-------------------- BEGINNING OF PAGE #1 ------------------- INTERNATIONAL REPORTING ISSUES IN THE DIVISION OF CORPORATION FINANCE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS TWENTY-THIRD ANNUAL CONFERENCE ON CURRENT SEC DEVELOPMENTS WASHINGTON, DC FEBRUARY 16, 1996 WAYNE E. CARNALL * ASSOCIATE DIRECTOR - ACCOUNTING OPERATIONS DIVISION OF CORPORATION FINANCE U.S. SECURITIES AND EXCHANGE COMMISSION ** * Copyright 1996, all rights reserved. Portions of this paper may be utilized with other programs. ** The U.S. Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement of its employees. The views expressed in this paper are those of the author, and do not necessarily represent the views of the Commission or other members of the staff. INTRODUCTION It is my pleasure to speak once again at this conference on international reporting issues in the Division of Corporation Finance. The increasing number of auditors, registrants, standard setters and regulators from foreign countries in attendance make this session truly an international event. I offer my sincere appreciation to many of our foreign visitors for their assistance in addressing unique accounting and reporting issues in their respective countries, and to all I welcome the opportunity to meet with you during your stay in the United States. The US capital markets continue in their preeminent spot in cross border listings. As of December 31, 1995, there were 738 companies from 45 countries registered with the Commission. This total includes 103 companies that filed with the Commission for the first time during 1995. My remarks today will address four items: 1. frequently issued comments and interpretative guidance regarding rules that were adopted during 1994; 2. issues that were addressed by the AICPA International Practices Task Force; 3. accommodations granted during the year; and 4. recommendations to consider in preparing filings with the Commission. RULES ADOPTED IN 1994 - COMMENTS AND INTERPRETATIONS The staff issued a number of comments and addressed various interpretative inquiries regarding the rules adopted in 1994. I would like to review three of the more frequently issued comments, and summarize five interpretive matters addressed by the staff during the year. -------------------- BEGINNING OF PAGE #2 ------------------- COMMENTS 1. Currency Used For Dividends The first of the frequently issued comments reminded registrants that Rule 3-20 of Regulation S-X states that if dividends on publicly held equity securities will be declared in a currency other than the reporting currency, a note to the financial statements should identify that currency. This disclosure is required in the financial statements even if the registrant does not currently intend to pay dividends. Canadian and Israeli companies that present financial statements in US dollars frequently have omitted this disclosure. 2. US GAAP Reconciliation For Acquirees/Investees The second of the frequently issued comments reminded registrants that prepare financial statements of acquirees and investees using a foreign GAAP to include as part of the audited financial statements a discussion of differences between the accounting principles used and those required by US GAAP. The amendments to Item 17 and 18 of Form 20-F eliminated the requirement to provide a quantified reconciliation to US GAAP involving financial statements of acquirees and investees that were significant at a level less than 30%. The audited historical financial statements are still required to include a discussion of differences in accounting. 3. Pro Forma Information The third of the frequently issued comments reminded registrants that the pro forma information required by Article 11 of Regulation S-X should either be prepared on a US GAAP basis or include a quantified reconciliation to US GAAP in a manner consistent with Item 17 of Form 20-F. The reconciliation of pro forma information is required even if the historical financial statements of the acquired business are not reconciled. INTERPRETATIONS 1. Acquirees and Investees That Use US GAAP The first interpretive matter relates to financial statements of acquirees and investees. As indicated in the adopting release, foreign private issuers that elect to prepare audited financial statements in accordance with US GAAP are only required to provide audited financial statements for two years if the financial statements had not been previously filed with the Commission.