9.7 Other Disclosure Considerations

Entities should also consider the foreign currency presentation and disclosure requirements in ASC topics other than ASC 830 and, if applicable, those in SEC guidance.

9.7.1 SEC Considerations

The SEC staff has historically encouraged registrants to provide supplemental disclosures about how the reporting entity is affected by foreign operations and foreign currencies. For instance, in FRR 6 (codified in Section 501.09 of the Codification of Financial Reporting Policies), the staff gave several examples of the types of disclosures registrants should consider including in their MD&A (although the staff did not specify the preferred nature and location of such disclosures). These supplemental disclosures include:

“[I]nformation enabling an evaluation of the amounts and certainty of cash flows from operations and a registrant’s ability to generate adequate amounts of cash to meet its need for cash (liquidity) as well as an assessment of the impact of events that have had, or may have, a material effect on trends of operating results.”
“[D]isplay of net investments by major functional currency.”
“[A]nalysis of the translation component of equity (either by significant functional currency or by geographical areas used for segment disclosure purposes).”
“[F]unctional currencies used to measure significant foreign operations or the degree of exposure to exchange rate risks (which exists for all companies engaged in foreign operations, regardless of their functional currencies), in order to enable investors to assess the impact of exchange rate changes on the reporting entity.”

In addition, the staff cited two examples of instances in which registrants should consider providing additional disclosures:

When there is an “indication that all or some of [a foreign operation’s] cash flows are generally not available to meet the company’s other short-term needs for cash.” Such disclosures should be disaggregated enough to “meaningfully address liquidity and capital resource considerations,” and entities should especially consider disclosing the nature of their intra-entity financing in such situations.
When the reporting entity has “significant foreign operations in highly inflationary economies.”

Further, the SEC staff has indicated1 that, when providing quantitative disclosures regarding foreign currency adjustments, registrants should:

“[R]eview [MD&A] 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.”
Identify, to the extent they are material, “unhedged monetary assets, liabilities or commitments denominated in currencies other than the operation’s functional currency, and strategies for management of currency risk.”

In assessing whether it needs to provide disaggregated financial information about its foreign operations in MD&A, a registrant should 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.

9.7.2 Non-GAAP Measures

Constant currency is a method used to eliminate the effects of exchange rate fluctuations of international operations in a registrant’s determination of financial performance. For example, when presenting its MD&A, a registrant with material operations in various countries should disclose the impact of material exchange rates. To do so, the registrant may use a constant exchange rate between periods for translation, which would remove the effect of fluctuations in foreign exchange rates.

The presentation of financial results in a constant currency is considered a non-GAAP measure.

C&DIs — Non-GAAP Financial Measures

Question 104.06

Question: Company X has operations in various foreign countries where the local currency is used to prepare the financial statements which are translated into the reporting currency under the applicable accounting standards. In preparing its MD&A, Company X will explain the reasons for changes in various financial statement captions. A portion of these changes will be attributable to changes in exchange rates between periods used for translation. Company X wants to isolate the effect of exchange rate differences and will present financial information in a constant currency — e.g., assume a constant exchange rate between periods for translation. Would such a presentation be considered a non-GAAP measure under Regulation G and Item 10(e) of Regulation S-K?

Answer: Yes. Company X may comply with the reconciliation requirements of Regulation G and Item 10(e) by presenting the historical amounts and the amounts in constant currency and describing the process for calculating the constant currency amounts and the basis of presentation. [Jan. 11, 2010]

Since constant-currency amounts are non-GAAP measures, the registrant should include the appropriate non-GAAP disclosures to isolate the effects of the exchange rate differences for (1) the historical amounts and (2) the amounts in constant currency. The disclosure of the non-GAAP measure should describe both the basis of presentation and how the constant-currency amounts were computed. Note that if a registrant only discloses the impact of exchange rates as part of its explanation of the period-to-period fluctuation between two GAAP amounts, such disclosure would not constitute a non-GAAP measure (e.g., foreign currency fluctuations resulted in $XX of the change in net revenue).

For more information about non-GAAP measures, see Deloitte’s Roadmap Non-GAAP Financial Measures and Metrics.

