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.