2.11 Acquisition or Probable Acquisition of a Foreign Acquiree

A registrant may acquire a business that is not incorporated in the United States (i.e., a “foreign acquiree”). A foreign acquiree that does not conduct the majority of its operations in the United States often does not prepare its financial statements in accordance with U.S. GAAP. Relief from certain reporting requirements may be available for a foreign acquiree that is also a foreign business acquiree (i.e., an acquired or to be acquired business that meets the definition of a foreign business in Rule 1-02(l)) or a foreign private issuer acquiree (i.e., an acquired or to be acquired business that would meet the definition of a foreign private issuer in Rule 240.3b-4(c) of the Code of Federal Regulations if the acquiree were to file its own initial registration statement with the SEC). A registrant is advised to consult with its SEC counsel in determining whether a foreign acquiree is also a foreign business acquiree or foreign private issuer acquiree.

The sections below outline the reporting requirements for a foreign acquiree and any additional relief that may be available if the acquiree is also a foreign business acquiree or foreign private issuer acquiree. Before applying the guidance on foreign acquirees, entities must understand the general application of the SEC reporting requirements for business combinations under Rule 3-05, which are discussed throughout this chapter.

2.11.1 Use of U.S. GAAP in the Performance of the Significance Tests Under Rule 3-05

The significance tests for a foreign acquiree are the same as those for a domestic acquiree. Further, when performing the significance tests, a domestic registrant must use the foreign acquiree’s U.S. GAAP results. However, if a registrant is a foreign private issuer that files its financial statements in accordance with IFRS Accounting Standards (i.e., as issued by the IASB), it must use the results of the foreign acquiree, prepared in accordance with IFRS Accounting Standards, when performing the significance tests.

If the foreign acquiree uses IFRS Accounting Standards or another comprehensive basis of GAAP (i.e., local GAAP) when presenting its financial statements, the domestic registrant must reconcile the financial statements to U.S. GAAP when performing the significance tests. The foreign acquiree’s financial statements, including the reconciliation to U.S. GAAP, do not have to be audited for the significance tests to be performed. However, if a business acquisition exceeds the 20 percent significance level, an audit must be performed of the required annual acquiree financial statements that will ultimately be filed with the SEC in accordance with Rule 3-05.

2.11.2 Auditing Standards Applicable to a Foreign Acquiree's Financial Statements

Instruction 2 of Form 20-F, Item 8.A.2, specifies that an audit must be performed, in accordance with U.S. GAAS or PCAOB standards, of the financial statements of a foreign acquiree that are filed with the SEC to meet the requirements of Rule 3-05. The SEC staff will not accept audit reports indicating that the audit was performed in accordance with local GAAS or International Standards on Auditing (ISA). The SEC staff has noted that it does not have authority to waive the requirement that the financial statements be audited in accordance with the standards of the PCAOB or AICPA (e.g., to provide relief by allowing a registrant to submit financial statements that are audited under ISA or other jurisdictional auditing standards). However, the staff will not object if the audit report refers to compliance with both U.S. GAAS and another set of auditing standards.

2.11.3 Accounting Principles Applicable to a Foreign Acquiree's Financial Statements

To satisfy the requirements of Rule 3-05, a foreign acquiree may prepare financial statements in accordance with U.S. GAAP, IFRS Accounting Standards, or local GAAP (i.e., a comprehensive basis of accounting other than U.S. GAAP or IFRS Accounting Standards) for filing with the SEC. If it uses IFRS Accounting Standards or local GAAP, that fact must be disclosed in the accountant’s report and, as discussed in Section 2.11.4, a reconciliation to U.S. GAAP may be needed.

2.11.3.1 Financial Statements That Do Not Constitute a Full Set of Financial Statements Under IFRS Accounting Standards

As outlined by the SEC staff at the 2019 AICPA Conference on Current SEC and PCAOB Developments, there are certain circumstances in which the periods required for financial statements provided in accordance with SEC regulations, including Rule 3-05, may not be considered a full set of financial statements as defined under IFRS Accounting Standards. While the SEC staff rarely accepts qualified opinions, it would accept an audit opinion that is qualified solely with respect to either of the following:

The omission of the comparative period required by IFRS Accounting Standards when only one year of financial statements is needed in accordance with Rule 3-05. Similar considerations apply for review opinions (if presented) when no comparative period is required for interim information.
The omission of the balance sheet as of the date of adoption required by IFRS 1 when the financial statements provided reflect the first-time adoption of IFRS Accounting Standards and such adoption date precedes the periods required under Rule 3-05.