9.7.3 Risks and Uncertainties

ASC 275-10

50-18 Concentrations, including known group concentrations, described below require disclosure if they meet the criteria of paragraph 275-10-50-16. (Group concentrations exist if a number of counterparties or items that have similar economic characteristics collectively expose the reporting entity to a particular kind of risk.) Some concentrations may fall into more than one of the following categories:

Concentrations in the volume of business transacted with a particular customer, supplier, lender, grantor, or contributor. The potential for the severe impact can result, for example, from total or partial loss of the business relationship. For purposes of this Subtopic, it is always considered at least reasonably possible that any customer, grantor, or contributor will be lost in the near term.
Concentrations in revenue from particular products, services, or fund-raising events. The potential for the severe impact can result, for example, from volume or price changes or the loss of patent protection for the particular source of revenue.
Concentrations in the available sources of supply of materials, labor, or services, or of licenses or other rights used in the entity’s operations. The potential for the severe impact can result, for example, from changes in the availability to the entity of a resource or a right.
Concentrations in the market or geographic area in which an entity conducts its operations. The potential for the severe impact can result, for example, from negative effects of the economic and political forces within the market or geographic area. For purposes of this Subtopic, it is always considered at least reasonably possible that operations located outside an entity’s home country will be disrupted in the near term.

50-19 Concentrations of financial instruments, and other concentrations not described in the preceding paragraph, are not addressed in this Subtopic. However, these other concentrations may be required to be disclosed pursuant to other Topics, such as Subtopic 825-10.

50-20 Disclosure of concentrations meeting the criteria of paragraph 275-10-50-16 shall include information that is adequate to inform users of the general nature of the risk associated with the concentration. For those concentrations of labor (see paragraph 275-10-50-18(c)) subject to collective bargaining agreements and concentrations of operations located outside of the entity’s home country (see paragraph 275-10-50-18(d)) that meet the criteria in paragraph 275-10-50-16, the following specific disclosures are required:

For labor subject to collective bargaining agreements, disclosure shall include both the percentage of the labor force covered by a collective bargaining agreement and the percentage of the labor force covered by a collective bargaining agreement that will expire within one year.
For operations located outside the entity’s home country, disclosure shall include the carrying amounts of net assets and the geographic areas in which they are located.

This Subtopic does not, however, prohibit entities from also stating in disclosures of concentrations related to customers, grantors, or contributors or operations located outside the entity’s home country that the entity does not expect that the business relationship will be lost or does not expect that the foreign operations will be disrupted if such is the case.

50-21 Adequate information about some concentrations may already be presented in other parts of the financial statements. For example, adequate information about assets or operations located outside the entity’s home country may be included in disclosures made to comply with Subtopic 280-10. In accordance with the guidance in this Subtopic, such information need not be repeated.

As noted above, ASC 275 requires entities to provide disclosures about risks and uncertainties resulting from certain concentrations, including concentrations associated with foreign operations and therefore with exposure to foreign exchange risk. In addition, SEC Regulation S-K, Item 303, requires SEC registrants to disclose in their MD&A any known trends, events, or uncertainties that are reasonably likely to have a material effect on their liquidity, capital resources, or results of operations.

SEC Considerations

The SEC staff has also historically provided informal guidance for registrants with foreign operations that may be subject to material risks and uncertainties, such as political risks, currency risks, and business climate and taxation risks. The staff has reminded registrants that the effects on their consolidated operations of an adverse event related to these risks may be disproportionate to the size of their foreign operations. Therefore, the staff has historically encouraged registrants to discuss in their MD&A any trends, risks, and uncertainties related to their operations in individual countries or geographic areas and to supplement such disclosures with disaggregated financial information about those operations.

In addition, SEC Regulation S-K, Items 305 and 503(c), require registrants to disclose risks, including risk factors and market risks. The SEC staff has emphasized that registrants should present tailored risk factors in their filings and avoid using boilerplate language. Registrants should consider whether to provide more specific discussion and enhanced explanations of how the risks could materially affect their business. This discussion may be supplemented with quantitative information that puts the risks in context.

Footnotes

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

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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.