International Practices Task Force — November 19, 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
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technical literature. These highlights do not purport to be applicable or sufficient
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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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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)
Victor Oliveira (EY)
Ignacio Perez Zaldivar (Deloitte)
Scott Ruggiero (Grant Thornton)
Guilaine Saroul (PwC)
Observers
SEC staff from the Division of Corporation Finance
Annette Schumacher Barr (CAQ staff)
Carolyn Hall (CAQ staff)
Guests
David Oldham (KPMG)
Mike Hottel (BDO)
II. Transition to FPI status of a foreign public shell immediately upon its reverse merger with a foreign operating company and basis of accounting reported by the operating company in conjunction with the transaction
In December 2008, the SEC adopted Foreign Issuer Reporting Enhancements, which
mandated that SEC registrants with periodic reporting obligations test and
establish foreign private issuer (FPI) status only once a year - on the last
business day of their second fiscal quarter (that is, on the “determination
date”). The purpose of creating the FPI annual determination date was to avoid
the former continuous testing requirement which was viewed as burdensome to
FPIs. In contrast, determining FPI status during an Initial Public Offering
(IPO) registration could take place within 30 days of filing the IPO
registration statement (Rule 405 under the Securities Act and Exchange Act Rule
3b-4).
Sections 6410.2.d and 6410.4, Backdoor listings by foreign companies, of
the Division of CorporationFinance Financial Reporting Manual (FRM)
states a foreign operating company merging with a US public shell shall
provide US GAAP financial statements given that the public shell is a US legal
entity, and hence, could not be considered an FPI and the operating company
succeeds into the SEC reporting obligations of the US public shell upon
completion of the reverse merger.
However, in certain transactions, the public shell company is a foreign-domiciled
entity with predominantly US shareholders and therefore, does not meet the FPI
status as of its last determination date. In addition, the foreign operating
company has readily available audited financial statements prepared under IFRS
as issued by the IASB (IFRS-IASB). Immediately upon the merger of the two
entities, the combined company may now meet the FPI criteria, as a result of
shareholder composition and/or its foreign nexus, however, it must wait until
its next “determination date” to obtain the FPI status.
In many of these transactions, the merged entity may be able to ascertain before
the next determination date whether it would qualify as an FPI or not at that
date. Given the guidance from FRM 6410 discussed above, when the shell company
is not a FPI, the foreign operating company may not use IFRS-IASB for purposes
of the financial reporting of the operating company in either the Form
S-4/merger proxy or Form 8-K (“Super 8-K”) reporting the merger. The foreign
operating company presents financial statements in accordance with US GAAP and
reports as a U.S. issuer Then upon the next determination date, if the
registrant obtains FPI status it would be able to convert to IFRS-IASB and
investors may only have US GAAP financial statements for a short period, i.e.
the Form S-4/proxy, Super 8-K and any periodic reports prior to the next
determination date.
The Super 8-K or “Super 20-F”should provide the same information for the foreign
operating company as would be required in an initial registration statement on
Form 10 or Form 20-F. Based on this observation the Task Force asked whether the
SEC staff would permit a foreign operating company merging with a
foreign-domiciled public shell, that does not meet FPI status at time of
transaction, to re- determine its FPI status either: (a) immediately upon
completing a reverse merger/recapitalization or (b) 30 days prior to the reverse
merger consistent with the determination for an initial registration
statement.
The staff observed that the answer to this question involves a legal
determination regarding the FPIstatus of the entity and facts specific to the
transaction. The staff in the Office of International Corporate Finance (OICF)
is aware that this is a fact pattern in the SPAC market.
III. Impact on updating schedules such as Schedule 12-28 (real estate) for the application of IAS 29
Rule 12-28 of Regulation S-X requires certain real estate companies to provide a
schedule detailing realestate and accumulated depreciation amounts. This
includes providing the initial costs to the company and costs capitalized
subsequent to acquisition. IAS 29, FinancialReporting in Hyperinflationary
Economies, requires entities to apply the standard from the beginning of
the period in which the existence of hyper-inflation is identified.
The Task Force asked whether the staff would expect that all schedule information
also be restated forthe application of IAS 29 in the first filing (e.g., Form
20-F) where the financial statements are presented under IAS 29.
Thestaff indicated that they would expect the schedule information to conform to
the basis of presentation of the financial statements and related notes.
Registrants may consult with the staff if they believe providing this
information presents a hardship.
IV. Next meeting
The next meeting of the Task Force has been set for May 19, 2020.