Further, as described in Section 2.6.4, the SEC staff sometimes accepts a statement of assets acquired and liabilities assumed and revenue and expenses (i.e., abbreviated financial information) in lieu of full financial statements. The staff will accept such a statement if certain qualifying conditions are met (see Section 2.6.4.1 for more information about these qualifying conditions). Abbreviated financial information would generally not be considered a full set of financial statements under IFRS Accounting Standards. As discussed at the May 2019 CAQ International Practices Task Force joint meeting with the SEC staff, when appropriate and consistent with the requirements in Rule 3-05, such abbreviated financial information may be prepared in accordance with IFRS Accounting Standards as long as certain additional disclosures are provided. As indicated in the minutes of the joint meeting, the abbreviated financial information would include:

A statement describing the regulatory purpose of such financial statements
A statement that they are not intended to represent a complete presentation of the financial position or results of operations and the related footnotes of the acquired business
A statement that the financial statements are prepared on a basis that is “in accordance with IFRS as issued by the IASB relevant to such financial statements”
A description of the basis for determining the assets and liabilities to be included
An explanation as to why a complete set of financial statements is not available and cannot be prepared
A statement that the financial statements have been derived from the accounting records of the entity from which it was acquired and
Additional disclosures necessary to understanding the abbreviated financial statements.

The minutes also indicate that the relevant audit report for the abbreviated financial information should include:

A statement describing the regulatory purpose of such financial statements
A statement that they are not intended to represent a complete presentation of the financial position or results of operations of the acquired business
A statement that the financial statements are prepared on a basis that is “in accordance with IFRS as issued by the IASB relevant to such financial statements.”

2.11.4 Reconciliation to U.S. GAAP May Be Required

Unless certain conditions are met (see the sections below), if a foreign acquiree uses local GAAP or IFRS Accounting Standards when preparing its financial statements, a reconciliation to U.S. GAAP prepared in accordance with Form 20-F, Item 18, is required. Under Item 18, a quantified reconciliation of net income and shareholder’s equity must be performed and all disclosures required by U.S. GAAP and Regulation S-X provided. The reconciliation must be audited for annual periods. If a reconciliation to U.S. GAAP needs to be included in the foreign acquiree’s annual financial statements, any required interim financial statements of the foreign acquiree must also include a reconciliation to U.S. GAAP. For additional guidance on the U.S. GAAP reconciliation requirements, see Form 20-F, Item 18.

2.11.4.1 Reconciliation Relief Available for Foreign Private Issuer Acquirees

A foreign private issuer acquiree is eligible to omit the U.S. GAAP reconciliation when the financial statements are prepared in accordance with IFRS Accounting Standards. A reconciliation to U.S. GAAP is still required if the financial statements are prepared in accordance with local GAAP.

Connecting the Dots

If a registrant is a foreign private issuer that prepares its financial statements by using IFRS Accounting Standards, Rule 3-05(d) permits the registrant to reconcile foreign private issuer acquiree financial statements to IFRS Accounting Standards rather than U.S. GAAP if they were prepared by using local GAAP. The reconciliation to IFRS Accounting Standards generally must adhere to the form and content requirements in Form 20-F, Item 17(c). The SEC staff has also clarified that IFRS 1, which addresses first-time adoption of IFRS Accounting Standards, applies and that Form 20-F, Item 17, reconciliation accommodations that are inconsistent with IFRS Accounting Standards are not available to registrants that reconcile to IFRS Accounting Standards. Registrants that perform such reconciliations should consider consulting with their audit and legal professionals.

2.11.4.2 Reconciliation Relief Available for Foreign Business Acquirees

If a foreign business acquiree’s financial statements are prepared under IFRS Accounting Standards, no U.S. GAAP reconciliation is required. However, a U.S. GAAP reconciliation, prepared in accordance with Form 20-F, Item 17, must be provided if a foreign business acquiree uses local GAAP when preparing its financial statements and 30 percent significance is exceeded under any of the conditions in Rule 1-02(w). Further, in accordance with Item 17, a foreign business acquiree does not have to include the disclosures required by U.S. GAAP or Regulation S-X that it would otherwise have to provide under Form 20-F, Item 18. However, such reconciliation relief does not apply a when foreign business acquiree is a target in proxy statement or registration statement. In such cases, the reconciliation to U.S. GAAP must be provided even if significance does not exceed 30 percent.

For additional guidance on the U.S. GAAP reconciliation requirements, see Form 20-F, Items 17 and 18.

