SEC Staff Training Manual — Division of Corporation Finance: Accounting Disclosure Rules and Practices

1.  Required audited financial statements for a domestic registrant in a registration statementor proxy materials:

 Required unaudited interim financial statements [SX Article 10] for a domestic registrant to be presented in a registration statementmade effective or a proxy statementmailed 135 days or more after the fiscal year-end.

1. Required for fiscal years or year-ends as specified by the applicable article of Regulation SX.

1. An annual report to shareholders containing audited financial statements for the most recently completed year must accompany or precede a proxy relating to an annual meeting at which officers and directors will be elected.

 Financial information of a registrant’s predecessor is required for all periods prior to the registrant’s existence, with no lapse in audited periods or omission of other information required about the registrant. Any interim period of the predecessor prior to its acquisition by the registrant should be audited when audited financial statements for the period after the acquisition are presented. Schedules required by SX Article 12 are required for predecessor entities.

1. What is a development stage company?

 If a material business combination to be accounted for using the pooling-of-interests method has been consummated after the latest balance sheet date and post-combination operating results have not been published, a registrant may not reflect the business combination in its financial statements. However, the registrant may elect to provide, and may be required to provide in connection with registration statements or proxies, supplemental audited financial statements giving effect to the pooling of interests. See Appendix C for guidance applicable to supplemental or restated financial statements as a result of post-balance sheet events, including transactions accounted for in a manner similar to a pooling of interests.

1. Staff should not commence review of a filing unless the registrant’s financial statements comply with the rules for age of financial statements and audit at the date of filing. The staff should evaluate compliance immediately upon assignment for review.

1. The following applies to both SX and SB filers.

1. If a company has registered an offering of securities under the Securities Act, that Company is required to file reports for periods ending after the date of the last balance sheet included in the registration statement. [EAR 15d]

1. Exchange Act reports are due as follows:

1. Fiscal years may not exceed 12 months. Under SX 3-06, nine to twelve months of audited financial statements will meet the requirement for one year of audited financial statements:

• for financial statements of an acquired business, or
• when a registrant has changed its fiscal year (see immediately below).

1. When a company changes its fiscal year it is required to file a report covering the transition period. [EAR 13a-10, 15d-13 & FRC 102.05]

1. Regulation S-X and GAAP must be followed. Financial statements not prepared in accordance with GAAP are presumed to be inaccurate or misleading. [SX 4-01(a)(1)]

 Generally, majority owned subsidiaries should be consolidated but that presumption may, in some circumstances, be overcome. Careful analysis of the facts and circumstances should be applied to evaluate the existence of a controlling financial interest equivalent to majority ownership of voting stock, notwithstanding the absence of legal ownership of a majority of voting stock. [FRC 105, ARB 51, FAS 94 and EITF 96-16]

 A guarantee of a security is considered a security, and the guarantor is subject to the reporting and registration requirements applicable to other issuers. Relief from separate reporting and financial statement requirements is available for guarantors in certain limited circumstances. [See Topic Two, IV.A]

 In unusual circumstances, it may be appropriate to present financial statements on a liquidation basis. Audit reports on those statements are described in AU 9508.33-37.

1. Consolidation of a parent and subsidiaries with year-end differences not exceeding 93 days is permissible (accompanied by disclosure of the different closing date and its justification). However, intervening events that materially affect financial position or operating results should be disclosed. [ARB 51] Where fiscal years differ by more than 93 days, statements of the subsidiary should be adjusted to a period that more nearly corresponds with the fiscal period of the parent.

1. Consolidation and Equity Method Accounting

1. Fair market valuation of assets and liabilities should not result in a net asset value exceeding that reported prior to the quasi-reorganization. Any reorganization value in excess of previously reported net assets should be treated as a reduction of goodwill, then other intangibles, then other non-current assets.

1. Fiscal Year-end. Presumed to be calendar year-end if no closing date has been adopted. [SX 1-02(k)]

1. Defined as a matter about which an average prudent investor ought reasonably to be informed. [SX 1-02(o)] A matter is material if there is a substantial likelihood that a reasonable person would consider it important.

1. Financial statements of acquired businesses are required as follows:

1. Required financial statements: Form S-4 registers securities being offered to security holders of a business to be acquired. The requirement to include the financial statements of the target varies based on a number of facts and circumstances, as summarized below:

 What is a business?

1. How do I measure significance?

1. The basic tests of significance are:

 The requirement under SX 3-05 to furnish financial statements of individually insignificant businesses under certain circumstances is applicable only to registration statements and proxies. Form 8-K does not require audited financial statements of insignificant acquirees unless they are "related businesses" (see Section I.D.1.d above).

1. For year end financial statements in a ’33 Act registration statement:

1. Financial statement requirements for registration statements and proxies

1. Financial statements of each operating real estate property (or group of related properties) acquired or probable of acquisition that is significant individually or in the aggregate at the 10% level or higher is required to be filed in all transactional filings (registration statements and proxies).

 If a real estate property will be leased to a single tenant on a long-term basis immediately after its acquisition under a net lease that transfers substantially all of the property’s nonfinancial operating and holding costs to the tenant, financial data and other information about the tenant (or other party that guarantees the lease payments) may be more relevant to investors than financial statements of the property acquired. In that case, the financial statements of the property may be omitted from the filing, but pertinent financial data and other information about the lessee or guarantor should be furnished. That information should include audited financial statements of the lessee or guarantor if the purchase price of the property exceeds 20% of the greater of total assets at the latest audited year end balance sheet date or the amount expected in good faith to be raised within the next twelve months pursuant to an effective registration statement. That view is consistent with the guidance furnished in SAB 71 concerning significant credit concentrations. If the lessee or lease guarantor is a public company currently filing reports with the Commission, only summary data need be provided. The disclosure pertaining to a material lessee, including its audited financial statements if the investment exceeds 20% of total assets, should be provided in filings made under both the Securities Act and the Exchange Act. The periods presented for lessee or guarantor financial statements should comply with SX 3-01 and 3-02.

 What is an "ADC arrangement?"

 If over 20% of offering proceeds (or total assets at the latest audited year end balance sheet date, if greater) have been or will be invested in a single loan (or in several loans on related properties to the same or affiliated borrowers), financial statements of the property securing the loan are required in both ’33 and ’34 Act filings. Properties are related, for example, if they are subject to cross default or collateralization agreements.

1. Separate financial statements of non-consolidated subsidiaries. If any of the conditions set forth in SX 1-02(w) are significant at the 20 percent level or greater, separate financial statements for each subsidiary not consolidated should be provided. (Of course, consolidation is presumed to be necessary for all subsidiaries.)

1. If the tested equity investee incurred a loss and if income averaging is used by the registrant (because income in the most recent fiscal year is at least 10 percent lower than the average of the income for the last five fiscal years), the equity in the income or loss of the investee should be excluded by the registrant from each year averaged.

 SX 3-09 allows for the presentation of combined or consolidated financial statements (where appropriate) if financial statements are required for two or more subsidiaries. Combined financial statements generally are appropriate only for entities under common control or common management, and then only for periods in which that condition existed.

 Required if the investee falls in the 10% to 20% significance level (current and non-current assets and liabilities; redeemable stock and minority interests; revenues; gross profit; income from continuing operations; and net income). Summarized annual financial data should not be labeled "unaudited". [SX 4-08(g)] SB issuers are required to provide summarized financial data if the investee is at least 20% significant. [SB 310(b)(2)(iii)]

 Financial statements required by SX 3-09 for an investee that meets the definition of a foreign business need only comply with the reporting requirements of Item 17 of Form 20-F and are subject to the updating requirements of SX 3-19. Reconciliation requirements are described at Topic Six.

 Registrants may request DCAO interpretation in unusual situations for relief where strict application of the rules and guidelines results in a requirement that is unreasonable under the circumstances.