-[1]- This accommodation is equally applicable for financial statements of acquirees and investees of foreign private issuers or if the acquiree/investee is a foreign business as defined by Regulation S-X. 2. Definition of a Foreign Business The second interpretive matter relates to the definition of a foreign business. The amended rules provide relief regarding the reconciliation requirements and age of financial statements for acquirees and investees that are foreign businesses as defined under Regulation S-X. Under this definition, an entity --------- FOOTNOTES --------- -[1]- See Note 37 to Securities Act Release No. 7053. -------------------- BEGINNING OF PAGE #3 ------------------- that is 50% owned by a domestic entity and 50% owned by a foreign entity would not be deemed to be a foreign business even though it may be exclusively located outside the US. 3. Israeli Companies That Change Reporting Currency The third interpretive matter affects a number of Israeli companies. As a result of the flexibility in the selection of reporting currency, a number of Israeli companies will change reporting currency from the New Israeli Shekel (NIS) to the US dollar. These companies should consider the following in recasting financial statements into US dollars for prior periods: * During periods in which (i) the US dollar was not the currency of the primary economic environment, or (ii) Israel was not considered a hyperinflationary economy, the US dollar amounts should be translated from financial statements prepared in NOMINAL NIS into US dollars using a method that is consistent with paragraph 12 of SFAS Statement No. 52, Foreign Currency Translation (SFAS 52) - that is, income statements at the applicable average exchange rate and assets and liabilities at the period end exchange rate. The US dollar amounts should NOT be translated from financial statements prepared in NIS adjusted for inflation. * During periods in which (i) the US dollar was the currency of the primary economic environment, or (ii) Israel was considered a hyperinflationary economy, the US dollar amounts should be remeasured from NOMINAL NIS into US dollars in a manner consistent with paragraph 10 of SFAS 52. The staff will not object to the conclusion that Israel was considered a hyperinflationary economy for periods prior to January 1, 1993. 4. Reporting Currency - Predecessor The fourth interpretive matter also relates to the selection of reporting currency. Rule 3-20 of Regulation S-X requires that the financial statements should be stated in the same currency for all periods presented. This requirement applies to financial statements of a predecessor as well as those of the registrant. That is, the reporting currency used in financial statements of the predecessor should be the same as that of the registrant. 5. Business Combinations Under IAS 22 The fifth interpretive matter involved evaluation of whether a business combination qualified as a uniting of interest under International Accounting Standard No. 22 Business Combinations (IAS 22). Form 20-F states that a business combination which would be deemed a uniting of interest under IAS 22 and was accounted for using that method in the primary financial statements may be deemed, for purposes of the reconciliation to US GAAP, a pooling of interests. Both the proposing and adopting releases stated that there would be extremely few transactions that would qualify as a uniting of interest under IAS 22, and that the criteria was more stringent than US GAAP.-[2]- One of the criteria to achieve uniting of interest accounting is that the fair value of one enterprise should not be --------- FOOTNOTES --------- -[2]- See Securities Act Release Nos. 7056 and 7119. -------------------- BEGINNING OF PAGE #4 ------------------- significantly different from that of the other enterprise.-[3]- That is, the fair value of each entity is approximately 50% of the combined entity. This simple concept appears to have a wide degree of interpretation. Canadian GAAP has a concept similar to IAS 22.-[4]- The staff was informally advised by the staff of the Ontario Securities Commission that pooling of interests accounting is extremely rare and would be very difficult to justify if one entity represented more than 55% of the combined entity. The Accounting Standards Board in the United Kingdom recently issued a standard that states that there is a presumption that merger accounting is not appropriate if one entity is more than 50% larger than the other entity - that is, one entity should not represent over 60% of the combined entity.-[5]- This standard also states that it is consistent with IAS 22. The staff addressed several situations in which a company believed that uniting of interests accounting was appropriate under IAS 22 when one entity represented approximately 70% of the combined entity. The staff was unable to concur that these business combinations met the IAS 22 criteria for uniting of interests accounting. The staff believes that business combinations that qualify for pooling or merger accounting under the Canadian or UK standards, as well as various other countries' standards, will not necessarily qualify for uniting of interests accounting under IAS 22. While the staff has not established bright line criteria, business combinations will be carefully evaluated, and registrants are encouraged to discuss such transactions with the staff on a prefiling basis. AICPA INTERNATIONAL PRACTICES TASK FORCE Several years ago, the AICPA established an International Practices Task Force ("Task Force") to address unique accounting and reporting issues that confront foreign private issuers and, to a lesser extent, other international issues that affect domestic registrants. The Task Force cannot develop accounting standards; rather, its primary purpose is to reduce diversity in practice by reaching a consensus on the accounting or reporting