Appendix A — Sample SEC Comments: Foreign Currency | DART

...

Appendix A — Sample SEC Comments: Foreign Currency

A.1 Foreign Currency Comment Letters

The SEC staff’s comments on quantitative disclosures related to foreign currency adjustments reflect published staff views 1 on the topic, under which registrants should:

“[R]eview management’s discussion and analysis and the notes to financial statements to ensure that disclosures are sufficient to inform investors of the nature and extent of the currency risks to which the registrant is exposed and to explain the effects of changes in exchange rates on its financial statements.”
Describe in their MD&A “any material effects of changes in currency exchange rates on reported revenues, costs, and business practices and plans.”
Identify “the currencies of the environments in which material business operations are conducted [when] exposures are material.”
“[Q]uantify the extent to which material trends in amounts are attributable to changes in the value of the reporting currency relative to the functional currency of the underlying operations [and analyze] any materially different trends in operations or liquidity that would be apparent if reported in the functional currency.”

The extracts in this publication that reflect these topics have been reproduced from comments published on the SEC’s Web site that were issued on or after June 1, 2013. In instances in which there were numerous comments on the same topics, only certain comments have been included. Dollar amounts and information identifying registrants or their businesses have been redacted from the comments.

For a discussion of SEC comment letters on additional topics and information about the SEC review process, see Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

A.2 Examples of SEC Comments

A.2.1 Determination of Functional Currency

The following are examples of SEC staff comments that registrants have received about the determination of their functional currency:

We note you have activities and operations in [Country A] and store inventory in [Country B]. Please disclose your accounting policies for foreign currency translation and related impacts to your financial statements such as the aggregate transaction gain or loss included in determining net income or explain to us why disclosure is not necessary. Refer to ASC 830.
We note your significant foreign operations and that you are a [Country A] corporation reporting your financial statements in U.S. dollars. In future filings, please revise this note to disclose your functional currency as well as those of your significant foreign subsidiaries. Disclose your policy for determining the functional currency of foreign entities, and describe your accounting for foreign currency transactions i.e., transactions denominated in a currency different from the functional currency. In addition, disclose your policy for foreign currency translation. Refer to ASC 235-10-50-1, ASC Topic 830 and FRC 501.09.b.
You disclose that your functional currency is the U.S. dollar. Please tell us the basis for your conclusion including all the factors you considered. In your response, tell us how you applied the guidance of FASB ASC 830-10-45-3 to 45-6 and 830-10-55-3 to 55-7, as applicable. Please also tell us the currency in which your cash and bank deposits are denominated.
You disclose that the U.S. dollar is your functional currency; however, we note that all of your current operations are outside of the U.S. Using the guidance in ASC 830-10-45 and ASC 830-10-55 please tell us how you determined your functional currency.
Please refer to the following disclosure in the last paragraph on page [XX] under the risk factor “Fluctuations in Foreign Currency Exchange Rates Could Negatively Affect Our Profitability:”
- “ . . . we have substantial operations in [Country A] and a significant portion of our premiums and investment income in [Country A] is received in [LC]. Most claims and expenses associated with our operations in [Country A] are also paid in [LC] and we primarily purchase [LC]-denominated assets to support [LC]-denominated policy liabilities.”
You disclose herein, however, that [Country A] is an exception to your use of the local currency as the functional currency and that “multiple functional currencies exist in [Country A].” Tell us why the [LC] is not the functional currency for your [Country A] operations and what you mean by “multiple functional currencies exist” in [Country A]. In your response, tell us what you determined the functional currencies to be for your [Country A] operations, and include an analysis supporting your determination under ASC 830-10-45 and ASC 830-10-55.
Pursuant to ASC 830-10-45-2, please help us better understand how you determined that the U.S. dollar is the currency of the primary economic environment in which you operate and in which you primarily generate and expend cash. Please specifically address your consideration of ASC 830-10-55-3 through 55-5. We note that your disclosures . . . indicate that you have not generated any revenues in the U.S. and that all of your long-lived assets are located in [Country A].

For more information about an entity’s determination of its functional currency, see Section 2.3.

A.2.2 Change in Functional Currency

Because changes in functional currency are expected to be infrequent, the SEC staff will often ask registrants for additional information about the related facts and circumstances, including an explanation of how the registrant considered each factor associated with the change.

