-------------------- BEGINNING OF PAGE #1 ------------------- SECURITIES AND EXCHANGE COMMISSION 17 CFR PART 249 RELEASE NOS. 33-7119; 34-35095; FR 45 INTERNATIONAL SERIES RELEASE NO. 759 FILE NO. S7-13-94 RIN 3235-AG16 RECONCILIATION OF THE ACCOUNTING BY FOREIGN PRIVATE ISSUERS FOR BUSINESS COMBINATIONS AGENCY: Securities and Exchange Commission ACTION: Final rules. SUMMARY: The Commission is announcing the adoption of amendments to Form 20-F to streamline the financial statement reconciliation requirements for foreign private issuers that have entered into business combinations. The amendments eliminate the requirement to reconcile to U.S. generally accepted accounting principles certain differences attributable to the method of accounting for a business combination or the amortization period of goodwill and negative goodwill, provided the financial statements comply with International Accounting Standard No. 22 , "Business Combinations," as amended, regarding those items. EFFECTIVE DATE: [Insert date of publication in the FEDERAL REGISTER] FOR FURTHER INFORMATION CONTACT: Wayne E. Carnall, Deputy Chief Accountant, Division of Corporation Finance at (202) 942-2960 U.S. Securities and Exchange Commission, Mail Stop 3-13, 450 Fifth Street, N.W., Washington, D.C. 20549. SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to Form 20-F -[1]- under the Securities Exchange Act of 1934 (the "Exchange Act").-[2]- I. INTRODUCTION The Commission is adopting amendments to streamline the financial statement reconciliation requirements for foreign private issuers that have entered into business combinations. The amendments eliminate the requirement to reconcile to U.S. generally accepted accounting principles ("GAAP") certain differences attributable to the method of accounting for a business combination or the amortization period of goodwill and negative goodwill, provided the financial statements comply with International Accounting Standard No. 22, "Business Combinations," as amended ("IAS 22"), regarding those items. The amendments adopted today were proposed by the Commission on April 19, 1994. -[3]- Comments received on the proposing release were divided almost evenly in their views. -[4]- Commenters questioning the proposal expressed concern about the lack of comparability to U.S. GAAP that would result from adoption of the proposal, and observed that the reconciled balance sheet and net income information furnished under the -[1]- 17 CFR 249.220f. -[2]- 15 U.S.C. 78a et seq. -[3]- See Securities Act Release No. 7056 (April 19, 1994) [59 FR 21821] (the "Proposing Release"). -[4]- Nine comment letters on the proposal were received. Those letters and a summary of the comments are available for public inspection and copying in File No. S7-13-94 at the Commission's Public Reference Room in Washington, D.C. 2-------------------- BEGINNING OF PAGE #2 ------------------- proposed rule would be a hybrid of U.S. GAAP and International Accounting Standards ("IAS"). Those supporting the proposal cited the cost and complexity of reconciling the pervasive differences attributable to an issuer's method of accounting for business combinations and, in the case of a supporting letter from financial analysts, the lack of comparability which exists presently under the U.S. accounting rules applicable to business combinations. The Commission believes that acceptance of the guidance in IAS 22 with respect to the particular matters addressed by the amendment, without reconciliation to U.S. GAAP, will not result in the loss of material information that is necessary for a U.S. investor to make an informed investment decision. Accordingly, the amendments are being adopted substantially as proposed, although certain modifications and clarifications are included in response to recommendations and other comments received. II. METHOD OF ACCOUNTING FOR BUSINESS COMBINATIONS As adopted, the amendments eliminate the requirement that foreign private issuers quantify the effects of differences arising solely from the different criteria applied to the selection of the basic method of accounting for a business combination if the criteria used in the primary financial statements for determining the method are consistently applied and are consistent with IAS 22. The two basic methods of accounting can be summarized as either "pooling of interests" or "purchase" as determined under U.S. GAAP primarily pursuant to Accounting Principles Board Opinion No. 16, "Accounting for Business Combinations" ("APB 16"), or "uniting of interests" and "acquisition" under IAS 22. APB 16 and IAS 22 have a similar conceptual framework underlying the particular conditions