 [Note: Refer to Division of Corporation Finance: Frequently Requested Accounting and Financial Reporting Interpretations and Guidance located under Current SEC Rulemaking — Other Commission Notices and Information on our website for guidance in this area. The Commission is expected to issue new rules applicable to guarantors of securities soon.]

1. SX 3-10 requires registrants to file financial statements of each affiliate whose securities constitutes a substantial portion of the collateral for any class of security (collateral entities). SX 3-10 views guarantees and collateralizations as two separate disclosure matters. SAB 53 and our interpretations apply only to guarantors and does not apply to collateral situations, as the concepts of full, unconditional, and joint and several do not apply to collateralizations. Therefore, full audited financial statements of each affiliate whose securities constitute a substantial portion of the collateral of a security are required by SX 3-10.

 Third party credit enhancements differ from guarantees. A guarantee running directly to the security holder is a security within Section 2(1) of the Securities Act and must be covered by a Securities Act registration statement filed by the guarantor, as issuer. A third party credit enhancement is an agreement between a third party and the issuer or a trustee that does not run directly to the security holders. A party providing credit enhancement generally is not a co-issuer. However, if an investor’s return is materially dependent upon the third party credit enhancement, the staff requires additional disclosure about the credit provider. The disclosure must provide sufficient information on the third party to permit an investor to determine the ability of the third party to fund the credit enhancement. In most cases, the disclosure of the third party’s audited financial statements presented in accordance with generally accepted accounting principles would be required. However, if such financial statements are not available, statements prepared under statutory standards may be acceptable (e.g., statutory financial statements of insurance companies serving as credit enhancers).

1. Financial Statements Required in Transactional Filings

 Required as an S-X schedule where the restricted net assets of consolidated subsidiaries exceed 25% of consolidated net assets at the most recent fiscal year-end. Also, GAAP requires this as a supplement to the financial statements where material. [ARB 51.24] The information prescribed by SX 12-04 should be presented in the footnotes of bank holding companies.

1. If authorization is sought from shareholders for disposition of a significant business, unaudited financial statements of that business should be provided in the proxy materials for the same periods as are required for the registrant (along with pro forma information). See PR Item 14(b)(1)(ii)(D)

 The staff may require other financial statementsas necessary for a fair presentation of the financial condition of any entity whose financial statements are required. [SX 3-13]

1. A significant business combination has occurred in the latest fiscal year or subsequent interim period, or is probable. (See Topic Two for definition of a business and tests of significance.) Not required if the transaction is already reflected in historical statements as a pooling of interests or reorganization.

1. Disposition either by sale, abandonment or distribution to shareholders has occurred or is probable, and is not fully reflected in the historical financial statements.

 Acquisitions, which are in the aggregate significant, have occurred in the latest fiscal year or subsequent interim period, or are probable. See Topic Two Section II for guidance related to aggregate significance tests for real estate acquisitions.

 In connection with a transaction subject to the roll-up rules of SK 914, pro forma financial information should be presented showing the effect on the successor entity assuming (a) that all combining entities participate and (b) participation is limited to those having the lowest combined net cash provided by operating activities for the last fiscal year of such entities. Consideration should be given to the need to present other variations of participation that are permitted by the terms of the roll-up. The following pro forma information should be furnished:

• Balance sheet as of the later of the end of the most recent fiscal year or latest interim period
• Statements of income with separate line items to reflect income (loss) excluding and including roll-up expenses and payments, earnings per share amounts, and ratio of earnings to fixed charges for the most recent fiscal year and the latest interim period
• Statement of cash flows for the most recent fiscal year and the latest interim period
• Book value per share as of the later of the end of the most recent fiscal year or the latest interim period
• Pro forma oil and gas reserve data, if applicable.

 Pro forma presentation may be necessary to reflect operations and financial position of the registrant as a stand-alone entity.

 Events or transactions have occurred or are probable for which disclosure of pro forma financial information would be material to investors, such as:

 SX Article 11 pro forma financial information is intended to provide investors with information about the continuing impact of a transaction by showing how a specific transaction or group of transactions might have affected historical financial statements, illustrating the scope of the change in the registrant’s financial position and results of operations.

1. Pro forma presentation should be based on the latest balance sheet included in the filing. A pro forma balance sheet is not required if an acquisition is already reflected in a historical balance sheet, however, disclosures related to balance sheet accounts would still be required.

1. Pro forma presentation should be based on the latest fiscal year and interim period included in the filing, unless the transaction is already reflected in those historical statements for 12 months. Unless the pro forma information gives effect to one of the two items below, a pro forma income statement should not be presented for more than one complete fiscal year. In addition to the required latest fiscal year and interim period, the staff will not object to a registrant providing a pro forma income statement for the corresponding prior interim period.

1. Columnar form, with separate columns presenting historical results, pro forma adjustments, and pro forma results. In limited cases, (where they are only a few easily understood adjustments) a narrative description of the effects of the transaction may suffice.

 An accountants’ report on pro forma financial information is not required. However, any auditor report provided on pro forma financial information must comply with AICPA guidelines as set forth in the "Statement on Standards for Attestation Engagements; Reporting on Pro Forma Financial Information." The auditor’s consent should cover the report on the pro forma financial statements. Generally, reports on pro forma data are only appropriate where the auditor has a sufficient basis to express an opinion because it also audited the majority of the underlying historical financial statements and issued a report thereon.

 Generally, pro forma adjustments should be presented gross on the face of the pro forma statements. Alternatively, components of the adjustments may be broken out in a sufficiently detailed manner in the notes to the pro forma statements. [SP]

1. Purchase Accounting

1. Pro forma statements that give effect to a business combination using the purchase method of accounting generally require only two pro forma adjustments: (1) the allocation of the purchase price, including adjusting assets and liabilities to fair value and recognizing intangibles, with related changes in depreciation and amortization expense and (2) the effects of additional financing necessary to complete the acquisition. However, other related adjustments may be necessary.
2. Contractual terms of the combination such as major new compensation contracts with management would require pro forma adjustment if the new contracts are entered into as part of the acquisition agreement. [SAB 2C]
3. Actions to be taken by management subsequent to a business combination, as reflected in liabilities recorded in accordance with EITF 95-3, may relate to the planned disposal or termination of revenue producing activities, as well as other business integration activities. It is appropriate to present SX Article 11 pro forma adjustments depicting the recurring effects of exiting revenue producing activities. That type of pro forma adjustment is consistent with the requirement to provide pro forma information depicting material dispositions as discussed at I.B. Only revenues and costs specifically identifiable with that revenue-producing activity may be included in the pro forma adjustments. Allocations of corporate costs should not be adjusted for the disposition.
4. Termination of employees and closing facilities are typical actions taken in connection with business combinations to eliminate costs perceived by management as redundant. The timing and effects of these actions are generally too uncertain to meet the SX Article 11 criteria for pro forma adjustments. Management’s estimate of how these actions (and other business integration activities not specifically associated with the disposition of a business) are expected to impact the operations and liquidity of the newly combined companies going forward should be discussed in MD&A and in supplemental information clearly identified as forward looking information.
5. A schedule showing the calculation of the purchase price(including the value assigned to non-cash portions) should be provided in a note, if not otherwise reasonably apparent.
6. The purchase price should be allocated to specific identifiable tangible and intangible assets (such as customer lists, contracts acquired, trademarks and patents, in-process research and development, etc.) and liabilities. If the allocation is preliminary, significant liabilities and tangible and intangible assets likely to be recognized should be identified and uncertainties regarding the effects of amortization periods assigned to the assets should be highlighted.
7. If the registrant is awaiting additional information necessary for the measurement of a contingency of the acquired company during the allocation period specified by FAS 38, the registrant should disclose prominently that the purchase price allocation is preliminary. In this circumstance, the registrant should:

   • describe clearly the nature of the contingency,
   • discuss the reasons why the allocation is preliminary (i.e., identify the information that the registrant has arranged to obtain),
   • indicate when the allocation is expected to be finalized, and
   • furnish other available information, which will enable a reader to understand the magnitude of any potential accrual and the range of reasonably possible loss.
   In the absence of such disclosure, investors may assume reasonably that the purchase price allocation is final and that all future revisions of estimated fair values of assets and liabilities acquired will be reflected in income. [SAB 2A.7]

1. If contingent consideration is issuable (as discussed in paragraph 77 of APB 16), the registrant should disclose the terms of the contingent consideration and the potential impact on future earnings.
2. The expected useful lives or amortization periods of significant assets acquired in a purchase business combination, including goodwill and other identified intangibles, should be disclosed in a note to the pro forma financial statements.
3. If amortizationof purchase adjustments is not straight-line, the effect on operating results for the five years following the acquisition should be disclosed in a note, if material.

