SEC Material – Supplement — International Practices Task Force: November 10, 2020, Meeting Highlights

International Practices Task Force — November 10, 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 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subsequent issuance of technical pronouncements or positions taken by the SEC staff, nor are they deleted when they are superseded by the issuance of subsequent highlights or authoritative accounting or auditing literature.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)

Timothy Brown (KPMG)

Rich Davisson (RSM-US)

Steven Jacobs (EY)

Grace Li (BDO)

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

Annette Schumacher Barr (CAQ staff)

Carolyn Hall (CAQ staff)

II. SPACs and pro forma presentation – Updating requirements when more recent information is released by a domestic SPAC, but not the to-be-acquired foreign operating entity

The Task Force and staff discussed a scenario in which a foreign operating company with a March 31 year\u0002end was in the process of being acquired by a calendar year-end SPAC (a domestic registrant) prior to the consummation of the reorganization. In this scenario, a foreign holdco (a shell company) was formed to effect the “de-SPAC” transaction by concurrently acquiring the SPAC and the operating entity. The holdco is the registrant filing the F-4 and is filing all documents under the foreign private issuer (FPI) forms. The combined company will qualify as an FPI after the consummation of the merger. The financial information available in the F-4 is the following:

Initial Presentation

Operating foreign entity - Annual financial statements through March 31, 2020 SPAC - Annual Financial statements through December 31, 2019 and Q1 interim financial statements through March 31, 2020

Most Recent Information Available for Future F-4 or F-1 Filings

Operating foreign entity - Annual financial statements through March 31, 2020 SPAC - Interim financial statements through June 30, 2020 (filed on Form 10-Q)

SEC FRM 6220.8 (see below) contains guidance on the requirement to update the Article 11 proforma financial statements in this circumstance. (Section 6360 contains additional guidance on preparation of pro forma financial information.)

6220.8 Age of Pro Formas in Cross-border Business Combinations

1. The age of the pro forma financial information included in a registration statement is 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 U.S. domestic registrant, the age of the pro forma information may be determined by reference to Item 8 of Form 20-F. By contrast, if a U.S. 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 S-X 3-12.

2. Application of the age of financial statement rules may require the foreign target company to include in a Form S-4 a period in the pro forma information that would be more current than its separate historical financial statements. However, S-X Article 11 permits the ending date of the periods included for the target company to differ from those of the registrant by up to 93 days.1 Registrants are permitted to use combinations of periods that involve overlaps or gaps in the information of the target company of up to 93 days, provided that the resulting annual and interim periods are of the same length required for the registrant, and there are no overlaps or gaps in the registrant’s information. However, registrants are not permitted to omit an interim pro forma presentation because of different fiscal periods.

The Task Force discussed with the SEC staff whether, considering the transaction is filed using the FPI F\u0002forms and the registrant/combined company will qualify as an FPI after the transaction, and based on the guidance above, the periods required for the pro forma financial information should align with the historical financial statement periods of the foreign entity (i.e., annual period ended March 31, 2020 only) based on the application of the age of financial statement rules for FPIs.

The staff indicated that Article 11 pro forma financial statements should follow the age of the financial statement requirements for the registrant, which in this case is the foreign holding company. The staff added that there may be unique circumstances relating to pro forma presentations (e.g., reverse acquisitions) in which the legal and accounting acquirer are subject to different reporting requirements or have different fiscal year ends. In these cases, registrants are encouraged to consult the staff.

The staff is considering various reporting questions relating to SPACs and a registrant may discuss their live fact pattern with the staff in the Division’s Office of International Corporate Finance.

III. IFRS reconciliation under Rule 3-05

The Task Force and staff discussed the recent Amendments to Financial Disclosures about Acquired and Disposed Businesses (Final Rule Release), including changesto Rule 3-05(c) which enable FPIsthat 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 U.S. 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-IASB without reconciliation or to present home country GAAP financial statements reconciled to IFRS-IASB if the acquiring registrant is an FPI that prepares its financial statements using IFRS-IASB.

The final rule states:

In response to comments, we are adopting two additional modifications to the proposed amendments to clarify that:

IFRS 1, First-time Adoption of IFRS, will be applicable when reconciling to IFRS-IASB; and
Form 20-F accommodations that are inconsistent with IFRS-IASB will not be available when reconciling to IFRS-IASB.