they establish for determining which of the two basic accounting methods should be applied to a business combination. Both standards acknowledge limited circumstances under which remeasurement of an acquired company's assets and liabilities pursuant to the purchase or acquisition method is not appropriate, but the particular criteria qualifying a transaction for pooling of interests (under APB 16) and uniting of interests (under IAS 22) are different, with IAS 22 being generally more restrictive. The Commission believes that the criteria articulated in IAS 22 are sufficiently clear so that companies and their auditors can be expected to apply the guidance in a consistent manner to similar transactions. Although different from the criteria in U.S. GAAP, the criteria in IAS No. 22 provide a rational and effective basis for distinguishing the substantively unique transactions for which the special accounting treatment is appropriate. The criteria in IAS No. 22 appear sufficiently rigorous to restrict the use of uniting of interests accounting to a relatively small class of similar transactions. The Commission believes that financial statements of foreign private issuers that distinguish business combinations on the basis specified by IAS No. 22 will provide information that is sufficiently informative and useful to investors without a reconciliation of that departure to U.S. GAAP. In evaluating the concerns expressed about the effects on comparability of the proposed use of IAS 22, the level of comparability under current U.S. accounting principles needs to be examined. Although the two accounting methods of "purchase" and "pooling" prescribed by U.S. GAAP produce very significant financial reporting differences, many transactions that are accounted for in the U.S. as poolings of interests are difficult to distinguish economically or structurally from transactions accounted for as purchases. Because the criteria qualifying a transaction for pooling under U.S. GAAP are restrictive, a 3-------------------- BEGINNING OF PAGE #3 ------------------- registrant is rarely if ever compelled to account for a transaction as a pooling if it does not want to do so. The registrant may elect to avoid pooling accounting through essentially nonsubstantive modifications of merger terms or other insignificant actions. Under IAS 22, it is even more difficult to qualify a business combination as a uniting of interests, or pooling. Many transactions that would qualify for pooling under U.S. GAAP would be accounted for as purchases under IAS 22. As under the U.S. rule, issuers could elect to avoid pooling accounting by the essentially subjective designation of an acquirer. On balance, it would appear that using the provisions of IAS 22 to determine whether a combination is accounted for as a purchase or pooling will not materially affect the comparability of financial statements. A substantial degree of comparability will be retained under the rules adopted today because they provide that the effects of differences in amounts determined upon application of either the purchase or pooling methods of accounting would continue to be quantified. For example, if the acquisition method is applicable to a business combination under IAS 22, differences between the amounts assigned in the issuer's primary financial statements to tangible and intangible assets and liabilities and those amounts as would be determined using the purchase method applied in accordance with U.S. GAAP must be identified and quantified in the reconciliation. If a determination has been made pursuant to the criteria in IAS 22 that the uniting of interest method is appropriate, then differences between the accounting used in the primary financial statements and the accounting that would be required for a pooling of interests under U.S. GAAP must be included in the reconciliation to U.S. GAAP. In response to comments, language in the amendment has been modified to more clearly describe the continuing requirement to reconcile the amounts that would be reported under U.S. GAAP for the particular method of accounting that was determined to be applicable using the criteria contained in IAS 22. As suggested by many commenters, the new provisions will not be available with respect to business combinations that are promoter transactions, leveraged buyouts, mergers of entities under common control, or reverse acquisitions. The final rule indicates that those types of transactions would continue to be required to be reconciled in full to U.S. GAAP. The rule also states that other business combinations that are not addressed by IAS 22 are not eligible for relief from reconciliation. III. ACCOUNTING