regarding selected unique issues. I am an observer to the Task Force, and also use it as a means of communicating the staff's position on certain issues. While the Task Force addressed a number of items, I would like to share with you five of the more interesting issues addressed during the year. 1. Enactment Date - SFAS 109 The first issue involves the definition of enactment date under SFAS Statement No. 109 Accounting for Income Taxes (SFAS 109). That standard states that deferred tax assets and liabilities should be adjusted for the effects of a change in tax law or rates in the period that includes the enactment date. In the US, enactment date is considered to be the date that the President of the United States signs the legislation and it becomes law. --------- FOOTNOTES --------- -[3]- See paragraph 16(b) of IAS 22. -[4]- See Section 1580 of the Canadian Institute of Chartered Accountants Handbook. -[5]- See paragraph 68 of Financial Reporting Standard No. 6 Acquisitions and Mergers. -------------------- BEGINNING OF PAGE #5 ------------------- The Task Force addressed how enactment date should be applied in foreign jurisdictions with a specific question relating to a change in tax rates in Australia. Most Australian companies have a June 30th year-end. Prior to June 30, 1995, the Australian Parliament passed a bill that changed the tax rates for corporations, but the bill did not receive Royal Assent by the Governor-General until after June 30, 1995. The Governor- General is head of state and is appointed by Queen Elizabeth II. The Australian constitution stipulates before legislation can become law it must receive Royal Assent by the Governor-General. The constitution gives the Governor-General discretion to withhold assent. In practice, however, the Governor-General does not withhold Royal Assent unless, in the unusual circumstance, it was requested by the Prime Minister. The conclusion reached by the Task Force is pragmatic and can be applied to any jurisdiction regardless of the form of government. Simply stated, enactment date is when all steps in the process for legislation to become law have been completed. In Australia, enactment date would be when Royal Assent is given to the bill. This conclusion is equally applicable to foreign subsidiaries of US companies. 2. Brazilian Inflation Indices The second issue involves the selection of an inflation index used by Brazilian companies to prepare price level adjusted financial statements. Brazil has experienced severe inflation with rates in some recent years exceeding 2000%. In addition to the official index, there are numerous different indices published by private independent institutions. Historically, the official index presents rates of inflation that are less than those published by the private institutions. In preparing price level adjusted financial statements in accordance with Brazilian statutory requirements, the official index is used. Several accounting firms, however, believe the official index does not fully recognize the actual rate of inflation. In preparing price level adjusted financial statements in accordance with US GAAP, different registrants have proposed the use of different inflation indices. The selection of an inflation index will affect virtually every amount in the financial statements except monetary assets and liabilities in the most recent balance sheet. Two entities with the same transactions could present significantly different financial statements depending on the index selected notwithstanding the statement by both entities that the financial statements are prepared in constant currency of equivalent purchasing power. Representatives of the Task Force intend to work with their counterparts in Brazil to try to reduce diversity in practice regarding the selection of the inflation index. The staff supports and encourages the accounting profession to resolve this issue. 3. Determining if Mexico is a Hyperinflationary Economy The third issue affects US companies and foreign private issuers with subsidiaries in Mexico. The Task Force concluded that for purposes of applying SFAS 52, Mexico is not a hyperinflationary economy at December 31, 1995. While high in 1995, inflation was in the single digits in 1994 and 1993, resulting in a three year cumulative inflation rate of -------------------- BEGINNING OF PAGE #6 ------------------- approximately 76%. Domestic registrants with operations in Mexico should consider the peso to be the functional currency unless a different currency is the currency of the primary economic environment. Likewise, foreign private issuers with operations in Mexico should follow the guidance in SFAS 52 for non hyperinflationary operations for purposes of reconciling to US GAAP. The acceptance of IAS 21 for the translation of hyperinflationary operations would not be applicable. As allowed by Form 20-F, Mexican companies can continue to present price level adjusted financial statements in constant pesos, and are not required to eliminate the effects of price level changes in the reconciliation to US GAAP. 4. Impairment - Mexico The fourth issue also involves Mexico. Under Mexican GAAP, fixed assets are recorded