1. Generally should be based on either the current interest rate or the interest rate for which the registrant has a commitment. If actual interest rates in the transaction can vary from those depicted, disclosures of the effect on income of a 1/8 percent variance in interest rates should be disclosed.

 Normally should be calculated with reference to the statutory rate in effect during the periods for which the pro forma income statements are presented. If taxes are not calculated on that basis, or if unusual effects of loss carryforwards or other aspects of tax accounting are depicted, explanation should be provided in a note to the pro forma financial statements.

 Effects of new major distribution, cost sharing, or management agreements, and compensation or benefit plans may only be reflected if amounts can be factually supported, are directly attributable to the transaction, and are expected to have a continuing impact on the statement of operations.

1. A forecast about post-acquisition results of operations may be more meaningful than a pro forma statement of operations prepared in accordance with SX Article 11 when historical financial statements of the acquiree are not indicative of financial condition or results of operations going forward because of the changes in the business and the omission of various operating expenses in the financial statements of businesses carved out of larger entities. Refer to V for guidance regarding forecasts.

 The following adjustments generally are not appropriate on the face of the respective pro forma financial statements, but could be disclosed in the footnotes thereto.

1. Pro forma financial statements may not reflect the receipt or application of offering proceeds, except as follows:

1. to the extent of a firm commitment from underwriter,
2. to the extent of the minimum in a best-efforts minimum/maximum offering;
3. in a best-efforts all-or-none offering; and
4. certain exceptions for savings and loan conversions.

1. An acquired entity’s income statement should be brought up to within 93 days of the registrant’s fiscal year, if practicable, by adding subsequent interim results to the fiscal year’s data and deducting the comparable preceding year interim results, with appropriate disclosure. [SX 11-02(c)(3)]

 If unusual events enter into the determination of operating results presented for the most recently completed fiscal year, the effect of such unusual events should be disclosed and the registrant should consider presenting an additional pro forma statement of operations for the most recent 12-month period. The effects of the unusual events ordinarily should not be eliminated from pro forma data. The registrant may wish to consider furnishing a forecast in lieu of pro forma data. See Section V.

1. If the issuer was formerly a Sub-S, partnership or similar tax exempt enterprise, pro forma tax and EPS data should be presented on the face of historical statements for the periods identified below.

1. If necessary adjustments include more than adjustments for taxes, limit pro forma presentation to latest year and interim period.
2. If necessary adjustments include only taxes, pro forma presentation for all periods presented is encouraged, but not required.

1. If a planned distribution to owners (whether declared or not, whether to be paid from proceeds or not) is not reflected in the latest balance sheet but would be significant relative to reported equity, a pro forma balance reflecting the distribution accrual (but not giving effect to the offering proceeds) should be presented along side the historical balance sheet in the filing.

1. Generally, the historical balance sheet and statement of operations (including EPS) should not be revised to reflect modifications of the terms of outstanding securities that become effective after the latest balance sheet date, although pro forma data may be necessary. If the registrant and its independent accountants elect to present retroactively a conversion of securities as if it had occurred at the date of the latest balance sheet included in the filing (with no adjustment of earlier statements), the staff ordinarily will not object. However, if the original instrument accrues interest or accretes toward redemption value after the balance sheet date until the conversion actually occurs, or if the terms of the conversion do not confirm the carrying value, only pro forma presentation would be deemed appropriate.

1. Statements of estimated taxable operating results and cash to be made available by operations are required. These should be pro forma statements of the registrant, rather than of the property, giving effect to the acquisition.

1. If the property is to be operated by the registrant, the presentation should be based on the most recent 12 month period and include only those adjustments which are factually supportable. Annualized results for a period less than twelve months is not appropriate.
2. If the property to be acquired is subject to one or more leases, the presentation should be based on the rents to be paid in the first year of those leases. Material changes in the terms that will occur pursuant to the terms of the leases subsequent to the first year should be prominently disclosed.
3. Registrants that are partnerships or REITs may present in tabular form for a limited number of years, typically one year, the estimated cash distribution per unit showing the portion thereof reportable as taxable income and the portion thereof that is a return of capital. If taxable net income will be greater than the cash available for distribution per unit, this should be disclosed.

 Financial forecasts may be presented in lieu of pro forma statements of operations, or they may be presented for other informational purposes. [SX 11-03]

1. All projections and forecasts must comply with the guidelines for projections in Item 10 of Regulation S-K and S-B. Item 10 requires that management have a reasonable basis for the assumptions underlying their prospective financial statements. Similarly, sections 210 and 316 of the AICPA Guide for Prospective Financial Statementsrequire these assumptions to be reasonably objective with persuasive support. Support for assumptions include market surveys, industry data, general economic indicators, historical operations, signed contracts, etc. An absence of adequate support may preclude a registrant’s ability to include prospective financial statements in the filing. Additionally, a company with a limited operating history may not have a reasonable basis to present a financial forecast beyond one year.

 Certain "pro forma" disclosures are required by GAAP (e.g., APB 16, 20 and certain EITF consensuses) and should be provided where applicable. Those presentations may differ in style and content from the requirements of SX Article 11.

1. Licensure status should be confirmed with appropriate personnel in OCA if the accounting firm is unfamiliar to the staff.

1. All independence questions should be referred through DCAO to the Commission’s OCA.

 Indemnification of parties subject to liability under the U.S. securities laws is considered contrary to public policy. Indemnification also may impair an auditor’s independence (FRC 602.02.i.i). The staff does not object to a domestic or foreign registrant’s indemnification of predecessor auditors for costs incurred in successful defense of claims. However, the current auditor may not be indemnified under any circumstances. Any auditor indemnification arrangement should be described under "Experts" in a registration statement.

1. A principal auditor must take responsibility for the financial statements of the registrant for each year presented, although that auditor may refer to other auditors whose reports and audits are being relied upon by the principal auditor. The principal auditor is expected to have audited or assumed responsibility for reporting on at least 50% of the assets and revenues of the consolidated entity. If it is impracticable for a principal auditor to assume that extent of responsibility for one or more of the periods presented, the staff will evaluate whether to accept the audit reports as sufficient for reliance in filings with the Commission depending on the facts and circumstances. The staff should encourage registrants that are unable to obtain a report from an auditor assuming that degree of responsibility to consult with the staff well in advance of filing.

 Independent accountants are not required to be members of the AICPA or the AICPA SEC Practice Section to practice before the Commission. However, the AICPA requires a member of the AICPA that issues a report on financial statements of a company after it has become subject to the Commission’s reporting requirements to be a member of the AICPA SEC Practice Section.

1. Basic requirements: dated; signed; indication of City and State where issued; identify the financial statements covered.

 The audit report that an independent auditor may be required to issue under GAAS may indicate that either the financial statements or the audit procedures applied do not satisfy the requirements of the form or the Commission’s rules. Examples of audit reports that always represent a substantial deficiency in the filinginclude the following:

1. NNEmphasis of a matter [AU 508.19]

1. Prior to filing, interim financial statements included in quarterly reports on Forms 10-Q and 10-QSB, must be reviewed by an independent public accountant using professional standards and procedures for conducting such reviews, as established by generally accepted auditing standards, as may be modified or supplemented by the Commission. If, in any filing, the company states that interim financial statements have been reviewed by an independent public accountant, a report of the accountant on the review must be filed with the interim financial statements. Otherwise, the report is not required to be included in Forms 10-Q and 10-QSB.