FOR GOODWILL AND NEGATIVE GOODWILL The amendments also eliminate the requirement that foreign private issuers quantify the effects of differences arising from the period of amortization of both goodwill and negative goodwill, as proposed. Under IAS 22, goodwill and negative goodwill is amortized over a period not exceeding five years unless a longer period, not exceeding twenty years, can be justified. Accounting Principles Board Opinion No. 17, "Accounting for Intangibles" ("APB 17"), requires the amortization of goodwill or negative goodwill over its useful life, except that the period cannot exceed forty years. Some commenters raised concerns about the proposed rule because the resulting amount would not be comparable to U.S. GAAP. However, if the primary financial statements reflect an amortization period that complies with IAS 22, a reconciliation of differences in goodwill amortization periods does not necessarily improve the comparability of financial statements in a material fashion. U.S. companies presently exercise substantial judgment in selecting an amortization period for goodwill, and significant differences among similarly situated companies can be seen among companies reporting to the 4-------------------- BEGINNING OF PAGE #4 ------------------- Commission. The accounting differences between IAS 22 and APB 17 are not so opaque as to result in the loss of material information to investors. If the useful life of goodwill or amortization period of negative goodwill exceeds five years, justification of the longer period is required by paragraph 72 of IAS 22 to be furnished in a note to the primary financial statements. Registrants will continue to be required under both Item 17 and 18 of Form 20-F to describe the accounting differences, even where relief from quantification of differences is granted by this rule. The relief from reconciliation permitted under the adopted rule is applicable only to differences in the amortization period as it applies to the aggregate amount of goodwill or negative goodwill that would be determined under U.S. GAAP. For example, negative goodwill under IAS 22 (the amount by which the fair value of acquired net assets exceeds the purchase price) must be reconciled to negative goodwill determined under U.S. GAAP (the amount remaining after the excess over the purchase price has been applied to reduce the carrying value of non-monetary noncurrent assets). In response to a commenter's suggestion, Items 17 and 18 of Form 20-F have been modified to clarify that point. IV. IMPLEMENTATION AND TRANSITION Issuers will be permitted by the adopted rule to elect to apply the provisions of IAS 22 in the determination of the method of accounting for business combinations but not adopt its provisions for amortization of goodwill and negative goodwill. Similarly, issuers could adopt the provisions of IAS 22 with respect to goodwill amortization periods, but need not adopt that standard with respect to any other aspect of accounting for business combinations. Transition guidance in the 1993 amendment of IAS 22 calls for its new provisions to be implemented in financial statements for periods beginning on or after January 1, 1995, with retroactive application encouraged but not required. As originally proposed, the relief from reconciliation afforded by the rule would be available only to an issuer that implemented IAS 22, as amended, in its financial statements with respect to all current and prior business combinations for all financial reporting periods presented. At the suggestion of a commenter and in consideration of the difficulty of retroactive implementation of IAS 22, the rule as adopted would also provide relief from reconciliation for business combinations consummated on or after January 1, 1995 if, commencing by that date, the issuer accounts for all business combinations in its primary financial statements in accordance with IAS 22. For an issuer that does not retroactively implement IAS 22, full reconciliation to U.S. GAAP would be required with respect to business combinations consummated prior to January 1, 1995. As requested by several commenters, the adopted rules clarify how issuers and their auditors should describe the balance sheet and income statement amounts which do not reflect full reconciliation to U.S. GAAP. Amounts reported in the reconciliation should be referred to as determined in accordance with U.S. GAAP except for the specific items for which there is a deviation; exceptions should be stated to be in accordance with Item 17 or 18 of Form 20-F, as applicable, and different than that required by U.S. GAAP. -[5]- -[5]- The accommodation provided under the adopted rule is an exception to the requirement to reconcile to U.S. GAAP that is similar to the accommodation that had been (continued...) 