at replacement cost which represents the amount that it would cost to replace an asset as opposed to its fair value. As permitted by Form 20-F, the effect of recording fixed assets at replacement cost is not eliminated in the reconciliation to US GAAP as the financial statements comprehensively include the effects of price level changes. Mexican Circular 29 provides guidance on the accounting for impairment and establishes a "value in use" concept. Under this guidance, fixed assets cannot exceed the value in use amount which is defined as future cash flow (income less related expenses) expected to be obtained over the life of the asset expressed in pesos of constant purchasing power. However, pursuant to the Circular, the write down of fixed assets would be reflected in the income statement only to the extent that the value in use amount is less than the fixed asset balance expressed in beginning of the year pesos - that is, not adjusted to constant purchasing power. The remaining amount of the write down would be charged directly to equity. By applying this methodology, the greater the rate of inflation, the smaller the amount of the write down that would be included in the income statement. The Task Force concluded that for purposes of reconciling to US GAAP, the amount of the write down included in the income statement should be determined using amounts expressed in pesos of constant purchasing power. In addition, the total amount of the write down could be different under US GAAP compared to Mexican GAAP. The mechanics of implementing this conclusion, as well as a number of other issues affecting Mexican companies, is expected to be addressed at a meeting next week between the Task Force and representatives of the Mexican Accounting Principles Commission. 5. Approved Enterprise Zones in Israel The fifth issue involves a tax incentive program for approved enterprize zones in Israel. Under the alternative system of tax benefits, a company has a tax holiday for a specified period provided the profits generated during the exempt period are retained. If those profits are subsequently distributed, the company would generally owe taxes at the applicable rate. -------------------- BEGINNING OF PAGE #7 ------------------- Under SFAS 109, a deferred tax liability would normally be recorded relating to taxes that would be owed on the distribution of profits even if management does not currently intend to declare dividends. However, under Israeli tax law, a company could be liquidated and profits distributed with no tax liability to the company; rather, the shareholders would incur the tax liability. If the registrant can represent that profits could be distributed tax free in a liquidation, and the undistributed earnings are essentially permanent in duration, a deferred tax liability does not need to be recorded. If the approved enterprise benefit relates to a domestic (Israeli) subsidiary, the parent company would be liable for the taxes upon distribution. Accordingly, a deferred tax liability should be recorded unless the subsidiary could be merged with the parent in a tax free merger or if there is some other manner in which the earnings could be distributed tax free. If deferred taxes are not provided for amounts that would be owed on distribution of profits, the following disclosures may be appropriate: * a description of the approved enterprise zone program indicating if the benefit relates to the parent company or a subsidiary; * the amount of retained earnings for which taxes have not been provided; * a statement that such undistributed earnings are essentially permanent in duration; * a statement that such earnings could be distributed to shareholders tax free in a liquidation, or if applicable, in some other manner; * the tax rate to the company if the profits were distributed; and * the amount of tax that would be owed if the profits were distributed. ACCOMMODATIONS The staff is constantly balancing the need for investors to have information necessary to make an informed investment decision with the pragmatic problems of applying the Commission's rules to the diverse reporting and accounting environments of issuers from 45 countries. While the resolution of any unique issue is based on the specific facts and circumstances, the following is a summary of five accommodations that the staff addressed during the year: 1 Pensions - Application of SFAS 87 The first accommodation relates to the application of SFAS Statement No. 87 Employers' Accounting for Pensions (SFAS 87) in an initial registration statement. Some foreign issuers have concluded that it is not feasible to obtain the actuarial information necessary to implement SFAS 87 as of the effective date specified in the standard - January 1, 1989 for foreign plans with a calendar year-end. The staff will not object if a foreign issuer that cannot implement SFAS 87 as of the effective date due to the unavailability of actuarial data adopts the -------------------- BEGINNING OF PAGE #8 ------------------- standard as of a later date. However, the standard must be adopted as of a date no later than the beginning of the first period for which US GAAP reconciled data is