INTERNATIONAL PRACTICES TASK FORCE — November 21, 2017
The Center for Audit Quality (CAQ) SEC Regulations Committee and its International Practices Task Force (the Task
Force) meet periodically with the staff of the SEC 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.
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I. Attendance
Task Force Members
Steven Jacobs, Chair (EY)
DJ Gannon, Vice-Chair (Deloitte)
Greg Bakeis (PwC)
Rich Davisson (RSM-US)
Jonathan Guthart (KPMG)
Kathleen Malone (Deloitte)
Alan Millings (EY)
Victor Oliveira (EY)
Ignacio Perez Zaldivar (Deloitte)
Scott Ruggiero (Grant Thornton)
Julie Valpey (BDO USA)
Observers
Craig Olinger (SEC staff)
Mark Green (SEC staff)
Bobby Klein (SEC staff)
Ryan Milne (SEC staff)
Mike Willis (SEC staff)
Annette Schumacher Barr (CAQ staff)
Guests
Julien Boucher (EY)
Guilaine Saroul (PwC)
Tom Young (KPMG)
II. Current Practice Issues
A. Use of General Instruction G accommodations upon making an unreserved statement of compliance with IFRS-IASB for the first time when Previous GAAP was substantially consistent with IFRS-IASB
Rule 3-05 of Regulation S-X and Item 17 of Forms S-4 and F-4 require registrants to
provide up to three years of financial statements of an acquired business or a target
company (depending on certain thresholds). When the acquired business or the target
company is foreign, the Task Force observed that financial statements using accounting
standards that are consistent or substantially consistent with IFRS-IASB (but that do not
assert compliance with IFRS-IASB) and audited under local auditing standards or ISAs
may already be available outside the US, sometimes publicly.
Forms S-4 and F-4 do not require the historical financial statements of target companies to
be audited (except for the most recent year) unless they were already audited. However, the
November 1, 2004 International Reporting and Disclosure Issues in the Division of
Corporation Finance states, “However, if financial statements of a non-reporting foreign
target have been previously audited using auditing standards other than US GAAS, and
those financial statements have been published for general distribution in the target's home
jurisdiction or elsewhere, the staff would generally expect financial statements to be
audited in accordance with US GAAS and included in the registration statement.”
Given the hardship in obtaining three years of financial statements re-audited under US
GAAS, the Task Force asked the SEC whether a company could rely on General
Instruction G to Form 20-F to omit the earliest of the three years if asserting compliance
with IFRS-IASB for the first time even if the previous GAAP was substantially similar to
IFRS-IASB. The SEC staff noted that it did not believe that foreign businesses could avail
themselves of the accommodations provided by General Instruction G (requirement to
present only the most recent year, the comparative year and the opening balance sheet of
the comparative year) upon making an unreserved statement of compliance with IFRSIASB
given they generally would have used already the IFRS1 accommodation available to
first-time adopters in their accounting framework that is substantially consistent with IFRSIASB.
The SEC staff encouraged companies to consult with the SEC staff with their facts and
circumstances to discuss whether relief from the US GAAS audit requirement would be
appropriate for the earliest of the three years in (1) Rule 3-05 financial statements or (2)
target company financial statements in an S-4 or F-4.
B. Adoption of IFRS in an interim period in relation to Regulation S-X, Rule 3-05 financial statements
FRM 6340.4 (which summarizes language included in General Instruction G.(f)(2) to
Form 20-F) provides guidance for an issuer changing the body of accounting standards
used to prepare its financial statements from a previous GAAP to IFRS. It indicates that “a
situation may arise in which the most recent annual financial statements are prepared
under previous GAAP and any interim financial statements might be prepared under IFRS.
Because the most recent annual and interim periods may not be comparable, financial
statements in transitional registration statements for first-time adopters may be prepared
under one of three options.” Further, as indicated in the 2005 Adopting Release “First-time
application of International Financial Reporting Standards,” the SEC confirmed that
it viewed the accommodations of General Instruction G to also apply to Regulation S-X,
Rule 3-05 financial statements of a foreign business. While the guidance in the FRM
specifically references an issuer, a foreign business whose financial statements are being
provided to satisfy Rule 3-05 of Regulation S-X could find itself in that same situation.
For example, a company may prepare local GAAP financial statements reconciled to US
GAAP for the three years ended December 31, 2016, and then transition to IFRS on
January 1, 2017. Accordingly, by June 30, 2017, this entity is no longer producing local
GAAP financial statements. If an acquirer is required to provide annual and interim
financial statements of this company under S-X 3-05, the same lack of comparability
exists as noted in the FRM example.
The Task Force inquired of the staff as to whether the guidance in FRM 6340.4 that is
applicable to an issuer (i.e. the three options of interim reporting for financial statements
in transitional registration statements for first-time adopters of IFRS) would also apply to
an entity preparing financial statements pursuant to S-X 3-05.
The staff noted that the three options in FRM 6340.4 also could be used to satisfy interim
financial statement requirements for an entity preparing financial statements pursuant to SX
3-05.
C. Application of New Securities Act Compliance and Disclosure Interpretations (C&DIs) to Foreign Private Issuers
On August 17, 2017, the SEC’s Division of Corporation Finance issued two
new Compliance and Disclosure Interpretations (C&DIs) that permit interim financial
information to be omitted from a draft registration statement submitted for
confidential/non-public review. Under the new guidance, an issuer that is not an EGC, but
that is permitted to submit draft registration statements for non-public review, may omit
from its draft registration statements interim financial information it reasonably believes
will not be required to be separately presented at the time it publicly files its registration
statement and an EGC may omit interim information from a confidential submission that it does not believe will be required at the time of the contemplated offering. In Securities
Act registration statements, FPIs must maintain timeliness of interim financial statements
by providing at least six months of comparative interim information for filings made or
declared effective nine months or more after year-end (Timeliness Requirements). If, at
the filing date of the document, the company has published interim financial information
that covers a more current period than those otherwise required to meet the Timeliness
Requirements, the more current interim financial information must be included or
incorporated by reference in the registration statement (pursuant to Form 20-F Item
8.A.5).