5-------------------- BEGINNING OF PAGE #5 ------------------- The reconciliation provided pursuant to Item 17 or 18 of Form 20-F must be included in notes to the financial statements and, accordingly, must be considered by the auditor when expressing an opinion on the financial statements taken as a whole. The auditor's report is required to comply with Rule 2- 02 of Regulation S-X, and need not refer specifically to the note containing the reconciliation. However, if the reconciliation furnished in the notes to the financial statements fails to include disclosure of all material departures from U.S. GAAP or the quantification of the effects of accounting differences is materially misstated, or, where applicable, is incorrectly stated to be determined pursuant to the special provisions afforded under Item 17 or 18 by the rules adopted today, the financial statements would be presumed to be materially misleading and an exception should be cited in the auditor's report. V. COST-BENEFIT ANALYSIS No specific data were provided in response to the Commission's request regarding the costs and benefits of the amendment being adopted today. Several commenters noted that the proposal would address to a large extent the time and cost of additional recordkeeping and reporting resulting from having to reconcile different accounting methods for business combinations. The Commission believes costs will be reduced by this amendment. The Commission believes that the adoption of these rules will be beneficial to U.S. investors, as it will encourage more foreign companies to list their securities and raise capital in the United States and will be consistent with investor protection. VI. REGULATORY FLEXIBILITY ACT CERTIFICATION Pursuant to the Regulatory Flexibility Act [5 U.S.C 605(b)], the Chairman of the Commission has certified that the proposed amendments will not have a significant impact on a substantial number of small entities. Members of the public who wish to obtain a copy of the Regulatory Flexibility Certification should contact Wayne E. Carnall, (202) 942-2960, Deputy Chief Accountant, Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington D.C. 20549 VII. STATUTORY BASES The Commission's rules and forms are amended pursuant to section 19 of the Securities Act of 1933 and sections 3(b), 4A, 12, 13, 14, 15, 16 and 23 of the Securities Exchange Act of 1934. VIII. EFFECTIVE DATE The amendment to Form 20-F shall be effective immediately upon publication in the FEDERAL REGISTER, in accordance with the Administrative Procedure Act, which allows effectiveness in less than 30 days after publications for, inter alia, "a substantive rule which grants or recognizes an exemption or relieves a restriction." 5 U.S.C. 553(d)(1). List of Subjects in 17 CFR Parts 249 Accounting, Reporting and recordkeeping requirements, Securities. TEXT OF RULE AND FORM AMENDMENTS In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations is amended as follows: PART 249 - FORMS, SECURITIES EXCHANGE ACT OF 1934 -[5]-(...continued) provided previously to foreign private issuers that prepare price level adjusted financial statements. See Securities Act Release No. 7117. 6-------------------- BEGINNING OF PAGE #6 ------------------- 1. The authority citation for part 249 continues to read in part as follows: AUTHORITY: 15 U.S. C. 78a, et seq., unless otherwise noted; * * * * * 2. By amending Form 20-F (referenced in 249.220f) by adding paragraph (viii) to Item 17(c)(2) and adding Instruction (6) to Item 17 and adding paragraph (viii) to Item 18(c)(2) and adding Instruction (5) to Item 18 to read as follows: NOTE: THE FORM 20-F DOES NOT APPEAR AND THE AMENDMENTS WILL NOT APPEAR IN THE CODE OF FEDERAL REGULATIONS. Form 20-F * * * * * Item 17. Financial Statements * * * * * (c) * * * (2) * * * (viii) Issuers that prepare financial statements on a basis of accounting other than U.S. generally accepted accounting principles and which basis conforms with the guidance in International Accounting Standards No. 22, as amended in 1993, with respect to the period of amortization of goodwill and negative goodwill may omit the disclosures specified by paragraphs (c)(2)(i), (c)(2)(ii), and (c)(2)(iii) of this Item regarding the effects of differences attributable solely to the period of amortization. Goodwill and negative goodwill that is subject to the amortization period under IAS 22 is based on the amount determined in accordance with U.S. GAAP. Instructions * * * * * (6) (a) A business combination which would