November 17, 2015, Joint Meeting Highlights

Registrants are responsible for monitoring inflation in countries in which they have operations. Application of “highly-inflationary” accounting as defined by ASC 830 is a judgment to be made by the financial statement preparer. The approach and the related assumptions used to monitor country inflation rates are described below. Under ASC paragraph 830-10-45-12, the determination of a highly-inflationary economy begins by calculating the cumulative inflation rate for the three-year period that precedes the beginning of the reporting period, including interim reporting periods. If that calculation results in a cumulative inflation rate in excess of 100%, the economy should be considered highly-inflationary in all instances. However, if that calculation results in the cumulative rate being less than 100%, historical inflation rate trends and other pertinent factors should be considered.

The Task Force discussed three-year cumulative inflation rates for certain countries. Countries were categorized as follows:

1. Countries with three-year cumulative inflation rates exceeding 100%
2. Countries where the three-year cumulative inflation rates had exceeded 100% in recent years
3. Countries (a) with three-year cumulative inflation rates between 70% and 100%; (b) where the last known three-year cumulative inflation rates previously exceeded 100% and current actual inflation data has not been obtained; or (c) with a significant increase in inflation during the current period

For all countries, data is extracted from the International Monetary Fund ("IMF") website. IMF data is extracted from www.imf.org as follows:

On the home page, select the "Data and Statistics" tab and then click:

• "World Economic Outlook Databases (WEO)" link
  • Select the most recent database (October, 2015)
    • Select "By Countries (country-level data)"
      • Select "All Countries", then click the "continue" button.
        • Under the “Monetary” subject header, select "Inflation”, end of period consumer prices" (both the index and percent change); then click the "continue" button.
          • Select a date range (e.g., 2011-2015); click "prepare report" and a table is produced with the data; click the "download" link to export to excel. The data table includes the actual and estimated end of period price indices for each country.

The IMF World Economic Outlook (“WEO”) report estimates inflation when actual inflation data has not been obtained. The text of the report describes the assumptions and conventions used for the projections in the WEO. The data that are estimated are highlighted. While the IMF data has limitations (projected inflation data and varying dates through which actual data is included in the table), the calculated three-year cumulative inflation allows us to determine which country’s calculations require further analysis.

Using the downloaded table, the three-year cumulative inflation rate is calculated as follows (assuming the current year is end of year 2015): (2015 End of Year CPI– 2012 End of Year CPI) / 2012 End of Year CPI.

It should be noted that the IMF inflation data used to summarize inflation for these IPTF Highlights could be different from the inflation data reported by the respective countries’ central banks or governments. The Task Force has not performed procedures to identify any potential differences. Accordingly, this summarized IMF information should be supplemented, to the extent considered necessary, with other pertinent information that may be available.

For registrants that need additional information to monitor inflation for operations in certain countries, it should be noted that annual or month-end CPI information can be obtained from some countries’ central bank or government websites or other publicly available information but that data may differ from the inflation data reported by the IMF and may need to be converted because of differences in presentation or other reasons (for example, some countries have reset their base index back to 100 during recent years). While inflation data published by a central bank or government is often more current than the IMF data, each country releases its inflation data at different times and inflation data for some countries may not be otherwise publicly available.

The following information, based on the WEO Database – October, 2015, is provided to assist registrants in applying the US GAAP guidance in determining which countries are considered highly-inflationary:

1. Countries with three-year cumulative inflation rates exceeding 100%
   • Malawi – The three-year cumulative inflation rate for Malawi was 106% for 2014 and is projected to be 82% by the end of 2015.
     As indicated in the May 2015 IPTF Highlights, based on these inflation rates and discussions with the staff, registrants should treat the economy of Malawi as highly-inflationary beginning on or after January 1, 2015. Registrants that have already issued financial statements for interim periods beginning on or after January 1, 2015 which do not reflect the economy of Malawi as highly-inflationary are encouraged to discuss their facts and circumstances with the SEC staff to the extent a change to highly inflationary would be material.
     The staff would expect registrants to monitor Malawi's reported inflation data and consider other pertinent economic indicators to determine when it is appropriate to cease treating the economy as highly-inflationary.
   • Venezuela— The three-year cumulative inflation rate for Venezuela was estimated to be 216% for 2014 and the three-year cumulative inflation rate at the end of 2015 is projected to be 663%.
     Based on these inflation rates and discussions with the staff, registrants should continue to treat the economy of Venezuela as highly-inflationary.
   • Sudan – According to the WEO report, Sudan’s cumulative three year inflation rate was 158% at the end of 2014 and is projected to be 106% by the end of 2015. Sudan’s data excludes South Sudan after July 9, 2011.
     Based on these inflation rates and discussions with the staff, registrants should continue to treat the economy of Sudan as highly-inflationary.
2. Countries where the three-year cumulative inflation rates had exceeded 100% in recent years
   • Belarus – The three-year cumulative rate as of the end of 2014 was 65% and is projected to be 58% by the end of 2015.
     As indicated in the May 2015 IPTF Highlights, based on these inflation rates and discussions with the staff, registrants should cease treating the economy of Belarus as highly-inflationary no later than the first reporting period beginning on or after July 1, 2015.
   • Islamic Republic of Iran – The three year cumulative inflation rate, using the data in the WEO Report was 96% as of the end of 2014 and is projected to be 59% by the end of 2015.
     Based on these inflation rates and discussions with the staff, registrants should continue to treat the economy of Islamic Republic of Iran as highly-inflationary.
     The staff would expect registrants to monitor the Islamic Republic of Iran's reported inflation data and consider other pertinent economic indicators to determine when it is appropriate to cease treating the economy as highly-inflationary.
   • South Sudan
     South Sudan's three-year cumulative inflation rate through the end of 2014 was calculated to be 26%, based on the reported index data in the WEO Report. The three-year cumulative inflation rate is projected to be 25% by the end of 2015.
     As indicated in the May 2014 IPTF Highlights based on these inflation rates and discussions with the staff, registrants should cease treating the economy of South Sudan as highly-inflationary as soon as practicable, but no later than the first reporting period beginning on or after April 1, 2014.
3. Countries (a) with projected three-year cumulative inflation rates between 70% and 100%; (b) where the last known three-year cumulative inflation rates previously exceeded 100% and current actual inflation data has not been obtained; or (c) with a significant increase in inflation during the current period
   1. Countries with projected three-year cumulative inflation rates between 70% and 100%
      Ukraine - The three-year cumulative inflation rate for Ukraine was 25% for 2014 and is projected to be 83% by the end of 2015.
      The staff would expect registrants to monitor Ukraine's reported inflation data and consider other pertinent economic indicators to determine if Ukraine should be considered a highly-inflationary economy.
   2. Countries where the last known three-year cumulative inflation rates previously exceeded 100% and current actual inflation data has not been obtained
      None.
   3. (c) Countries with a significant increase in estimated inflation during 2015
      None, other than countries already discussed above.

The SEC staff confirmed that, for a merger transaction, they consider the shareholder approval date to be the end of the period that the offer is outstanding, as the investing decision is made at such date, whereby the acquiree shareholder will be entitled to receive shares of the acquirer when the transaction closes. Accordingly, the requirement to keep current the financial statements in an F-4 business combination effected through a merger applies only through the shareholder approval date, and does not extend through the consummation date of the merger or termination date for the mechanical process of exchanging share certificates after the closing.

The guidance in Section 6360.1 of the Division of Corporation Finance Financial Reporting Manual states that the “…S-X Article 11 pro formas are based on the accounting used by the issuer.” While this position is easily understood in forward acquisitions, its application can become more challenging to understand in reverse acquisitions when the legal acquirer and target each use a different basis of accounting (GAAP).

The SEC staff and Task Force discussed whether it would be appropriate or required for pro forma financial information to be prepared based upon the GAAP of the accounting acquirer (i.e. non-issuer) rather than the issuer in a reverse acquisition.