2.11.5 Financial Statement Periods to Be Presented for Foreign Business Acquirees

The financial statement periods to be presented for a foreign acquiree that is not a foreign business acquiree are the same as those for a domestic acquiree, including interim periods. Rule 3-12 provides guidance on determining the appropriate annual and interim financial statement periods that are required for such a foreign acquiree. See Section 2.5 for more information.

Connecting the Dots

A foreign acquiree may meet the definition of a foreign private issuer but not the definition of a foreign business. If so, the registrant may wish to apply the guidance on the age of financial statements that applies to a foreign business to satisfy the financial statement requirements of Rule 3-05. At the 2018 AICPA Conference on Current SEC and PCAOB Developments, the SEC staff indicated that such a registrant would need to obtain preclearance from the CF-OCA through the waiver process.

Note that a registrant must generally provide financial statements of an acquiree for the periods specified in Rules 3-01 and 3-02. However, for a foreign business acquiree, the registrant may look to Form 20-F, Item 8 (specifically, Items 8.A.4 and 8.A.5), to determine the appropriate annual and interim financial statement periods required.

When determining the appropriate financial statement periods to present for a foreign business acquiree under Rule 3-05, a registrant should be mindful that the financial statements must adhere to the age of financial statement requirements when a Form 8-K, a registration statement, or a proxy statement is filed and when a registration statement is declared effective or when a proxy statement is mailed.

The sections below discuss how a registrant determines the appropriate annual and interim periods to present for a foreign business acquiree.

2.11.5.1 Annual Financial Statement Requirements for Foreign Business Acquirees

Form 20-F, Item 8.A.4, addresses the age requirements for annual financial statements. It states, in part, that the “last year of audited financial statements may not be older than 15 months at the time of the offering or listing.”

Generally, financial statements for the most recently completed fiscal year of a foreign business acquiree are not required if the filing date of the initial Form 8-K, the filing or effective date of a registration statement, or the filing or mailing date of a proxy statement is within three months after the foreign business acquiree’s year-end. Filings that are made, mailed, or declared effective three months or more after a foreign business acquiree’s year-end must include audited financial statements for the most recently completed fiscal year.

The examples below illustrate how to determine the appropriate annual financial statement periods required for a foreign business acquiree. For a discussion and examples of how to determine the appropriate interim periods, see Section 2.11.5.2.

Example 2-44

On January 7, 20X4, Registrant A acquires Company B, a foreign business that is 35 percent significant to A. Both A and B have a December 31 fiscal year-end.

On January 11, 20X4, A files its initial Form 8-K announcing the consummation of the acquisition of B (within four business days of the acquisition’s consummation).

In its Form 8-K/A, which is due within 71 calendar days of the initial Form 8-K filing, A is required to file audited financial statements of B as of and for the year ended December 31, 20X2, since on the date the initial Form 8-K was filed, the audited financial statements were not more than 15 months old. Registrant A must also file unaudited interim financial statements of B for the relevant period. For a discussion and examples of how to determine the appropriate interim periods, see Section 2.11.5.2.

Example 2-45

Assume the same facts as in the previous example, except that Registrant A acquired Company B on April 1, 20X4.

On April 5, 20X4, A filed its initial Form 8-K announcing the consummation of the acquisition of B (within four business days of the acquisition’s consummation).

In its Form 8-K/A, which is due within 71 calendar days of the initial Form 8-K filing, A must file audited financial statements of B as of and for the year ended December 31, 20X3, since on the date the initial Form 8-K was filed, the December 31, 20X2, financial statements were more than 15 months old.

Example 2-46

Assume the same facts as in Example 2-44 , except that Registrant A files a registration statement with the SEC on April 5, 20X4.

The financial statement requirements in the Form 8-K/A reporting the acquisition are the same as those in Example 2-44. However, for the registration statement, A must include audited financial statements of B as of and for the year ended December 31, 20X3, since on the date of the registration statement, the December 31, 20X2, financial statements were more than 15 months old and were required to be updated.

If the registration statement was initially filed on or before March 31, 20X4, financial statements of B as of and for the year ended December 31, 20X3, would not be required. However, if the registration statement was not declared effective before April 1, 20X4, financial statements of B as of and for the year ended December 31, 20X3, would be required in an amendment to the registration statement before the SEC will declare the registration statement effective.

2.11.5.2 Interim Financial Statement Requirements for Foreign Business Acquirees

Form 20-F, Item 8.A.5, addresses the requirement for interim financial statements. It states, in part, “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 . . . covering at least the first six months of the financial year.”