1. Required for all registrants except foreign private issuers, mutual life insurance companies and small business issuers filing on small business forms. If it is required to be furnished, it must be reviewed by the independent accountant. [SK 302]

 Compilation reports are not appropriate in any filings, including Regulation A fillings, because the association of the accountant provides no basis for reliance. [SP]

1. If a change in accountants occurred within 24 months prior to or in any period subsequent to the date of the most recent financial statements, the registrant should provide required information:

• in Form 8-K within 5 business days of the change
• in proxies, even though previously discussed in Form 8-K
• in registration statements, unless the change was previously disclosed.

1. New accountant hired prior to termination of prior accountant

 If audited financial statements are required in a filing, the audit report should be signed and unrestricted. Generally, the staff should not commence a review of a filing that does not meet that requirement. However, if the entities comprising the registrant will not be legally transferred to the registrant in a reorganization until immediately before effectiveness, the staff has accepted filing of a "draft" report in the form that it will be expressed at effectiveness. In that case, the draft report should be accompanied by a signed preface of the auditor stating that it expects to be in a position to issue the report in the form presented at effectiveness. No registration statement can be declared effective until the preface is removed and the accountant’s report finalized. If a filing does not include a currently effective audit report for reasons other than as described here, DCAO should be advised promptly.

 If a report is restricted solely to avoid issuing a modified report because of doubt about the registrant’s continued existence and the modification would removed upon receipt of proceeds from offering, the accountant’s report should reflect such modification in the registration statement upon effectiveness. [SP]

1. Registrants must file a copy of the auditor’s consent to the use of its report in any filing under the Securities Act as an exhibit. The primary purpose of obtaining consent is to assure that the auditor is aware of the use of its report and the context in which it is used.

 When an auditor becomes aware of information in interim periods which relates to financial statements previously reported on and that information would require revision of the financial statements and/or the auditor’s report, the auditor must notify the Commission (through OCA) that the report must no longer be relied upon. If a registrant publicly discloses that previously filed audited financial statements require adjustment and the auditor has not withdrawn its report, confusion for investors as to the auditor’s concurrence with the adjustments may result. In this situation, the registrant should clarify in the filing the extent of reliance on the audit report.

 Some accounting firms have adopted risk management policies that lead them to refuse to reissue their reports on the audits of financial statements that have been included previously in Commission filings. In some cases, accountants whose reports on acquired businesses were included in a registrant’s Form 8-K have declined to permit that report to be included in a registrant’s subsequent registration statement. In other cases, accountants have declined to reissue their reports on the registrant’s financial statements after the registrant engaged a different auditor for subsequent periods. The Commission’s staff is not in a position to evaluate the reasons for an accountant’s refusal to re-issue its report and will not intervene in disputes between registrants and their auditors. Moreover, the staff will not waive the requirements for the audit report or the accountant’s consent to be named as an expert in filings. If a registrant is unable to re-use the previously issued audit report in a current filing, the registrant must engage another accountant to re-audit those financial statements. A registrant that is unable to obtain either re-issuance of an audit report or a new audit by a different firm may be precluded from raising capital in a public offering.

 Section 10A of the Exchange Act requires that auditors report in a timely manner certain uncorrected illegal acts to a registrant’s board of directors. It further requires the registrant, or the auditor if the registrant fails to do so, to provide information regarding the illegal act to the Chief Accountant of the Commission. Notify DCAO immediately upon any indication from a registrant or its auditor that an illegal act has occurred.

 Wherever a signature is required, typed signatures or duplicated or facsimile versions of the manually signed document may be used. In any of these cases, each signatory must manually sign the document authenticating, acknowledging or otherwise adopting the signature that appears in the filing before or at the time that the filing is made, and the manually signed document must be retained by the filer for five years. A copy of this document must be furnished to the Commission upon request. [ST 302]

1. An auditor may be engaged to report on selected financial data suing the guidance of SAS 42. Identification of some or all columns of selected financial data as "audited" or other references to the auditor can create the impression that the registrant has so engaged the auditor. If no auditor associated with the selected financial data has occurred but an investor could obtain such an impression from the manner of presentation, the staff should recommend revision of that presentation. A statement in a headnote too the data that the amounts presented for the fiscal year are derived from audited financial statements does notcreate the impression that the information was subject to a SAS 42 examination.

1. The financial statements should not appear on the accountant’s letterhead, and should not refer in any way to the accountants’ report. [TPA 9410.06]

1. Annual revenues of less than $25 million, as reported in its most recent fiscal year (12 months) for which audited financial statements are prepared in accordance with U.S. GAAP.

 A reporting company may enter the S-B system only at the beginning of a fiscal year, and must determine at the time of its first filing in a fiscal year (first quarterly report, Form 8-K, or registration statement) whether it will enter the S-B reporting system. A reporting issuer cannot enter the S-B system during a fiscal year if it has already filed Exchange Act reports for periods included in that fiscal year under Regulation S-X. A reporting company may enter the S-B system if it meets both the revenue and the public float test for each of the last two fiscal years.

1. Small business issuers wishing to remain in the S-B system must file all Exchange Act reports including Form 8-K, following the requirements of Regulation S-B beginning with the first Exchange Act report in a given fiscal year, or with the first Exchange Act report following effectiveness of the initial S-B registration statement.

 Small business issuers need not comply with the disclosure requirements of Regulation S-X, except as indicated under the "NOTES" to Item 310 of Regulation S-B.

 Pro forma financial statements are required in transactional filings whenever a significant business combination has occurred or is probable, and the transaction has not been reflected in at least nine months of historical audited financial statements of the issuer. In addition, pro forma financial information should be furnished whenever consummation of an event or transaction has occurred or is probable for which disclosure of pro forma information would be material to investors. Issuers should consider the guidance in SX Article 11.

 The disclosure about significant equity investees cited under Item 310(b)(iii) of Regulation S-B is required in both interim and annual financial statements.

 Canadian small business issuers that present financial statements in accordance with Canadian GAAP shall include a reconciliation to U.S. GAAP that complies with Item 18 of Form 20-F for registration statements (with certain exceptions). The requirements of Item 17 need only be met for financial statements included in periodic reports and certain registration statements. [Note 2 to SB 310]

1. Foreign private issuers are eligible to use Form 20-F and the other "F forms" which provide certain financial statement and disclosure accommodations.

1. Auditedfinancial statements required in a registration statement or annual report:

NOTE: Item 8 of Revised Form 20-F will supersede SX 3-19 effective for registration statements first filed after September 30, 2000 and annual reports that include financial statements for fiscal years ending on or after September 30, 2000. The guidance contained in this section reflects the Form 20-F revisions. Refer to old SX 3-19 for the age requirements for financial statements contained in filings that precede the effective date.

1. General rule

 Foreign private issuers are required to update the financial statements and other information included in a prospectus used more than nine months after effectiveness of a registration statement only when the financial statements would be as of a date later than the date of financial statements required under Item 8 of revised Form 20-F. Issuers filing on Form F-3 may incorporate by reference reports filed or furnished to the Commission that contain the updated financial statements rather than filing a post-effective amendment. [SK 512(a)(4)]

1. Transition reports for foreign private issuers are filed on Form 20-F as follows:

1. General

1. A reconciliation is required for each annual and interim period required to be included in a registration statement or annual report.
2. Form 20-F provides two levels of reconciliation to U.S. GAAP — Item 17 and Item 18. Item 18 requires the same information as Item 17 plus all of the disclosures required by U.S. GAAP and Regulation S-X. With certain limited exceptions, Item 18 is required for securities offerings. Some of these exceptions include:

   • offerings pursuant to reinvestment plans
   • offerings upon the conversion of securities
   • offerings of investment grade securities
   Item 17 is acceptable in these instances and for purposes of the annual report. Many foreign issuers elect to file their annual reports under Item 18 and provide all of the disclosures required by the U.S,GAAP and Regulation S-X. Issuers that file using Item 17 may be required to provide certain additional information in the MD&A to assist the U.S. investor in understanding the financial statements. [SAB 1D]

1. Selected financial data should include amounts under U.S. GAAP, if different. The selected data should be provided for 5 years.