be deemed a uniting of interests under International Accounting Standards No. 22, as amended in 1993 ("IAS 22"), and was accounted for using that method in the primary financial statements may be deemed to be, for purposes of the reconciliation to U.S. GAAP, a pooling of interests. A business combination which would be deemed an acquisition under IAS 22 and was accounted for using that method in the primary financial statements may be deemed to be, for purposes of the reconciliation to U.S. GAAP, a purchase. This paragraph is not applicable for promoter transactions, leveraged buyouts, mergers of entities under common control, reverse acquisitions and other transactions not addressed by IAS 22. Once the method of accounting is determined, the reconciliation to U.S. GAAP should quantify differences between the balances in the primary financial statements and the amounts determined in accordance with U.S. GAAP as required by this Item. (b) To obtain relief from the reconciliation requirement regarding the method of accounting, or the amortization period of goodwill or negative goodwill, the primary financial statements should apply the respective provisions of IAS 22 to all business combinations consummated on or after January 1, 1995. Issuers can either retroactively adopt IAS 22 in the primary financial statements for all business combinations consummated prior to January 1, 1995, or provide a full reconciliation to U.S. GAAP for such prior business combinations. 7-------------------- BEGINNING OF PAGE #7 ------------------- (c) If the method of accounting for a business combination and/or the provisions for amortization of goodwill or negative goodwill complies with IAS 22, a statement to that effect must be included in the financial statements. The reconciliation shall state that the amounts presented comply with Item 17 of Form 20-F and are different from that required by U.S. GAAP. Item 18. Financial Statements * * * * * (c) * * * (2) * * * (viii) Issuers that prepare financial statements on a basis of accounting other than U.S. generally accepted accounting principles and which basis conforms with the guidance in International Accounting Standards No. 22, as amended in 1993, with respect to the period of amortization of goodwill and negative goodwill may omit the disclosures specified by paragraphs (c)(2)(i), (c)(2)(ii), and (c)(2)(iii) of this Item regarding the effects of differences attributable solely to the period of amortization. Goodwill and negative goodwill that is subject to the amortization period under IAS 22 is based on the amount determined in accordance with U.S. GAAP. * * * * * Instructions * * * * * (5) (a) A business combination which would be deemed a uniting of interests under International Accounting Standards No. 22, as amended in 1993 ("IAS 22"), and was accounted for using that method in the primary financial statements may be deemed to be, for purposes of the reconciliation to U.S. GAAP, a pooling of interests. A business combination which would be deemed an acquisition under IAS 22 and was accounted for using that method in the primary financial statements may be deemed to be, for purposes of the reconciliation to U.S. GAAP, a purchase. This paragraph is not applicable for promoter transactions, leveraged buyouts, mergers of entities under common control, reverse acquisitions and other transactions not addressed by IAS 22. Once the method of accounting is determined, the reconciliation to U.S. GAAP should quantify differences between the balances in the primary financial statements and the amounts determined in accordance with U.S. GAAP as required by this item. (b) To obtain relief from the reconciliation requirement regarding the method of accounting, or the amortization period of goodwill or negative goodwill, the primary financial statements should apply the respective provisions of IAS 22 to all business combinations consummated on or after January 1, 1995. Issuers can either retroactively adopt IAS 22 in the primary financial statements for all business combinations consummated prior to January 1, 1995, or provide a full reconciliation to U.S. GAAP for such prior business combinations. (c) If the method of accounting for a business combination and/or the provisions for amortization of goodwill or negative goodwill complies with IAS 22, a statement to that effect must be included in the financial statements. The reconciliation shall state that the amounts presented comply with Item 18 of Form 20-F and are different from that required by U.S. GAAP. By the Commission Jonathan G. Katz 8-------------------- BEGINNING OF PAGE #8 ------------------- Secretary Dated: December 13, 1994