SEC Material — Supplement — International Practices Task Force: November 9, 2022, Meeting Highlights

International Practices Task Force — November 9, 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.

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subsequent issuance of technical pronouncements or positions taken by the SEC staff, nor are they deleted when they are superseded by the issuance of subsequent highlights or authoritative accounting or auditing literature.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	Observers	Guests
Timothy Brown, Chair (KPMG) Scott Ruggiero, Vice-Chair (GT) Renaud Cambet (KPMG) Wayne Carnall (PwC) Rich Davisson (RSM-US) Adam Dufour (EY) Steven Jacobs (EY) Grace Li (BDO) Kathleen Malone (Deloitte) Ignacio Perez Zaldivar (Deloitte) Guilaine Saroul (PwC)	SEC staff from the Division of Corporation Finance and Office of the Chief Accountant Annette Schumacher Barr (CAQ staff) Erin Cromwell (CAQ staff)	Cindy Williams (GT)

II. IFRS 17 Implementation Considerations

In December 2021, the AICPA Insurance Expert Panel (IEP) met with the SEC staff and asked for guidance on the transition date for ASU 2018-12: Targeted Improvements to Long-Duration Contracts (new ASU) when a new registration statement is filed in the year of adoption. At that meeting, a fact pattern was discussed as to whether the issuance of recasted financial statements in connection with a registration statement after adoption in an interim period could impact the date of initial application. Subsequent to the meeting, the SEC staff provided the following response:

The reissuance of the financial statements in Form S-3 accelerates the requirements to provide the financial statements for the years ended December 31, 2022 and 2021, with retroactive application, but it does not change the transition date of the accounting standard.

Appendix C of IFRS 17 states the following:

An entity shall apply IFRS 17 for annual reporting periods beginning on or after 1 January 2023. If an entity applies IFRS 17 earlier, it shall disclose that fact. Early application is permitted for entities that apply IFRS 9 Financial Instruments on or before the date of initial application of IFRS 17. For the purposes of the transition requirements in paragraphs C1 and C3–C33: (a) the date of initial application is the beginning of the annual reporting period in which an entity first applies IFRS 17; and (b) the transition date is the beginning of the annual reporting period immediately preceding the date of initial application

Accordingly, in a Form 20-F for the year ended December 31, 2023, the company would adopt IFRS 17 on January 1, 2023 and would retrospectively recast fiscal year 2022.

With this background in mind, the Task Force and staff discussed the following two questions relating to the adoption of IFRS 17 resulting from the filing of a registration before audited financial statements are issued for the year ended December 31, 2023 (assuming calendar year end) that include or incorporate by reference interim financial information reflecting the adoption of IFRS 17.

Question 1

A calendar year-end Company will file a registration statement on or after October 1, 2023 that includes interim financial statements for the six months ended June 30, 2023 and annual financial statements for the three years ended December 31, 2022. The June 30, 2023 interim financial statements and the December 31, 2022 annual financial statements will be recasted to reflect the adoption of IFRS 17. Does the recasting of the December 31, 2022 annual financial statements to reflect IFRS 17 require the company to change the date of initial application of IFRS 17 to January 1, 2022, and thereby result in the need to also recast the financial statements for the year ended December 31, 2021?

The staff’s response was no. That is, the recasting of the December 31, 2022 annual financial statements to reflect IFRS 17 does not require the company to change the date of initial application of IFRS 17 to January 1, 2022, and thereby does not result in the need to also retrospectively restate financial statements for the year ended December 31, 2021.

Question 2

Item 8.A.5 states in part, “If, at the date of the document, the company has published interim financial information that covers a more current period than those otherwise required by this standard, the more current interim financial information must be included in the document.” If a calendar year end Company files a registration statement prior to October 1, 2023 that includes interim financial statements for example, the three months ended March 31, 2023 pursuant to this requirement (because it has published them in its home country and it's an interim period more current than what is otherwise required) that reflect the adoption of IFRS 17, does the inclusion of such interim financial statements require the Company to recast the year ended December 31, 2022 to reflect the adoption of IFRS 17?”

The staff’s response was no. That is, a registration statement filed prior to October 1, 2023 that includes interim financial statements (for example the three months ended March 31, 2023 pursuant to this requirement) that reflect the adoption of IFRS 17 does not require the Company to retrospectively restate the year ended December 31, 2022 to reflect the adoption of IFRS 17.

III. Interim Financial Statement Requirements for Foreign Business Acquirees

Section 2045.15 of the Division of Corporation Finance's Financial Reporting Manual ("FRM") states:

"Acquired Company is a Foreign Private Issuer or a Foreign Business: For purposes of Form 8-K, interim financial statements must be filed if the date that the initial Form 8-K reporting the acquisition is filed is more than nine months after the end of the acquired company's most recently completed year. The interim financial statements must cover at least the first six months of the year. [S-X 3-01(h), S-X 3-02(d), Item 8.A.5 of Form 20-F] (Last updated: 6/30/2013)".