1. A discussion of material variations in accounting principles, practices and methods used in preparing the financial statements between foreign GAAP and U.S. GAAP.

1. Certain information is required to be disclosed under Item 18, but not Item 17. For example (list not all inclusive):

1. Reconciliations of the numerators and denominators used in computing basic and diluted EPS, and other EPS-related disclosures (FAS 128)
2. Segment information (FAS 131)
3. Fair value information (FAS 107)
4. Concentrations of credit risk (FAS 105)
5. Information about investment securities (FAS 115)
6. Information about off-balance sheet financial instruments (FAS 119, FAS 133)
7. Pro forma and other disclosures about stock-based compensation to employees and non-employees (FAS 123)
8. Components of pensions and benefits other than pensions (FAS 87, FAS 106, FAS 132)
9. Components of tax expense and deferred tax liability/asset (FAS 109)
10. Income statement classification differences

1. Statements of comprehensive income prepared using either U.S. GAAP or home-country GAAP are required for both Item 17 and Item 18 issuers. These statements may be presented in any format permitted by FAS 130. Reconciliation to U.S. GAAP is encouraged, but not required.

1. Cash flow statement

 While there is free choice in the selection of the reporting currency, there is not free choice in the selection of the currency used for measurement. All operations, including those of the parent company, that do not operate in a hyperinflationary environment should be measured using the currency of the primary economic environment to measure transactions. While not specifically referring to FAS 52, SX 3-20 is designed to be conceptually consistent with that standard. Assets and liabilities are translated at the period end exchange rate and the income statement is translated at the weighted average annual exchange rate. The translation effects of exchange rate changes are included as a separate component of equity.

1. Financial information for all periods presented in the filing should be recast into the new reporting currency using a methodology consistent with FAS 52. Income statements should be translated from the old reporting currency into the new reporting currency using a weighted average exchange rate for the applicable period. The balance sheet should be translated using the applicable period end exchange rate. The objective of this procedure is to present financial statements as if the issuer had always used the new reporting currency.

1. An issuer in a hyperinflationary economy must either comprehensively include the effects of price-level changes in the primary statements or, alternatively, present supplemental information to quantify the effects of changing prices using the historical cost/constant currency or current cost/replacement cost approach. [SX 3-20 and 20-F Items 17 & 18(c)(2)(iv)] The quantified effects of applying price-level accounting are not eliminated in the reconciliation to U.S. GAAP. This provision applies to all issuers who price level adjust even if the currency of the primary economic environment is not hyperinflationary as defined under U.S. GAAP.

1. All price level adjusted financial information in a foreign private issuer’s registration statement should be presented in equivalent purchasing power units of the reporting currency. For each period presented, all measurements are retroactively restated to the purchasing power unit as of the date of the most recent balance sheet information in the filing.

1. In certain instances where the independent accountant is not licensed in the U.S. and not familiar to the staff, OCA may request information about the accountant’s qualifications to practice before the Commission. Reports of unfamiliar foreign accountants should be brought to the attention of OCA via DCAO, who will advise of any procedures necessary to determine the acceptability of the foreign auditor’s report.

1. The report of the independent accountant, except for MJDS filers in Canada, should include a statement that the audit was conducted in accordance with U.S. GAAS. [Instruction 2 to Item 8.A.2 of revised Form 20-F; R33-7745]

 Unlike Regulation S-K, Form 20-F does not require disclosure of changes in accountants. Foreign private issuers are not required to provide disclosure regarding a change in accountants in Exchange Act or Securities Act filings.

1. All materialrelated party transactions.

1. The significance of an item may be independent of its amount; this is often the case with respect to related party transactions. [SAB 4E]
2. No disclosure is required by FAS 57 for compensation arrangements, expense allowances and other similar items in the ordinary course of business.

 All costs of doing business, including costs incurred by parent and others, should be reflected in historical financial statements. Allocation of common expenses may be required. Footnote disclosure should include management’s assertion that the allocation method is reasonable and management’s estimate of what the expenses would have been on a stand-alone basis, if materially different. See also Section IV, "Components of Larger Entities," below.

1. Contributed Services

1. Historical financial statements should reflect reasonable compensation levels. Where charges were not made or are unreasonably low, and if material to an understanding of operating results, historical statements should be revised to reflect the value of services rendered as a capital contribution. However, contributed services ordinarily need not be reflected it the entity is in formation or earliest phases of development stage.
2. If historical statements reflect compensation that is not unreasonable, but is materially different from that after the offering, disclosure of the salary commitment should be made and pro forma data for the latest year and interim period may be necessary. [SAB 2C]

 In most circumstances, transfers of nonmonetary assets for stock or other consideration of the registrant prior to an initial public offering are recorded at predecessor cost as determined in accordance with GAAP. Where the registrant gives monetary consideration for property conveyed by promoters, the excess over predecessor costs is treated as a reduction of equity (i.e., a special distribution).

1. Receivables from affiliates which are the equivalent of unpaid subscriptions receivable or capital distributions should be reflected as a deduction from equity. [SAB 4G]

1. Refer to Topic Three for detailed discussion of pro forma requirements.

1. If a material portion of the proceeds of an offering will be distributed to shareholders, present pro forma EPS for the latest year and interim period giving effect to the number of shares whose proceeds will be used to pay dividends in addition to historical EPS.

 The financial statements of components of larger entities should consider the following:

 Refer to Topic Two, Section 1.A.3 for a discussion of when less than full financial statements are appropriate as well as form and content requirements.

 Refer to Topic Three, Section II.K for guidance on pro forma financial information related to acquisitions of components of larger entities.

1. Compensatory stock, options or warrants issued to

1. employees are accounted for under APB 25 or FASB 123.
2. non-employees, including consultants, advisory board members or others providing services to the issuer are accounted for under FAS 123. See also EITF No. 96-18.

1. Measurement

 The staff views the placement of shares in escrow as a recapitalization by promoters similar to a reverse stock split. The agreement to release the shares upon the achievement of certain criteria is presumed by the staff to be a separate compensatory arrangement between the registrant and the promoters. Accordingly, the fair value of the shares at the time they are released from escrow should be recognized as a charge to income in that period. However, no compensation expense need be recognized for shares released to a person that has had no relationship to the registrant other than as a shareholder (for example, is not an officer, director, employee, consultant or contractor), and that is not expected to have any other relationship to the company in the future.

 While it may be required under FAS 131 for some registrants to disclose in a note to the financial statements and discuss in MD&A a non-GAAP measure related to its operating segments (See Section B below), some registrants choose to present a non-GAAP financial measure such as EBITDA or FFO (funds from operations) in their disclosure documents. Although such measures can be useful in some circumstances, an unbalanced presentation can be confusing and lead to undue reliance on the measure by investors. Problems associated with presentation of non-GAAP measures were highlighted by the Commission in Accounting Series Release No. 142. Some comments cited frequently by the staff include the following:

 Where consistent with a registrant’s internal management reports, FAS 131 permits measures of segment profitability that differ from consolidated operating profit as defined by GAAP, or that exclude items included in the determination of the registrant’s net income. Under FAS 131, a registrant also must reconcile key segment amounts to the corresponding items reported in the consolidated financial statements in a note to the financial statements. Similarly, the staff expects that the discussion of a segment whose profitability is determined on a basis that differs from consolidated operating profit as defined by GAAP or that excludes the effects of items attributable to the segment also will address the applicable reconciling items in MD&A. Likewise, the staff expects that the effects of management’s use of non-GAAP measures, either on a consolidated or segment basis, will be explained in a balanced and informative manner, and the disclosure will include a discussion of how that segment’s performance has affected the registrant’s GAAP financial statements.