The SEC staff acknowledged that FRM 6360.1 was not written in contemplation of reverse acquisitions; therefore it may be appropriate to consider other factors in determining the basis of accounting (i.e., whether to use the legal acquiror’s GAAP, or that of the accounting acquiror, if different) for the pro forma financial information in a reverse acquisition transaction. For example, it may be appropriate to consider the basis of accounting to be used by the combined entity subsequent to the merger and on an ongoing basis. This could be impacted by whether the issuer would qualify as a foreign private issuer after the transaction and for the foreseeable future. If the business combination requires shareholder voting, companies should also consider the needs of the respective shareholder groups so they may sufficiently understand the impact of the transaction. In addition, home country regulatory requirements may also present perspectives that may need to be considered. The SEC staff indicated that there are no single set of considerations to make the determination; individual facts and circumstances should drive the conclusion. In some situations, multiple pro forma presentations on both bases of accounting may be appropriate. Companies are invited to consult with the SEC staff if there are complexities in evaluating the appropriate basis of accounting to use for the pro forma financial information in a reverse acquisition.

As discussed at the November 2009 IPTF meeting, when “more current interim financial information” is provided on the basis of IFRS as issued by the IASB (IFRS-IASB), including when it indicates compliance with IAS 34, it is not considered “interim financial statements provided to meet timeliness requirements” that would trigger the updating requirements of MD&A (OFR), or any pro forma information in the registration statement.

The Task Force noted that this issue, as it relates to “more current interim financial information” provided on the basis of U.S. GAAP, has not been recently discussed with the SEC staff. The following was noted:

The April 2007 IPTF Highlights include a discussion of the SEC staff’s views that when an FPI provides more recent interim information that is reconciled to U.S. GAAP, absent a waiver in circumstances involving hardship, it is necessary to provide the comparative period, reconciled to U.S. GAAP, and that the current and comparative interim period would need to be accompanied by MD&A (OFR) and any pro forma information would need to be updated to that date. An excerpt of the SEC staff’s rationale for this view is:

The Task Force observed that the SEC staff has previously considered “more current interim financial information” that consists of a full set of interim financial statements that complies with U.S. GAAP and S-X Article 10 to be “interim financial statements provided to meet timeliness requirements” that would trigger the updating requirements of MD&A (OFR), and any pro forma information in a registration statement, on the basis that providing such information is “targeting” US investors. For FPIs reporting under IFRS-IASB, when “more current interim financial information” constitutes a full set of interim financial statements that complies with IAS 34, such information would not be considered “interim financial statements provided to meet timeliness requirements” for purposes of updating MD&A (OFR) and any pro forma information, on the basis that it is not “targeting” US investors.

The concept of “targeting US investors” appears to be less relevant now than it was in the past, when FPIs often provided financial information under home country GAAP reconciled to U.S. GAAP. Accordingly, the SEC staff indicated an FPI that provides “more current interim financial information” that constitutes a full set of interim financial statements under either U.S. GAAP or IFRS-IASB would not need to consider such information “interim financial statements provided to meet timeliness requirements" for purposes of updating the MD&A (OFR) and any pro forma information in a registration statement.

As outlined in the CAQ’s SEC Regulations Committee September 23, 2014 highlights, at a recent meeting of the Financial Accounting Standards Advisory Council (FASAC), the SEC staff stated that they will not object if registrants that apply the new revenue recognition standard retrospectively only apply it in their selected financial data tables to the periods covered by the financial statements. Further, the SEC staff indicated that if the earlier years in the selected financial data table are not retrospectively adjusted, registrants must clearly disclose that fact.

The SEC staff confirmed that they will not object if foreign private issuers that apply the new revenue recognition standard retrospectively (under either U.S. GAAP or IFRS-IASB) only apply it in their selected financial data tables to the periods covered by the financial statements. The SEC staff reiterated that if the earlier years in the selected financial data table are not retrospectively adjusted, registrants must clearly disclose that fact. Further, FPIs who desire to follow this approach will not need to demonstrate “unreasonable cost or expense” under Item 3 of Form 20-F in order to avail themselves of the accommodation.

Finally, similar to the position outlined at the CAQ’s SEC Regulations Committee meeting on October 21, 2015, the SEC staff will not object if FPIs that apply the new revenue standard retrospectively only apply it in the preparation of the ratio of earnings to fixed charges to the periods covered by the financial statements.