Item 8.A.5 on Form 20-F states:

"If the document is dated more than nine months after the end of the last audited financial year, it should contain consolidated interim financial statements, which may be unaudited (in which case that fact should be stated), covering at least the first six months of the financial year.

. . . .

. . . If, at the date of the document, the company has published interim financial information that covers a more current period than those otherwise required by this standard, the more current interim financial information must be included in the document."

Given this guidance, the Task Force observed that it is unclear if and when a registrant that acquires a foreign business should consider the concept of "more current interim financial information" in Item 8.A.5 on Form 20-F for the purpose of separate financial statements of a foreign business acquiree. To illustrate the ambiguity, the Task Force provided the following illustration:

Assume Company A, which meets the definition of a foreign private issuer ("FPI") (while the registrant is an FPI in this situation, the fact pattern should be considered the same if the registrant were a domestic issuer), acquired company B, which meets the definition of a foreign business. Company A prepares its initial registration statement under Form F-1.

The acquisition occurred on June 15, 20X1, and was 30 percent significant to Company A. The following summarizes the discussed fact patterns:

Both entities have a December 31 year-end.
Company A plans to file its Form F-1 on May 20X2, which will include its financial statements for the years ended on December 31, 20X1 and 20X0 (assume Company A also meets the definition of an emerging growth company).
Company B is a private company incorporated in country Z and provides financial services. According to the local laws in country Z, Company B is required to submit interim financial information (i.e., balance sheet, statement of income, statement of cash flows, statement of change in equity, and notes) for each quarter. Therefore, Company B has submitted this information as of March 31, 20X1 to the local regulator under its GAAP (i.e., local regulator GAAP, which differs from IFRS-IASB) and in the local language. The financial information is not audited or reviewed by Company B's auditor.

In the fact pattern above, and similar fact patterns, it is unclear whether the reference to Item 8.A.5 in FRM 2045.15 is intended to be limited to financial statements of the registrant or also include those of the acquired businesses. The Task Force understands that the intent of the disclosure requirement was to provide US investors with the same financial information for a registrant as provided to investors in the registrant’s home jurisdiction. This intent may not have been meant to carry to the acquired business.

Given this background, the Task Force asked the staff how it considers the applicability of the “most recent financial information” concept in the context of Rule 3-05 financial statements.

The staff indicated it is considering the question and affected issuers may contact CF-OCA to discuss their particular fact pattern.

IV. Presentation of Investment in Consolidated Subsidiaries in Schedule I

Schedule I which is referred to in S-X 12-04 as “Condensed financial information of Registrant” does not contain explicit guidance as to the accounting policy to be applied to reflect the registrant’s investment in its consolidated subsidiaries. Historically, many registrants looked by analogy to the requirements for condensed consolidating financial information required by Rule S-X 3-10. Instruction (i)(3) of the former Rule S-X 3-10 stated "the parent company column should present investments in all subsidiaries based on their proportionate share of the subsidiary's net assets" and instruction (i)(5) explicitly referred to the use of the equity method for the presentation of consolidated subsidiaries within subsidiary issuer and subsidiary guarantor columns. While not embedded within Rule 12-04, the existence within these instructions of the application of the equity method to consolidated subsidiaries, which otherwise would not have been compliant with GAAP, provided a basis for companies to use the equity method to present investment in consolidated subsidiaries in Schedule I.

At the December 2006 AICPA Conference on Current SEC and PCAOB Developments, an SEC staff speech provided views on the preparation of such information for FPI's whose financial statements are prepared under Home-Country forms of GAAP (including IFRS) which may require or permit the investment in subsidiaries to be carried at cost. The staff indicated that in such situations the parent company column may reflect the accounting policies required/allowed by the basis of accounting but should include a reconciliation of net income and stockholders' equity to present the information using the equity method.

IAS 27 permits a company to make a policy election when preparing separate financial statements to account for investments in subsidiaries using (a) cost less accumulated impairments, (b) fair value under IFRS 9, or (c) using the equity method of accounting. It should be noted that many registrants are required to report parent company financial statements within their home jurisdiction and do not want that information to differ from what is provided in Schedule I.

Given the absence of explicit guidance in Article 12-04, the Task Force asked the staff whether an IFRS-IASB reporting company has the ability to elect the method of accounting for subsidiaries as permitted by IAS 27 when preparing registrant financial information required by Article 12-04 (Schedule I), provided that they disclose their accounting policy election. As an alternative, the Task Force asked the staff whether the use of the equity method is necessary for the presentation of Schedule I such that the reconciliation would be required if the Schedule was presented using the cost method for investment in subsidiaries.

The staff indicated that the primary objective of Article 12-04 is to present the assets and operations of the parent separate from those of the subsidiaries in order to identify what is available at the parent level for distribution to investors. The staff noted that provided the accounting policy applied results in financial information of the parent that aligns with this purpose, the staff would not object to parent company information presented under IAS 27 to comply with the requirements of Article 12-04 for companies following IFRS-IASB. Such presentation may be provided without a reconciliation to amounts reflecting the application of the equity method of accounting.

V. Next Meeting

The Task Force and staff will meet next on May 10, 2023.