1. Except forthe following industries:

• financial institutions
• leasing and financing operations
• insurance companies
• broker-dealers
• real estate companies

1. Assets: Probable future economic benefits obtained or controlled as a result of past events or transactions. [CON 6.25]

 Prohibited if the specific criteria below are not met:

• Legal right of set-off exists
• Parties have determined the amount to be offset
• There is intent to offset
• Offsetting is enforceable under law

1. Restrictions as to use, including compensating balance requirements. Restricted cash generally is disclosed separately on the face of the balance sheet, and is not included in the cash total on the statement of cash flows. [SX 5-02.1, FRC 203]

1. If notes receivable exceed 10% of receivables, state separately.

1. Disclose:

• Major classes (finished, work-in-process, raw materials, etc.).
• Elements of cost, valuation and cost flow methods.

1. FAS 115 applies to equity securities that have readily determinable fair values and to all investments in debt securities. Investments accounted for under the equity method do not fall under the scope of FAS 115 (see K.below).

1. Major categories (commercial, financial and agricultural; real estate-construction; real estate mortgage; installment loans to individuals; lease financing; foreign; other).

 State separately any amounts in excess of 5% of total assets.

 If reverse repurchase agreements exceed 10% of total assets, the following disclosures are required:

• The name(s) of the counterparty(ies)
• The amount at risk
• The weighted average maturity of the agreements
• Whether or not there are any provisions to ensure that the market value of the underlying assets remains sufficient to protect the registrant in the event of default of the counterparty and disclosures of the nature of such provisions.

 A ceding enterprise shall disclose concentrations of credit risk associated with reinsurance receivables and prepaid reinsurance premiums pursuant to FAS 105. Identification of balances from individual reinsurers and/or a breakdown of aggregate balances by rating category (as to claims-paying ability) may be necessary as part of the description of business.

 Paragraph 60.c of FAS 60 requires certain disclosure related to acquisition costs. Disclosures of cost capitalized should be explicit as to the nature of the costs incurred, rather than using general terms, such as "other" and "marketing".

1. Balances, methods and periods of depreciation. If PP&E is significant, registrants should disclose balances and depreciation methods and periods for each major class of depreciable assets.

1. Investments in common stock accounted for under the equity method require disclosure specified by APB 18.20.

1. Separately state any item exceeding 5% of total assets; significant changes should be explained in a note. In particular, intangible assets groups that are amortized over different periods or using different methods should be disclosed separately.

 Separately state any item exceeding 5% of total assets; explain any material changes.

1. Generally, deferral of costs is not appropriate, except in the situations described below. Policies regarding deferred charges should be disclosed.

1. Separately state amounts due to trade creditors, banks, other financial institutions, commercial paper holders, and related parties.

 State separately amounts exceeding 5% of current liabilities.

1. Disclosures required:

1. Separately disclose each issue and obligation, describing rates of interest, maturities, priorities, convertibility, and other material terms, including the currency of denomination. Disclose reason for significant changes.
2. Identify assets mortgaged, pledged, or otherwise subject to lien, describing carrying value and related obligation.
3. Describe defaults existing at latest balance sheet date and not subsequently cured; if conditions waived, state period of waiver. [SX 408(c)]
4. Disclose principal payments for each of the five succeeding years. [FAS 47.10]
5. To the extent that derivative financial instruments are designated to long-term debt, the nature, terms and cash requirements disclosures required by FAS 119 should be included in the long-term debt footnote. The disclosures should be in sufficient detail to enable the reader to understand how the nature, terms and cash requirements of long-term debt have been effectively modified. [R33-7250]

 If repurchase agreements exceed 10% of stockholders equity, the following disclosures are required:

• The name(s) of the counterparty(ies);
• The amount at risk; and
• The weighted average maturity of the agreements.

1. The disclosure requirements previously required by FAS 87, FAS 88 and FAS 106 have been replaced with the disclosures specified in FAS 132.

 State separate items exceeding 5% of total liabilities.

1. On the face of the balance sheet, disclose:

1. future policy benefits and losses, claims and loss expenses

   1. Property/casualty claim liabilities should be shown separately from life insurance policy benefit liabilities on the face of the balance sheet. Policyholder balances under FAS 97 contracts (universal-life type and investment contracts) should be shown separately from FAS 60 (traditional) policy benefit liabilities.
   2. Where property casualty claims are discounted, disclose the basis for the selection of the discount rate, the rate used for each period or category of claim, and the effects of discounting on the amounts of aggregate claim liabilities at each balance sheet date and earnings for each period. If discount rates are not determined pursuant to SAB 5N, all conditions in EITF 93-5 and SAB 5Y must be met.
   3. Generally, FAS 5 disclosures regarding reasonably possible losses in excess of those accrued are not required for property/casualty loss liabilities. However, SAB 5W requires such financial statement disclosure of specific uncertainties related to unpaid insurance claims whose nature or significance makes them not susceptible to normal, recurring reserve estimates. Examples include claims arising from product liability or environmental pollution. The notes should also include clear disclosures regarding the accounting policies and methods for recognizing reserves for these types of claims. Where exposure is material, disclosures regarding these types of claims also will be necessary pursuant to Industry Guide 6 and MD&A. The disclosure guidance in SAB 5Y should also be considered.
2. unearned premiums
3. other policy claims and benefits payable

1. Include amounts of supplementary contracts without life contingencies, policyholders’ dividend accumulations, undistributed earnings on participating business, dividends to policyholders and retrospective return premiums. State separately any item the amount of which is in excess of 5% of total liabilities.

1. Disclose separately:

• the amounts of noninterest and interest bearing deposits
• deposits in foreign banking offices (see Industry Guide 3 for the definition of a foreign banking office)

1. Accrue for amounts when

• an asset is impaired or a liability at the balance sheet date is probable, and
• amount is reasonably estimable.

1. State separately material items, including deferred taxes and deferred income

 Additional disclosures may be necessary for these instruments in order to provide investors with a fair and balanced picture of the registrant’s capitalization and leverage, particularly if the outstanding security of the finance subsidiary is guaranteed by the parent and mirrors the cash flows of the debt of the parent held by the finance subsidiary. Inclusion of the outstanding public security in minority interest with minimal disclosure of its characteristics is not adequate, particularly when Section 12(h) reporting relief is requested for the finance subsidiary. The parent should disclose the subsidiary’s outstanding securities as a separate line item in the parent’s balance sheet captioned "Company-obligated mandatorily redeemable security of subsidiary holding solely parent debentures," "Guaranteed preferred beneficial interests in Company’s debentures," or similar descriptive wording. Notes to the financial statements should describe fully the terms of the securities and explain that those terms parallel the terms of the company’s debentures, which comprise substantially all of the assets of the consolidated trust or subsidiary.

1. Guidance in SX 5-02, FRC 211, SAB 3C, and SAB 6B.1 is applicable to all equity securities (not only preferred stock) the redemption of which is outside the control of the issuer. For example, common stock subject to a put and stock subject to rescission is subject to this guidance. [SP]

1. Disclose each issue, number shares authorized (may also be presented in the notes), issued and outstanding, and liquidation value (if any) on face of balance sheet; in notes, disclose terms of convertibility, etc. [SX 5-02] Also disclose number of shares issued upon conversion, exercise or satisfaction of required conditions during most recent fiscal year and subsequent interim period. [FAS 129]

1. Display separately from retained earnings and additional paid-in capital as a component of equity in the balance sheet.

1. State separately paid-in capital, other capital, retained earnings (appropriated and unappropriated).

 In a separate statement or a note, all individually material changes in the components of equity (dollar amounts and number of securities) should be disclosed. More detailed disclosure is required of development stage companies (FAS 7) in a separate statement from the companies’ inception.