required in a Commission filing. A foreign issuer adopting SFAS 87 later than the effective date specified in the standard should allocate a portion of the transition obligation/asset directly to equity on the adoption date based on the ratio of: (a) the years elapsed between the effective date in the standard and the adoption date, to (b) the remaining service period of employees expected to receive benefits as estimated at the adoption date. This process is using the service period at adoption date as a surrogate for the service period at the effective date specified in SFAS 87. The transition asset/obligation should be extinguished at the same date as if SFAS 87 were adopted on the effective date. To illustrate the mechanics of this accommodation, assume SFAS 87 is adopted on January 1, 1994. At that date, the transition obligation is 15,000 and the remaining service period is 15 years. Five years have elapsed since the effective date for a foreign plan and accordingly, 5/15ths, or 5,000 of the transition obligation would be recorded as a direct reduction of equity in the opening balance sheet under US GAAP. The remaining 10,000 would be amortized as part of pension expense over the next 10 years. Foreign private issuers implementing this accommodation should disclose the following: * the date SFAS 87 was adopted; * a statement that it was not feasible to apply SFAS 87 on the effective date(s) specified in the standard; and * the amortization period for the transition obligation/asset, and the amount that was recorded directly to equity in the opening balance sheet under US GAAP. The disclosure of this information would be applicable for financial statements prepared under both Item 17 and Item 18 of Form 20-F, and should be presented for periods that include the year that SFAS 87 was adopted. 2. Proportionate Consolidation The second accommodation relates to the use of proportionate consolidation. In 1994, the Commission adopted amendments allowing foreign private issuers that prepare financial statements on a basis other than US GAAP to use proportionate consolidation for joint ventures for purposes of reconciling to US GAAP. Generally, financial statements of foreign private issuers prepared using a comprehensive basis of accounting but containing a departure from that basis with respect to a material item would not be acceptable in Commission filings. However, the staff granted the request of one foreign private issuer to be allowed to prepare its financial statements using U.S. GAAP except that it accounted for its investments in joint ventures using the proportionate consolidation method. The staff could be expected to favorably consider a written request for a waiver for that accounting departure from other foreign private issuers subject to the following conditions: -------------------- BEGINNING OF PAGE #9 ------------------- * the joint venture is an operating entity, the significant financial operating policies of which are, by contractual arrangement, jointly controlled by all entities having an equity interest in the entity; * the auditors' report addresses this departure from US GAAP; * the disclosures required by Item 17/18(c)(2)(vi) of Form 20- F regarding proportionate consolidation are provided; and * retained earnings relating to the joint venture are disclosed similar to entities accounted for under the equity method consistent with Rule 4-08(e)(2) of Regulation S-X. 3. Departure From Foreign GAAP The third accommodation also relates to qualified auditors' reports. The Argentine National Securities Commission was ordered by decree not to accept price level adjusted financial statements for periods after September 1, 1995. Argentine GAAP, however, still requires the preparation of price level adjusted financial statements. Independent accountants in Argentina intend to qualify their report for this departure from GAAP. Argentina has experienced single digit inflation during the last several years, and the economy is clearly not hyperinflationary as defined in Rule 3-20 of Regulation S-X. The staff will not object if the independent accountants' report is qualified for this departure from Argentine GAAP. 4. Financial Statements of Acquirees in Hyperinflationary Economies The fourth accommodation relates to US companies that acquire a business in a country that has or had a hyperinflationary economy. These companies may have difficulty in applying the remeasurement principles of SFAS 52 in preparing pro forma information as well as for purposes of applying the significance tests of Regulation S-X. In certain instances, the staff did not object to these companies using amounts that were first adjusted for inflation prior to translation as a surrogate for the remeasurement principles of paragraphs 10 & 11 of SFAS 52 to determine the historical cost basis of non monetary items - for example, property, plant and equipment. In applying this accommodation, it was appropriate to use inflation adjusted balances only during the period that the economy was hyperinflationary. 