Regardless of the underlying reason for a change in functional currency, the SEC has indicated in published interpretations 2 that although a registrant is not required to do so under ASC 830, it “should consider the need to disclose the nature and timing of the change, the actual and reasonably likely effects of the change, and economic facts and circumstances that led management to conclude that the change was appropriate.” In addition, the registrant should discuss in its MD&A the “effects of those underlying economic facts and circumstances on the registrant’s business.” When registrants fail to do so, the staff may request additional disclosures about the underlying reason for the change and the associated effects. The following are examples of comments that registrants have received about changes in their functional currency:

We note that you changed the functional currency of your subsidiaries in [Countries] from the U.S. dollar to local currencies. Please tell us the facts and circumstances that resulted in the change in functional currency, including your consideration of each factor outlined in ASC 830-10-55-5. If material, please also expand your disclosures in MD&A to discuss the actual and reasonably likely effects of the change, the economic facts and circumstances that led management to conclude that the change was appropriate, and any effects of those underlying economic facts and circumstances on your business in those countries.
[W]e note that as a result of the Acquisition, you reevaluated your functional currency accounting conclusions. Due primarily to your new legal entity organization structure, global cash management and raw material sourcing strategies, you determined that the functional currency of certain subsidiaries operating outside of the United States is the local currency of the respective subsidiaries. For the Predecessor period, your reporting currency was the U.S. dollar as [Company B] management determined that the U.S. dollar was the functional currency of [Company B’s] legal entities and this functional currency was appropriate for the [Company B’s] organizational legal entity structure and the economic environment in which [Company B] operated during the period covered by the Predecessor consolidated and combined financial statements. With reference to ASC 830-10-45-3 through 45-6, please provide a thorough analysis that demonstrates the appropriateness of the functional currency of your subsidiaries in both the Successor and Predecessor periods.
We note your disclosure that “effective February [XX, XXXX], [Company A’s] functional currency changed to the United States dollar.” Please explain to us the facts and circumstances that resulted in the change in functional currency, including your consideration of each factor outlined in ASC 830-10-55-5.
We note your disclosure that “[Company A’s] functional currency changed to the United States dollar.” Please explain to us the facts and circumstances that resulted in the change in the functional currency, including your consideration of each factor outlined in ASC 830-10-55-5.

For more information about the determination of an entity’s functional currency, see Section 2.4.

A.2.3 MD&A Disclosures and Disclosures About Risks and Uncertainties

The foreign operations of many registrants are subject to material risks and uncertainties that should be disclosed, including those related to the foreign jurisdiction’s political environment, its business climate, currency, and taxation. The effects on a registrant’s consolidated operations of an adverse event related to these risks may be disproportionate in relation to the size of the registrant’s foreign operations. Therefore, the registrant’s segment information or MD&A may need to describe the trends, risks, and uncertainties related to its operations in individual countries or geographic areas and possibly supplement such disclosures with disaggregated financial information about those operations.

A registrant’s assessment of whether it needs to provide disaggregated financial information about its foreign operations in its MD&A would need to take into account more than just the percentage of consolidated revenues, net income, or assets contributed by foreign operations. The registrant also should consider how the foreign operations might affect the consolidated entity’s liquidity. For example, a foreign operation that holds significant liquid assets may be exposed to exchange-rate fluctuations or restrictions that could affect the registrant’s overall liquidity.

The staff continues to ask registrants to provide early-warning disclosures to help financial statement users understand these items and how they potentially affect the financial statements. For additional information about early-warning disclosures, see Section 3.1 of Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

The following are examples of comments that registrants have received about disclosures in MD&A:

Please tell us how you determined it was unnecessary to provide quantitative disclosures about foreign currency exchange risk. Please refer to Item 305 of Regulation S-K.
We note your disclosure in the final paragraph of this section that you maintain credit relationships with large financial institutions. Please expand your disclosure in one or more separate risk factors to more fully describe the risks related to currency and exchange rate controls, regulation, inflation or deflation, and fiscal and monetary policies in the foreign countries where you will maintain such credit relationships.
With reference to the risk factors associated with your foreign operations as discussed on pages [XX] and [XX], please disclose the nature and extent of any legal or economic restrictions on the ability of your subsidiaries or affiliates to transfer funds to you in the form of cash dividends, loans or advances and the impact such restrictions have had or are expected to have on your ability to meet cash obligations. Furthermore, please disclose the following:
- The amount of foreign cash you have as compared to your total amount of cash as of each of the balance sheet dates presented. Disclose whether or not you would need to accrue and pay taxes if these amounts are repatriated; and Disclose, if true, that you do not intend to repatriate these amounts.
We note your disclosure . . . that foreign currency exchange losses increased expenses and that you use the [Currency] as your functional currency. If material, please include a risk factor addressing any exposure you may have as a result of changes in foreign currency rates.
We note your risk factor . . . related to the value of the currencies in countries where you operate against the U.S. dollar and its effect on your financial results reported in U.S. dollar terms. As such, fluctuations in foreign exchange rates could affect your financial results reported in U.S. dollar terms without giving effect to any underlying change in your business or results of operations. Please fully expand your discussion of results of operations to separately quantify for each period presented the amount of the change in revenues and expenses that is due to foreign currency translations.
With regards to any material foreign operations, please tell and disclose the following: . . .
- Disclose any material foreign currency exchange differences during each period in accordance with ASC 830
We note you were able to achieve sales growth during fiscal 2015 despite $[X.X] million of adverse impact from the effects of foreign exchange. Please tell us whether you also experienced an offsetting impact to cost of sales for such strengthened US dollar, as you indicate gross margin was also adversely impacted by foreign exchange and there appears to be no discussion of the impact to your total cost of sales. Additionally, tell us what consideration you gave to providing a constant currency disclosure to quantitatively illustrate the impact of changes in foreign currency rates between periods.
We note your disclosure that the weakening of the U.S. dollar against the [LC] contributed to the change in net sales and cost of sales for the year ended December [XX, XXXX] compared to the year ended December [XX, XXXX]. In addition, you also disclose that the strengthening of the U.S. dollar against the [LC] impacted other expenses, net for the year ended December [XX, XXXX] compared to the year ended December [XX, XXXX]. Please clearly explain the disclosure surrounding the foreign currency impact on your operations, specifically how the U.S. dollar strengthened and weakened against the [LC] within the same year.
We note that foreign currency exchange rates materially impacted your consolidated statements of income and consolidated statements of comprehensive income. Please expand your disclosure to provide the disclosures required by Item 305 of Regulation S-K, including a discussion of the specific foreign currency rate exposures that represent the primary risk of loss.
We note your disclosure which states $[XX] billion (of the total $[XX] billion reflected on your balance sheet) of cash, cash equivalents and marketable securities is held off-shore by foreign subsidiaries. We further note your charge relating to your [Country A] deconsolidation included $[XXX] million of cash held in [Country A]. In addition, we note your risk factor disclosure which states you maintain cash balances in a number of foreign countries with exchange and other controls including [Countries A–H]. In future filings, please expand your liquidity section to provide disclosure of the amounts and foreign jurisdictions where the majority of your cash, cash equivalents and marketable securities is located. In addition, provide separate disclosure of the amounts and locations of cash, cash equivalents and marketable securities held in foreign jurisdiction subject to exchange controls.
In your disclosure here and on page [XX], please tell us how you considered the disclosures required by Item 303(a)(3)(iii) of Regulation S-K. For example, in [Segment A] you only disclose that sales increased due to significant increases in . . . plant, . . . equipment and parts sales. . . .

Further, where material, the effects of offsetting developments or events should be disclosed and, where changes are a result of several factors, you should disclose the relative extent of each material factor contributing to the increase or decrease. For example, in the second paragraph you disclose that international sales continue to be negatively impacted by the strengthening of the U.S. dollar compared to currencies in many of the countries in which you operate. In future filings, to the extent material, please quantify the impact of currency changes on your international sales and identify for investors the countries where your sales were most significantly affected by foreign currency fluctuations.
We note your disclosure throughout the document referencing foreign subsidiaries and foreign operations. Your accounting policies do not appear to address your accounting for foreign currency matters. In future filings, please provide the disclosures required by FASB ASC 830.
Clarify whether there is any material impact from foreign currency exchange adjustments, acquisitions or dispositions during any period presented and if so, disclose them separately and explain what they are.

Section A.2.4 below also includes discussion of comments that registrants may receive about MD&A disclosures and disclosures about risks and uncertainties. For more information about MD&A disclosures and disclosures about risks and uncertainties, see Section 9.7.