 Where registrant incurs losses, should be titled statement of operations, rather than income. [TPA 1200.04]

1. State separately:

• net sales of tangible products
• income from services
• income from rentals
• other revenues

  1. If excise taxes comprise 1% or more of sales, parenthetical disclosure of the amount should be made.
  2. Revenues of agents should not be reported as revenues of the registrant. Generally revenues are revenues of the registrant if that entity takes title to goods and has risks and rewards of ownership, such as risk for collection, delivery and returns. If the registrant performs solely as an agent or broker without taking title to the goods, sales should be reported on a margin only basis. [SAB 13A.5]
  3. Sales of leased departments should not be included in a retailer’s gross revenue, however, rental income form the leased departments may be included. [SAB 8A]

 Presentation of premiums ceded under reinsurance contracts on the face of the income statement (as a separate caption reducing premiums earned, or parenthetically) is encouraged. If not shown on the face, FAS 113 requires note disclosure of premiums ceded.

 In a note to the financial statements, disclose:

• Investment income for categories that exceed 5% of total investment income
• Total investment income

1. Present net realized investment gain/loss separately on the face of the income statement regardless of size.

 Presentation of recoveries recognized (i.e., ceded losses or policy benefits) under reinsurance contracts on the face of the income statement (as a separate caption reducing claims and policy benefits expense, or parenthetically) is encouraged. If not shown on the face, FAS 113 requires note disclosure of recoveries recognized.

 State separately on the face of the income statement or in a note to the financial statements the following:

• deferred policy acquisition costs amortized during the period
• amount of other operating expenses

 Disclose separately on the face of the income statement or in the notes to the financial statements the following:

 Disclosure separately on the face of the income statement or in the notes to the financial statements the following:

 Should include only a provision for loan losses. All other provisions should be separately disclosed and/or reconciled in the notes to the financial statements.

1. Other opearting costs or expenses

• Finance charge of retail operations should be disclosed separately. [SAB 8B]

1. "Restructuring charges" and "special charges" descriptions should be evaluated to ensure that the components do notinclude:

• costs not qualifying to be recognized solely upon management’s commitment
• amounts accrued without sufficient objective basis
• ordinary costs and write-offs that are misclassified as "restructuring" or "special," like environmental charges and write-downs of inventories or productive assets
• costs and write-offs that should have been recognized at an earlier date
• costs and activities that warrant more thorough discussion in MD&A

1. Separately disclose dividends, interest on securities, net gain (loss) on securities, and other income.

1. Other income — Disclose the following items separately if they exceed 1% of total interest income. Investment securities gains and losses must be shown separately regardless of size.

• Commissions and fees from fiduciary activities.
• Commissions, broker’s fees and markups on securities underwriting and other securities activities.
• Insurance commissions, fees and premiums.
• Fees of other customer services.
• Profit or loss on transactions in securities in dealer activities.
• Equity in earnings of equity method investees.
• Gains/loss on disposition of equity in securities of unconsolidated subsidiaries.

1. The term segment used in APB 30 refers to a component of an entity whose activities represent a separate major line of business or class of customer. A separate line of business that is not a major line of business does not qualify for discontinued operations accounting treatment under APB 30.

1. A segment as defined in FAS 131 may or may not be the same as that in APB 30 since FAS 131 does not require that segments be identified on a products and services basis. FAS 131 generally requires disclosure of revenues for each product and service or each group of similar products and services but with no quantitative threshold.
2. Item 101(c)(l) of Regulation S-K requires quantitative and qualitative information for "any class of similar products and services". The staff has interpreted "any class of similar product or class of customer" to be analogous to major line of business in APB 30.
3. MD&A also requires registrants to identify events, trends and uncertainties that are material to investors on a disaggregated basis. That disclosure, however, may be based on FAS 131 reportable segments rather than major lines of business.
4. In situations where a disposition of a business that was not separately reported as a segment under FAS 131 is classified as a discontinued operation, the staff looks to disclosures by registrants in the description of the business and MD&A to determine whether those disclosures communicate to investors expected relevant information for a major line of business.

 Disclose:

1. Limited to items that are both:

• unusual in nature, and
• infrequent of occurrence.

 Where income applicable to common shareholders differs from net income by 10% or more (due to dividends or amortization on preferred stock), a separate line on the face of the income statement should disclose income applicable to common shareholders. [SAB 6B.1]

1. Includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

1. Basic and diluted (if applicable) should be presented on the face of the income statement, rounded to the nearest cent, in order not to imply a greater degree of precision than exists.

1. The statement may be prepared using either the direct or indirect method of presenting cash flows from operating activities. Cash flows are classified and presented as being related to operating, financing and investing activities.

1. Netting of cash flow items is permitted when turnover is quick, the amounts are large and the maturities are three months or less. Revolving credit agreements must have underlying maturities of three months or less. Netting is not permitted for changes in property.

1. Principles of consolidation

1. The staff strictly interprets the aggregation guidance provided in paragraphs 16-24 of FAS 131. Segments may be aggregated in the disclosure only to the limited extent permitted by the standard. If segments are aggregated, that fact must be disclosed.

1. Major Customers

1. If 10% or more of revenue is derived from any single customer, disclose the amount for each customer separately.
2. FRR Section 503.02 requires registrants to disclose the names of significant customers and suppliers that exceed 10% of sales and purchases. This disclosure generally is not required in the notes to the financial statements but must appear in the description of the business section of the document.

1. Changes resulting from a pooling-of-interests, error corrections, reclassifications, etc., should be reconciled as to revenues and income. [SX 3-03(c); 10-01(b)(7)]

1. If about to emerge from reorganization, present an additional pro forma balance sheet giving effect to reorganization plan, with explanatory disclosure. After reorganization, a note should explain and summarize the effect of reorganization. [SOP 90-7]

1. Disclose the fair value of all financial instruments for which estimation is practical, either on the face of the financial statements or in the notes along with the carrying value. Disclose the method(s) and significant assumptions used to estimate the fair value.

1. In addition to GAAP required disclosures (FAS 119 and FAS 133), disclose accounting policies for derivative financial and derivative commodity instruments as described in SX 4-08(n):

1. accounting methods and types of instruments accounted for under each method;
2. criteria required to be met for each accounting method used;
3. accounting method used if the criteria specified above are not met;
4. accounting for terminations of hedging derivative instruments;
5. accounting for sale, extinguishment, or termination of hedged items, along with accounting for derivatives designated to an anticipated transaction when that transaction is no longer likely to occur; and
6. where and when derivative instruments and their related gains and losses, are reported in the financial statements.

1. Staff Accounting Bulletin 74 (Topic 11M) discusses disclosures that a registrant should provide in its financial statements and/or MD&A regarding the impact that recently issued accounting standards will have on its financial statements when the standard is adopted in a future period. Disclosure of the effects of not only standards recently issued by the FASB, but also Statements of Position and Practice Bulletins issued by the AICPA and consensus positions of the EITF may warrant this disclosure. Disclosures that should be considered include:

1. a brief description of the standard and its anticipated adoption date, and the method by which the standard will be adopted,

1. Balance Sheet

1. Need only include major captions outlined by Regulation S-X, with the exception of inventories (see below).
2. Inventories. Disclose data as to raw materials, work in process and finished goods.
3. Where any item is less than 10% of total assets, and amount of change is not greater than 25% since fiscal year-end, the caption may be combined with others.

1. Notes to interim data

1. Need not duplicate fiscal year-end disclosures.
2. Material events (new borrowings, changes in accounting principles or estimates, other material transactions) occurring subsequent to fiscal year-end should be disclosed.
3. Material contingencies should be disclosed, even if no changes occur since fiscal year-end.
4. Must be sufficient to keep the interim data from being misleading.
5. Changes in accounting principles including adoption of recently issued standards must be accompanied by all material disclosures required by the applicable standard unless such disclosures were previously provided in an annual report.