We believe it is appropriate to specify that IFRS 1 will be applicable when reconciling Rule 3-05 Financial Statements to IFRS-IASB, because a business that is reconciling to IFRS-IASB for the first time will face many of the same challenges in determining the relevant financial statement amounts as it would if it were directly presenting its financial statements under IFRS-IASB for the first time. Similarly, we believe it is appropriate to specify that Form 20-F accommodations that are inconsistent with IFRS-IASB will not be available when reconciling to IFRS-IASB. These accommodations, such as to not remove the effects of inflation accounting when the conditions of IAS 29 are not met or to not reconcile the effects of proportionate consolidation in joint ventures, were adopted in the context of reconciling to U.S. GAAP rather than IFRS-IASB. They were also adopted when the range of accounting practices around the world was wider than it is today and before IFRS-IASB was established in its current form. We believe that use of accommodations that are inconsistent with IFRS-IASB would not result in sufficient information for investors in this context.

The Task Force noted that considering the specific guidance in IFRS 1, there may be practical issues in reconciling to IFRS-IASB. Examples include, but are not limited to, determining the transition date under IFRS 1 and determining the form of the reconciliation.

The Task Force asked the SEC staff whether the objective of the amended Rule 3-05 (c) is to permit a reconciliation to IFRS using IFRS 1 that would be similar to the previous reconciliations to U.S. GAAP under Item 17 of Form 20-F.

The staff indicated that the intent of the reconciliation to IFRS under Rule 3-05 was to be similar to the form and content of what is required under Item 17 of Form 20-F.

IV. Other Application of Reconciliation to IFRS

As a result of the issuance of the Amendments to Financial Disclosures about Acquired and Disposed Businesses (Final Rule Release), Regulation S-X Rule 3-05(c) and (d) now provide for the reconciliation to IFRS-IASB in certain limited circumstances. Historically, other situations have arisen where the presentation of a reconciliation to IFRS-IASB (as opposed to U.S. GAAP) may appear to provide more useful information to the users of the financial statements. Now that a limited basis under which this reconciliation may be made to IFRS-IASB has been established, it may be appropriate to consider the merits of a reconciliation to IFRS-IASB in certain other circumstances.

The Task Force and staff discussed a situation in which an FPI reports on Form 20-F using IFRS-IASB, but reports interim results locally using home country GAAP. If the registrant was furnishing a Form 6-K with interim financial information solely because it has been issued locally (such information was not required to meet the age of financial statement requirements in a registration statement) in accordance with Instruction 3(a) and 3(b) to Item 8.A.5 of Form 20-F, the FPI would be required to provide a description of material differences between home country GAAP and U.S. GAAP applicable to those financial statements and quantify material differences. The users of these financialstatements do not receive or use U.S. GAAP information at any other time or for any other reason. However, a reconciliation to IFRS-IASB would provide the users of the financial statements relevant information with which to evaluate the interim financial statements on a comparable basis to those included in the Form 20-F.

The staff indicated that the changes in the Rule 3-05 rulemaking are not intended to be applied by analogy to other fact patterns or requirements. However, registrants who believe that it is more meaningful to reconcile local GAAP information to IFRS-IASB in the example provided may reach out to the staff to discuss their facts and circumstances.

V. Compliance with IAS 34 if comparative period information is not included

Amended Rule 3-05(b)(2) reduced the maximum number of years for which audited financial statements are required under Rule 3-05 from three years to two. It also eliminated the requirement to provide financial statements for a comparative interim period when only one year of audited annual financial statements is required under Rule 3-05. Like IAS 1, Presentation of Financial Statements, IAS 34, requires comparative information when interim financial statements are presented.

If only the most recent period is presented for the interim financial statements under IAS 34, without the prior comparative period, the basis of preparation disclosures in those interim financial statements would include a compliance statement under IAS 34, and would be required to indicate an exception for the lack of the comparative information. In addition, if a review report by the auditor is issued and included in an SEC filing, it would need to be qualified for the lack of comparative information.