5. Mandatorily Redeemable Preferred Stock The fifth accommodation affects Canadian issuers. Under US GAAP, mandatorily redeemable preferred stock is presented as temporary equity with dividends and accretion being presented as a direct charge to retained earnings. Recent amendments to Canadian GAAP require mandatorily redeemable preferred stock to be presented as a liability with dividends and accretion presented as an expense.-[6]- The staff will not require this presentation to be reconciled to US GAAP. Canadian issuers would continue to also be allowed to present the mandatorily redeemable preferred stock as temporary equity with dividends and accretion --------- FOOTNOTES --------- -[6]- See Section 3860 of the Canadian Institute of Chartered Accountants Handbook. -------------------- BEGINNING OF PAGE #10 ------------------- being recorded directly to equity in the reconciliation to US GAAP. RECOMMENDATIONS FOR PREPARING FILINGS WITH THE COMMISSION The last topic I would like to present today are 15 recommendations to consider when preparing filings with the Commission. These recommendations are based on comments that the staff frequently issued during the year. The first ten recommendations are primarily applicable to registrants in Canada, United Kingdom, Israel, Mexico, and Australia - these countries have the largest number of registrants. The remaining five recommendations are applicable to all registrants. While some were addressed in prior years, the frequency of our comments during the past year warrant repetition. Canada The first three recommendations apply to registrants in Canada: 1. The information regarding changes in stockholders' equity stipulated by Rule 3-04 of Regulation S-X should be provided for each period that an income statement is required. Many Canadian companies omit information relating to the currency translation adjustment account as well as other equity accounts. 2. Differences between the cash flow statement required by US GAAP and Canadian GAAP should be disclosed. Differences that are frequently omitted include: * disclosure of interest and dividends paid; * disclosure of non cash investing and financing activities that are included as part of the statement under Canadian GAAP; and * classification differences attributable to short term borrowings that are considered to be a cash equivalent under Canadian GAAP. It is the staff's understanding that the Canadian Accounting Standards Board intends to propose an amendment that would replace the existing cash flow standard with International Accounting Standard No. 7 Cash Flow Statements (IAS 7). The Commission's rules do not require a reconciliation of a cash flow statement prepared in accordance with IAS 7. 3. Canadian issuers that elect to change reporting currency are strongly encouraged to discuss their particular facts and circumstances with the staff. Rule 3-20 of Regulation S-X states that the primary financial statements should be recast as if the new reporting currency had always been used. As indicated in the proposing release, this method differs from the Canadian method described in EIC 11 that uses a convenience translation to recast prior periods.-[7]-. The level of additional information that will be necessary to comply with the Commission's requirements will depend on the differences in exchange rates that would be used to recast prior periods. The additional information could range from addressing differences in the methodology as part of the reconciliation to US GAAP to complete restatement of prior year financial statements using the methodology required by Rule --------- FOOTNOTES --------- -[7]- See Securities Act Release No. 7054. -------------------- BEGINNING OF PAGE #11 ------------------- 3-20. Additional information in management's discussion and analysis using the US GAAP balances may also be necessary. United Kingdom The next four recommendations apply to registrants in the United Kingdom: 4. All financial statements required by UK GAAP should be provided. Frequently, the "Statement of Total Recognized Gains and Losses" and the "Note of Historical Cost Profits and Losses" required by Financial Reporting Standard No. 3 Reporting Financial Performance (FRS 3) were omitted. 5. Disclosures that are required by UK GAAP that were frequently omitted include: * information on acquisitions and disposals relating to the cash flow statement required by Financial Reporting Standard No. 1 Cash Flow Statements (FRS 1) and relating to the income statement required by FRS 3; and * information about unprovided deferred taxes required by Statement of Standard Accounting Practice No. 15 Accounting For Deferred Tax (SSAP 15), which can be useful in understanding the tax provision under US GAAP. 6. Segment information should include total assets required by SFAS Statement No. 14 Financial Reporting for Segments of a Business Enterprise (SFAS 14) in addition to net assets required by SSAP 25 Segmental Reporting if the registrant is complying with Item 18 of Form 20-F. 7. Registrants should consider the need to provide disclosures stipulated by the Companies Act in filings with the Commission. The staff has been informally advised by the staff of the UK Accounting Standards Board that compliance with UK GAAP necessitates inclusion of disclosures required by the Companies