If the foreign business acquiree is acquired (or it is probable that it will be acquired) within the first six months of its fiscal year, interim financial statements are generally not required. If the foreign business acquiree is acquired (or it is probable that it will be acquired) in the second half of its fiscal year, interim financial statements are required if the Form 8-K, registration statement, or proxy statement is filed more than nine months after the foreign business acquiree’s fiscal year-end. If interim financial statements are required for the foreign business acquiree, they generally must be for a period of at least six months. However, there is no requirement to update the interim financial statements of a foreign business acquiree if the omitted period is less than six months.

Registrants should also consider the requirement in Item 8.A.5 that states, “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.” We understand that this requirement would apply in situations in which the registrant has published interim financial information of a foreign business acquiree to its investors in the registrant's home jurisdiction; however, it would not apply if the foreign business acquiree issued such interim financial information in its home jurisdiction.

The examples below illustrate how to determine the appropriate interim financial statement periods required for a foreign business acquiree.

Example 2-47

On June 29, 20X4, Registrant A acquires Company B, a foreign business that is 35 percent significant to A. Both A and B have a December 31 fiscal year-end. Company B does not prepare interim financial statements under its home country’s reporting requirements.

On July 3, 20X4, A filed its initial Form 8-K announcing the consummation of the acquisition of B (within four business days of the acquisition’s consummation).

In its Form 8-K/A, which is due within 71 calendar days of the initial Form 8-K filing, A must file financial statements of B as of and for the year ended December 31, 20X3. No interim financial statements of B are required because the acquisition occurred within the first six months of B’s fiscal year.

Example 2-48

On July 1, 20X4, Registrant A acquires Company B, which is 28 percent significant to A. Both A and B have a December 31 fiscal year-end. Company B does not prepare interim financial statements under its home country’s reporting requirements.

On July 5, 20X4, A filed its initial Form 8-K announcing the consummation of the acquisition of B (within four business days of the consummation of the acquisition).

In its Form 8-K/A, which is due within 71 calendar days of the initial Form 8-K filing, A must file financial statements of B as of and for the year ended December 31, 20X3. Since the initial Form 8-K was filed not more than nine months after B’s fiscal year-end, no interim financial statements of B are required in the Form 8-K/A.

Example 2-49

Assume the same facts as in the previous example, except that Registrant A files a registration statement with the SEC on October 5, 20X4.

The financial statement requirements in the Form 8-K/A reporting the acquisition are the same as those in the previous example. However, for the registration statement, A must also include interim financial statements of B as of and for the six months ended June 30, 20X4 (the comparative interim period ended June 30, 20X3, is not required since the significance of B does not exceed 40 percent). This is because the acquisition closed after June 30, 20X4, and the audited financial statements of B are more than nine months old at the time the registration statement is filed.

Example 2-50

On December 17, 20X3, Registrant A acquires Company B, which is 25 percent significant to A. Both A and B have a December 31 fiscal year-end. Company B does not prepare quarterly financial statements under its home country’s reporting requirements.

On December 21, 20X3, A filed its initial Form 8-K announcing the consummation of the acquisition of B (within four business days of the acquisition’s consummation). On April 1, 20X4, A filed a registration statement.

In its Form 8-K/A, which is due within 71 calendar days of the initial Form 8-K filing, A included audited financial statements of B as of and for the year ended December 31, 20X2, and interim financial statements as of June 30, 20X3, and for the six months ended June 30, 20X3 (the comparative interim period ended June 30, 20X2, is not required since the significance of B does not exceed 40 percent). Company B’s interim financial statements were included because the acquisition closed after June 30, 20X3, and the audited financial statements of B were more than nine months old at the time the initial Form 8-K was filed.

Although the latest balance sheet that B included in the Form 8-K/A is more than nine months old when A files the registration statement in April 20X4, such interim financial statements need not be updated because the omitted period (July 1–December 16) is less than six months.

2.11.5.3 Pro Forma Financial Statement Considerations

In addition to filing the financial statements of a foreign business acquiree, a registrant may be required to provide pro forma financial information under Rule 11-01. The pro forma financial statement periods to be presented are based on the requirements in Rules 3-01 and 3-02. When a registrant prepares its pro forma financial statements in accordance with Article 11, it may be required to present foreign business acquiree interim financial information that is more recent than the information it had to separately present under Rule 3-05. There may also be other facts and circumstances that affect the periods to be presented in a set of pro forma financial statements that includes a foreign acquiree. A registrant should therefore consider consulting with its audit and legal professionals. See Chapter 4 for further discussion of pro forma financial information.

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This SEC Reporting Interpretations manual provides comprehensive guidance; however, the manual does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.