Form 20-F. Specifically, the registrant may omit the following:

information required by Item 3.A, Selected financial data, and Item 5, Operating and Financial Review and Prospects, subject to the same disclosure requirements in General Instruction I(2)(a) to Form 10-K;
the list of subsidiaries exhibit required by Item 8 of Instructions as to Exhibits;
information required by Item 6.A, Directors and Senior Management, Item 6.B, Compensation, 6.D, Employees, Item 6.E, Share Ownership, Item 7, Major Shareholders and Related Party Transactions, Item 16A, Audit Committee Financial Expert, and Item 16B, Code of Ethics; and
information required by Item 4, Information on the Company, subject to the same disclosure requirements in General Instruction I(2)(d) to Form 10-K.

The Task Force asked whether, given the C&DI enables a wholly-owned subsidiary registrant of an FPI to omit certain information from its 20-F by reference to the instructions in Form 10-K, the FPI and its wholly-owned subsidiary could apply the guidance in FRM 1370 and file a combined 20-F for both entities. The staff indicated it would not object to an FPI in this scenario filing a combined 20-F for both entities.

VI. Can financial statements of foreign target in a F-4 be reconciled to IFRS/IASB?

In the Release Amendments to Financial Disclosures about Acquired and Disposed Businesses (33-10786), the Commission modified Rule 3-05(c) of Regulation S-X to allow FPIs that prepare their financial statements using IFRS-IASB to present financial statements of an acquired foreign business prepared using home country GAAP with a reconciliation to IFRS-IASB rather than to U.S. GAAP. Further, Rule 3-05(d) of Regulation S-X 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-IASB without reconciliation or to present home country GAAP financial statements reconciled to IFRS-IASB if the registrant is an FPI that prepares its financial statements using IFRS-IASB.

Assuming it meets the significance tests under Rule 1-02(w) of Regulation S-X, financial statements of a target company that is a foreign private issuer included in a F-4 would also be required under Rule 3-05 of Regulation S-X in a F-3/F-1 as an acquired or probable acquisition. Assuming the registrant prepares its financial statements under IFRS-IASB, financial statements of the acquired business under Rule 3-05 of Regulation S-X using home country GAAP could be reconciled to IFRS-IASB – and not to US GAAP.

Given these considerations, the Task Force asked the staff the following question: If the Registrant prepares its financial statements using IFRS-IASB would the staff object to financial statements of a target, which does not constitute a predecessor, in a Form F-4 that is prepared using home country GAAP reconciling to IFRS-IASB?

The staff indicated that Securities Act Release No. 10786 did not address this situation; therefore, the requirement is reconciliation to US GAAP. However, registrants may consider requesting a waiver from the staff to accept a reconciliation to IFRS-IASB in lieu of a reconciliation to US GAAP should an IFRS reconciliation be deemed more meaningful to investors. In a request for a waiver, registrants should explain why they believe an IFRS reconciliation is more meaningful and address whether the filings contain other GAAP information and if the target can readily prepare a GAAP reconciliation.

VII. Observations regarding “China-related” comment letters

The Task Force and staff briefly shared observations regarding China-related comment letters. Registrants are encouraged to consider the disclosures outlined in the Sample Letter to China-Based Companies issued by the staff on December 20, 2021.