1) Interim financial statements to meet the Timeliness Requirements:
The Task Force inquired as to whether the SEC staff would object to a FPI omitting
interim financial statements from a draft registration statement where such interim
statements would be required to meet the timeliness requirements, if those financial
statements will be superseded by more recent interim financial statements for a
subsequent interim period in the first public filing at the issuer’s election.
As an example, assume a calendar year end FPI submits a draft registration statement
on October 15, and plans to either (i) complete the contemplated offering as an EGC,
or (ii) make its first public filing in December and voluntarily include comparative
interim financial statements for the nine months ended September 30 rather than June
30.
When the FPI submits the draft registration statement on October 15, its September
30 statements are not available, but it has passed September 30, the date when the
timeliness requirements applicable to FPIs would require financial statements for at
least the six months ended June 30. While the June 30 financial statements would be
required to be included if this was a public filing, they ultimately will not be included
in the first public filing given the FPI’s election to present September 30 financial
information.
The staff indicated that they would not object to a FPI omitting interim financial
statements from a draft registration statement where such interim statements would be
required to meet the timeliness requirements, if those financial statements will be
superseded by interim financial statements for a subsequent interim period no later
than the first public filing (such financial statements should be included as soon as
they are available). In relying on this relief, the staff would recommend registrants
submitting a transmittal letter laying out their timeline and what financial information
they are reasonably expecting to include in the public filing. Notwithstanding this
relief, the staff advised that voluntarily including interim periods in the draft
registration statement for periods that will be superseded in later amendments, if
available, helps facilitate the review process as it allows for any significant issues or questions that may be raised related to those periods to be addressed with the staff
and resolved earlier (e.g., adoption of a new accounting standard).
2) Current published interim information to meet the requirements under Item 8.A.5 of Form 20-F
The Task Force further inquired of the staff as to whether the SEC staff would object
to a FPI omitting more current published information under Item 8.A.5 of Form 20-F
from a draft registration statement (where such interim information would not be
required to meet the timeliness requirements for full interim financial statements), if
that financial information will be superseded by interim (or full year annual) financial
statements for a subsequent interim (or full year annual) period in the first public
filing.
For example, assume a calendar year end EGC or non-EGC FPI is public in a local
jurisdiction and raising capital in the United States for the first time. This FPI is
planning to submit its first draft registration statement on September 15 (i.e., no
interim financial statements required to meet timeliness). This FPI published interim
financial statements under IAS34 in the local territory for the six-month period ended
June 30. In its first public filing, the FPI intends to either include interim financial
information for the nine months ended September 30 as discussed above or annual
financial statements.
The staff indicated that it would not object to an FPI omitting more current published
information under Item 8.A.5 of Form 20-F from a draft registration statement (where
such interim information would not be required to meet the timeliness requirements
for full interim financial statements), if that financial information will be superseded
by interim financial statements for a subsequent interim or the full year annual period
financial statements. As discussed above, the staff would recommend that registrants
submit a transmittal letter laying out their timeline and what financial information
they are reasonably expecting to include in the public filing. The staff again
emphasized that, while not required, including more recent current published interim
financial information could facilitate more efficient staff review.
D. Update on XBRL Implementation for IFRS Filers
On March 1, 2017, the SEC published the XBRL IFRS Taxonomy for Foreign Private
Issuers That Prepare Their Financial Statements in Accordance with International
Financial Reporting Standards as Issued by the International Accounting Standards Board
(IFRS Taxonomy). The IFRS Taxonomy will allow foreign private issuers (FPIs)
preparing financial statements in accordance with IFRS to submit financial information in
interactive data format using XBRL.
Mike Willis and Mark Green provided an update on XBRL implementation for IFRS
filers, noting the following:
- XBRL interactive data is required to be included starting with the first annual reports on Form 20-F or 40-F for fiscal periods ending on or after December 15, 2017. FPIs may elect to begin submitting XBRL information immediately. The staff clarified that tagging is not required before that Form 20-F or 40-F is due or filed.
- If required financial statements physically contain information that is voluntarily provided, that information must be tagged.
- Disclosure physically outside of required financial statements is required to be tagged when, nonetheless, it is part of those financial statements (e.g., IFRS 7 disclosures would require tagging when physically presented outside a Form 20-F’s required financial statements where the required balance sheet specifically references these disclosures, notes their location elsewhere in the same filing and states that they form an integral part of the financial statements).
- The program to utilize Inline XBRL applies to IFRS filers as well as US GAAP filers.
More information regarding XBRL implementation issues for IFRS filers can be found in
the highlights of the May 16, 2017 IPTF Meeting.
E. Monitoring Inflation in Certain Countries
Previously, the Task Force has discussed inflation in certain countries in this meeting.
Since the last meeting, the Task Force has re-evaluated how best to communicate the
information. In connection with changes to the way that the information is documented, the
Task Force has concluded that it will no longer include this document as a component of
the semi-annual meeting with SEC staff, but rather it will generate a separate document to
summarize the inflation data collected by the members of the IPTF. This document will not
be reviewed by the SEC staff, however, the SEC staff has indicated that they are available
for consultation should an entity wish to seek preclearance on its conclusions in this area.
III. Next Meeting
The next meeting of the Task Force has been set for May 16, 2018.