The Task Force discussed with the SEC staff whether in this fact pattern it would be appropriate for an issuer and its auditors to follow a similar approach and wording discussed at the May 2019 meeting relating to annual financial statements lacking a comparative period under IAS 1 and whether the staff would object to such exceptions/qualifications for interim financial statements.

The staff indicated that they would not object to such an approach.

VI. Disclosure Requirements for interim financial statements of FPIs under the amendments to S-X Rule 3-10

The Task Force and staff discussed a scenario in which a calendar year end FPI that reports using IFRS-IASB had applied amended S-X 3-10 and 13-01 in their annual report on Form 20-F for the year ended 20X0. The FPI intends to issue guaranteed debt using an existing effective shelf registration in October 20X1. Regulation S-K Item 512(a)(4) requires an FPI to maintain timeliness of financial statements (by reference to Item 8A of Form 20-F) at the start of a delayed or continuous offering, which results in timeliness required at the date of take-down on Form F-3.

The Task Force asked the SEC staff whether an FPI that already has applied the final amendments to Rules 3-10 and 13-01 under Regulation S-X in an annual report on Form 20-F (or a registration statement) would be required to include the summarized financial information in a Form 6-K filed to update financial statements in a delayed or continuous offering.

The staff noted that Rule 3-10 requires inclusion of Rule 13-01 disclosures as a condition to omitting the separate financial statements of subsidiary issuers and guarantors. Therefore, registrants with this fact pattern would be required to include updated unaudited interim summarized financial information to meet timeliness requirements, regardless of whether the previously provided annual summarized information was included within the financial statements (audited) or in other parts of the Form 20-F (unaudited).

VII. Impact of Regulation S-K Item 105 on a Form 20-F that is incorporated into Forms F-1, F-3, or F-4

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 Regulation S-K Item 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 Regulation S-K Item 105. While Form 20-F requires disclosure of risk factors under Part I, Item 3(D), it does not specifically refer to Regulation S-K Item 105.

Note 12

The final amendments to Items 101 and 103 will affect only domestic registrants and “foreign private issuers” that have elected to file on domestic forms subject to Regulation S-K disclosure requirements. Regulation S-K does not apply to foreign private issuers unless a form reserved for foreign private issuers (such as Securities Act Form F-1, F-3, or F-4) specifically refers to Regulation S-K. Form 20-F is the combined registration statement and annual report form used by foreign private issuers under the Exchange Act. It also sets forth certain disclosure requirements for registration statements filed by foreign private issuers under the Securities Act. Instead of Items 101 and 103, the foreign private issuer forms refer to Part I, Item 4 and Item 8.A.7., respectively, of Form 20-F. In contrast, the amendment to Item 105 will affect both domestic and foreign registrants because Forms F-1, F-3, and F-4, like their domestic counterparts, all refer to that Item. See, e.g., Item 3 of Form F-1. A foreign private issuer is any foreign issuer other than a foreign government, except for an issuer that (1) has more than 50% of its outstanding voting securities held of record by U.S. residents; and (2) any of the following: (i) a majority of its officers and directors are citizens or residents of the United States; (ii) more than 50% of its assets are located in the United States; or (iii) its business is principally administered in the United States. See Securities Act Rule 405 [17 CFR 230.405] and Exchange Act Rule 3b-4(c) [CFR 240.3b-4(c)]

The Task Force asked the SEC staff whether the amendments to Regulation S-K Item 105 have any impact to an already-filed Form 20-F that is incorporated into Forms F-1, F-3, or F-4 filed after the effective date of the new rules.

The staff indicated that while there would be no impact on the Form 20-F, registration statements would be impacted, and as such, registration statements on Forms F-1, F-3 and F-4 filed on or after November 9, 2020 need to be updated to comply with amended Regulation S-K Item 105. If a new annual report on Form 20-F is filed on or after November 9 and incorporated into a shelf existing registration statement that was declared effective prior to the new rules, the form would also need to comply with new Item 105 given it is deemed to be an update to the registration statement under Section 10(a)(3) of the Securities Act.

VIII. Next meeting

The next meeting of the Task Force has been set for Wednesday, May 19.

Footnotes

S-X 11-02(c)(3) was changed to “within one fiscal quarter” in the May 2020 revisions to Article 11. The FRM has not yet been updated for this amendment.