A.2.4 Accounting and Disclosure Considerations Related to Operations in Certain Countries

The SEC staff continues to focus on accounting and disclosure considerations related to the economic and political environment in certain countries, including Venezuela, Russia, Belarus, Ukraine, and Argentina. Business operations in Venezuela, Russia, Belarus, Ukraine, and Argentina may give rise to accounting and disclosure questions about (1) which exchange rate is appropriate for remeasurement, (2) whether such operations should be deconsolidated or considered impaired, and (3) uncertainties or exposures resulting from the general economic and political environment or specific business relationships that should be disclosed. The following are examples of comments that registrants have received about their accounting and disclosures related to operations in these countries:

We note the disclosures . . . regarding the monetary and certain nonmonetary assets located in Venezuela and Argentina. For each country, please address the following and expand your disclosure to clarify the following points:
- Tell us the nature of your operations in Venezuela and Argentina (e.g., manufacturing, importing, marketing, selling, etc.) and the nature of the activities conducted between those operations and your non-Venezuelan and non-Argentine operations;
- Clarify how the economic situation in Venezuela and Argentina impacts your liquidity, including the extent of intercompany receivables due from your Venezuelan and Argentine subsidiaries;
- Quantify the amount of monetary and nonmonetary assets in Venezuela and Argentina by significant asset grouping, (i.e., cash, inventories, PP&E, intercompany accounts, etc.). In this regard, we note your current disclosure only discusses your net asset position and amounts in accumulated foreign currency translation adjustments; and
- Discuss the factors you are currently monitoring in determining to continue consolidating your Venezuelan operations, the status of those factors and any associated uncertainties.
We note your disclosures that the conflict between Russia and Ukraine and inflationary and supply chain issues have impacted your operating results during the current period and it appears you expect these issues may continue to impact your future results. Please enhance your disclosures to more fully address the following:
- Quantify decreases in sales related to lower shipments to customers in Russia and Ukraine;
- Disclose and discuss trends in costs related to energy, raw materials and freight, including the percentage increases you experienced during each period, whether costs are continuing to increase or stabilizing, and your expectations regarding trends in your costs and the factors you believe may impact trends;
- Disclose and discuss the reasons why certain segments appear to have the ability to pass through increased costs to customers and others do not;
- Disclose any material impact of import or export bans on products or commodities, including energy from Russia, used in your business, or sold by you, including the current and anticipated impact on your business, taking into account the availability of materials, costs of needed materials, costs and risks associated with transportation, and the impact on margins and customers; and
- Discuss any actions you have taken mitigate the impact of the conflict between Russia and Ukraine and inflationary and supply chain issues on your business.
We note the disclosures . . . regarding your operations or those of companies with which you do business is conducted through facilities located in [Russia/Belarus/Ukraine]. Please describe the direct or indirect impact of Russia’s invasion of Ukraine on your business. In addition, please also consider any impact:
- resulting from sanctions, limitations on obtaining relevant government approvals, currency exchange limitations, or export or capital controls, including the impact of any risks that may impede your ability to sell assets located in Russia, Belarus, or Ukraine, including due to sanctions affecting potential purchasers;
- resulting from the reaction of your investors, employees, customers, and/or other stakeholders to any action or inaction arising from or relating to the invasion, including the payment of taxes to the Russian Federation; and
- that may result if Russia or another government nationalizes your assets or operations in Russia, Belarus, or Ukraine.
- If the impact is not material, please explain why.

For more information about highly inflationary economies, see Chapter 7. For more information about disclosures that the SEC may require as a result of the Russia-Ukraine conflict, see the SEC’s Sample Letter to Companies Regarding Disclosures Pertaining to Russia’s Invasion of Ukraine and Related Supply Chain Issues.

A.2.5 Translation Adjustments

The following are examples of comments that registrants have received about foreign currency translation adjustments:

We note your line item, “Other comprehensive income/(loss)” in your consolidated statements of comprehensive income . . . [w]e further note your disclosure . . . that other comprehensive income (loss), consists of the cumulative foreign currency translation adjustment and unrealized gain (loss) on available-for-sale securities. Please tell us your consideration of providing other comprehensive income/(loss) in a single continuous financial statement or in two separate but consecutive financial statements. Refer to FASB ASC 220-10-45.
In future filings, please provide an analysis of the changes in the cumulative translation adjustment, as appropriate, consistent with the guidance in ASC 830-30-45-18 through 20.
We note your presentation of the change in the foreign currency translation adjustment includes the related tax benefit. Please describe for us the transactions and circumstances that resulted in recognizing a tax benefit related to the foreign currency translation adjustment. Refer to ASC 220-10-45-16 and ASC 830-30-40-1.
Please revise your accounting policy disclosure to address how you account for the translation adjustments that result from the process of translating your financial statements from the [functional currency] to the [reporting currency]. Please refer to the guidance in ASC 830-30-45. Also disclose the impact of translation adjustments and include an analysis of the changes in the accumulated amount of translation adjustments. Please refer to the guidance in paragraphs 830-30-45-12 and 830-30-50-1.
Please expand your discussion and analysis of your consolidated financial results to include other comprehensive (loss) income as it relates to comprehensive income. For example, provide a discussion and analysis of the foreign currencies generating the foreign currency adjustments for the periods presented.
Your consolidated statement of income and comprehensive income for the fiscal year ended June [XX, XXXX] and the disclosures in Note [X] indicate that foreign currency translation adjustments reduced your comprehensive income by $[XX] during this period. Given the significance of this amount to your total comprehensive income for the period, please tell us and revise the notes to your financial statements in future filings to disclose the changes in foreign currency exchange rates that resulted in this significant foreign currency translation adjustment for the period.
Please expand your discussion and analysis of your consolidated results of operations to include other comprehensive (loss) income as it relates to comprehensive income. Specifically, we note that the components of other comprehensive loss resulted in the recognition of comprehensive income of $[XX] million as compared to consolidated net income of $[XX] million for fiscal year [XXXX] primarily due to currency translation and changes in the fair value of interest rate hedges accounted for as cash flow hedges. For currency translation adjustment, please provide a comprehensive discussion and analysis of the foreign currencies and transactions generating the foreign currency translation adjustments.
We note that foreign currency translations adjustments materially impacted the change in comprehensive income from [year 1] to [year 2]. Please expand your discussion and analysis to provide a comprehensive discussion and analysis of the foreign currencies and transactions that led to the adjustments recognized.
We note that other comprehensive loss resulted in a decrease to total comprehensive income of [XX]% for fiscal year [XXXX], which far exceeds the impact for the other periods presented. Please expand your disclosure to provide a comprehensive discussion and analysis of the foreign currencies and transactions generating the foreign currency adjustments that led to the adjustment recognized.
We note that you recorded $[XX] billion in foreign currency translation losses which materially affected other comprehensive income for the year ended March [XX, XXXX]. Please expand your disclosure in future filings to discuss the nature and timing of the facts or circumstances that led to the significant translation loss. Please also discuss the changes in foreign currency rates and the related foreign operations which related to the translation loss. Please provide us with your proposed disclosures.
For the three months ended [XXXX], we note you present a foreign currency translation adjustment gain of [XXXX] in the Condensed Consolidated Statements of Operations and Comprehensive Loss compared to a foreign currency translation adjustment loss of [XXXX] in the Condensed Consolidated Statements of Changes in Stockholder’s Equity. We also note you describe the foreign currency translation adjustment as a gain in other disclosure. Please amend your [XXXX] Form 10-Q to correctly present your foreign currency translation for each period presented.

For more information about foreign currency translation and the related presentation and disclosure requirements, see Chapter 5 and Chapter 9, respectively.

A.2.6 Statement of Cash Flows — Foreign Currency

The SEC staff often issues comments to registrants when the effects of having international operations are presented or disclosed elsewhere (e.g., within the income statement, MD&A, or the notes to the financial statements) but the effects are not apparent in the statement of cash flows. The following are examples of comments that registrants have received about their statements of cash flows:

We note you have international operations. Please tell us how you have complied with the guidance set forth in ASC 830-230-45-1 as it relates to your cash flow presentation.
We note your Consolidated Statements of Cash Flows does not include a line item for the effect of exchange rate changes in cash. Please tell us if applicable to you and how you complied with the guidance set forth in ASC 830-230-45-1 as it relates to your cash flow presentation.

For more information about foreign currency matters related to the statement of cash flows, see Section 9.6.

Footnotes

Division of Corporation Finance: Frequently Requested Accounting and Financial Reporting Interpretations and Guidance, Section II.J.

Division of Corporation Finance: Frequently Requested Accounting and Financial Reporting Interpretations and Guidance, Section I.D.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it 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.