 APB No. 16, paragraph 70, states that "presumptive evidence of the acquiring corporation in combinations effected by an exchange of stock is obtained by identifying the former common stockholder interests of a combining company which either retain or receive the larger portion of the voting rights in the combined corporation. That corporation should be treated as the acquiror unless other evidence clearly indicates that another corporation is the acquiror…" SAB Topic 2A affirms the above principle and discusses some of the factors which may rebut the normal presumption.

 Transaction costs (e.g., legal and investment banking fees, stock issuance fees, etc.) may be incurred in a reverse acquisition. In the merger of two operating companies, those costs will be, depending on their nature, either part of the purchase consideration that is allocated to the net assets of the acquired business, charged directly to equity as a reduction from the fair value assigned to shares issued, or expenses of the period. In contrast, an operating company’s reverse acquisition with a nonoperating company having some cash has been viewed by the staff as the issuance of equity by the accounting acquirer for the cash of the shell company. Accordingly, we believe transaction costs may be charged directly to equity only to the extent of the cash received, while all costs in excess of cash received should be charged to expense.

1. Commission rules do not address directly a registrant’s reporting obligations in the event that it acquires another entity in a transaction to be accounted for as a reverse acquisition. For accounting purposes, the acquiree is treated as the continuing reporting entity that acquired the registrant. The staff believes the reports filed by the registrant after a reverse acquisition should parallel the financial reporting required under GAAP — as if the acquiree were the legal successor to the registrant’s reporting obligation as of the date of the merger.

1. A Form 8-K should be filed not later than 15 days after the consummation of the reverse acquisition. That Form 8-K should note under the appropriate Form 8-K item number any intended change in independent accountants and changes in fiscal year end from that used by the registrant prior to the acquisition. Most typically, registrants adopt the fiscal year and auditor of the accounting acquirer, but that is not necessary.

1. Unless the same accountant reported on the most recent financial statements of both the registrant and the accounting acquirer, a reverse acquisition always results in a change in accountants. A Form 8-K filed in connection with a reverse acquisition should provide the disclosures required by SK Item 304 under Item 4 of Form 8-K for the change in independent accountants, treating the accountant that no longer will be associated with the registrant’s financial statements as the predecessor accountant.

 A Form 8-K filed in connection with a reverse acquisition should note under the appropriate Form 8-K item number any intended change in fiscal year from that used by the registrant prior to the acquisition.

1. Financial statements giving effect to the pooling should be presented in transactional filings or in voluntary supplemental filings as "supplemental financial statements."

1. The financial statements required in registration statements and proxies are the complete set of audited restated financial statements (not supplemental) giving retroactive effect to the pooling.

1. If material, the financial information required by Item 1010(a) and (b) of Regulation M-A for the issuer in an issuer tender offer and for the offeror in a third-party tender offer must be filed.

1. The financial information required by Item 1010(a) through (b) of Regulation M-A for the issuer of the subject class of securities must be filed.

1. Audited financial statements for the two fiscal years required to be filed with the company’s most recent annual report under Sections 13 and 15(d) of the Act.

 If material, pro forma information must be filed disclosing the effect of the transaction on:

 A fair and adequate summary must be filed of the information specified in paragraphs A and B of this section for the same periods specified. A fair and adequate summary includes:

 Where an employee benefit plan (Plan) registers Plan interests as separate securities from the issuer’s securities offered under the Plan, the Plan incurs a separate reporting obligation under §15(d) of the Exchange Act. This obligation requires the Plan to file an annual report on Form 11-K. Late or incomplete filings on Form 11-K by the Plan do not adversely affect the issuer’s ability to use Form S-3 or rely on Rule 144 because the Plan is a separate issuer.

1. The financial statement requirements in Form 11-K are specified by the Form and Article 6A of Regulation S-X, which follow generally the form and procedures as in Topic One, Section I.A.

 Form 11-K is required to be filed within 90 days after the end of the fiscal year of the Plan [General Instruction A to Form 11-K]. If the issuer of the securities offered by the Plan files annual reports on Forms 10-K or 10-KSB, the Plan may file its financial statements in the issuer’s Form 10-K or 10-KSB. [Rule 15d-21 of the Exchange Act] If this procedure is followed, the Plan’s financial statements (as required by Form 11-K) should be filed within 120 days after the end of the Plan’s fiscal year (either as a part of the Form 10-K or as an amendment to the Form 10-K). However, if the Plan’s fiscal year ends within 62 days prior to the end of the fiscal year of the issuer, such information may be furnished as a part of the issuer’s next annual report.

 Form 11-K for a plan subject to ERISA is due within 180 days after the Plan’s fiscal year end [General Instruction A to Form 11-K]. If the Plan subject to ERISA elects the option permitted by Rule 15d-21 (see II.A above), the financial statements required by Form 11-K should be filed within 180 days after the Plan’s fiscal year end.

 Since the Plan is a separate registrant with Section 15(d) reporting requirements, it is also subject to Form 8-K reporting requirements.

1. To encourage Canadian issuers to extend rights offers to their U.S. shareholders (rather than cash them out in order to avoid U.S. registration), MJDS Form F-7 is available for Securities Act registration in connection with such offers. Form F-7 acts as a wraparound for the relevant Canadian offering documents. No reconciliation to U.S. GAAP is required for financial statements included under cover of that Form.

1. To encourage Canadian issuers to extend exchange offers to U.S. shareholders, MJDS Forms F-8 and F-80 are available in specified circumstances for Securities Act registration in connection with such offers. In the case of an exchange offer, those Forms consist primarily of the relevant Canadian offering documents. No reconciliation to U.S. GAAP is required for financial statements included under cover of those Forms.

1. Registration of securities is allowed on MJDS Forms F-8 and F-80 in connection with Canadian statutory amalgamations, mergers, arrangements and other reorganizations requiring the vote of shareholders of the participating companies ("business combinations"). In the case of a business combination, those Forms consist of primarily the information prepared for distribution under Canadian proxy requirements. No reconciliation to U.S. GAAP is required for financial statements included under cover of those Forms.

1. Offerings by issuers of investment grade debt and preferred stock may be registered under the Securities Act on Form F-9. The debt or preferred stock must be rated investment grade (typically, the four highest ratings) by a nationally recognized statistical rating organization or by a securities rating organization recognized by Canadian securities regulators as an "Approved Rating Organization" in order to qualify. Securities registered on the Form must either be non-convertible or convertible only after one year from the date of issuance. Like the other MJDS forms, Form F-9 is primarily a wraparound form for the Canadian disclosure documents. No reconciliation of financial statements to U.S. GAAP is required.

1. Securities Act registration of other securities, including equity securities, is permitted on Form F-10. Form F-10 is primarily a wraparound form for the Canadian disclosure documents, but reconciliation of included financial statements to U.S. GAAP, as specified in Item 18 of Form 20-F, is required. As originally adopted, the requirement for reconciliation would have been subject to a sunset provision effective July 1, 1993. As of July 1, 1993, however, the Commission rescinded the sunset provision, which had the effect of continuing the requirements for reconciliation. [Securities Act Release No. 7004 (June 28, 1993)]

 These forms are available for use by certain Canadian issuers to register securities under Section 12(b) or 12(g) or report under Section 15(d) of the Exchange Act. Information to be filed on Form 40-F includes the issuer’s annual information form and audited annual financial statements with accompanying management’s discussion and analysis, all as prepared in accordance with Canadian requirements. Reconciliation as specified in Item 17 of Form 20-F is required in connection with any Form 40-F filed unless the obligation to file arises because of registration on Form F-7, F-8, F-9, or F-80 or the Form 40-F is filed with respect to securities that could have been registered under the Securities Act on Form F-9. Form 6-K information is that which the issuer has made public in its home jurisdiction, filed with a stock exchange where its securities are traded, or distributed to its shareholders.

1. The percentage ceiling on U.S. ownership for cash and exchange offers made pursuant to the MJDS is calculated by reference to securities held by persons with U.S. addresses in the record of the issuer and other specified records. U.S. affiliates of the Canadian company are not excluded from the calculation of the U.S. ownership ceiling.