Act to the extent that the disclosures relate to the balance sheet or income statement. Registrants that disclose that the financial statements filed with the Commission do not comply with the Companies Act are encouraged to explain the nature of the departure. In addition, the registrant should be able to justify why the departure does not affect the representation that the financial statements comply with UK GAAP. Israel 8. The recommendation for registrants in Israel relates to income taxes. The currency of measurement, or functional currency, of many of the entities in Israel is the US dollar. These registrants are reminded that the provisions of paragraph 9(f) of SFAS 109 are applicable unless the registrant has elected to pay its taxes based on US dollar amounts. Paragraph 9(f) is an exception to the true liability approach and stipulates that the effects of changes in exchange rates and indexing for inflation are excluded from the temporary differences in determining the deferred tax balances. The staff has been advised that a similar concept does not exist under Israeli GAAP. The staff has also concluded that the Israeli Inflationary Taxation System has the same effect as indexing. Registrants are encouraged to clearly describe how deferred taxes are determined, and if appropriate, address the provisions of paragraph 9(f) in the reconciliation to US GAAP. -------------------- BEGINNING OF PAGE #12 ------------------- Mexico 9. The staff addressed a number of unique accounting issues that affect Mexican companies that are described in letters from the staff to the Mexican Accounting Principles Commission. Topics included in these letters, which are still applicable, include the following: March 20, 1995 - capitalization of financing costs; June 9, 1995 - monetary gain on deferred income taxes, "double counting" the monetary gain/loss, allocation of the change in deferred income tax balance between equity and the income statement, employee profit sharing, exchange rates, negative goodwill, US GAAP shareholders' equity, and disclosures regarding the effect of the devaluation of the peso; September 18, 1995 - exchange rates used by banks; and October 6, 1995 - the staff's position regarding restatement of prior period information into pesos of equivalent purchasing power when interim information is presented in a registration statement. This issue would be applicable to all registrants that prepare price level adjusted financial statements. Copies of these letters have been distributed to the AICPA International Practices Task Force and can also be obtained from our office. Australia 10. A number of Australian registrants amortize goodwill using a methodology referred to as the Inverse Sum of the Year's Digit method. This method results in less amortization expense in the earlier years and greater expense in later years compared to the straight line method. The Inverse Sum of the Year's Digit method of amortization is not acceptable under US GAAP, and material differences should be addressed in the reconciliation to US GAAP. In evaluating materiality, registrants that are relying on differences in estimated lives that are allowed under Australian GAAP compared to US GAAP are encouraged to disclose that fact. It is the staff's understanding that the Australian Accounting Research Foundation recently issued an exposure draft that would require the use of the straight line method. General The next five recommendations are applicable to all foreign issuers: 11. The applicability of SFAS Statement No. 123 Accounting for Stock-Based Compensation (SFAS 123) to foreign private issuers will depend on if the financial statements are prepared in accordance with Item 17 or Item 18 of Form 20-F. Registrants filing under Item 18 should comply with the disclosure/pro forma measurement principles of SFAS 123 in the same manner as a US company. Accordingly, if a foreign private issuer elects not to use the fair value method of accounting for stock based compensation in the reconciliation to US GAAP, the pro forma disclosures of net income and earnings per share, along with all of the other disclosures required by SFAS 123, should be provided in the annual financial statements. Foreign private issuers filing under Item 17 would not be required to provide pro forma -------------------- BEGINNING OF PAGE #13 ------------------- net income and earnings per share or any of the other disclosures stipulated in SFAS 123 except that the disclosures, either in the primary financial statements or the reconciliation to US GAAP, should be clear as to the method of accounting that is followed for purposes of complying with US GAAP. 12. The reconciliation of shareholders' equity should be in sufficient detail to allow an investor to determine the differences between a balance sheet prepared in accordance with the foreign GAAP and one prepared in accordance with US GAAP. The staff continues to issue comments requiring additional disclosure or clarification regarding this item. Some of the more common deficiencies include the following: * Recording items net of tax. All reconciling items should be presented gross with a separate adjustment for taxes. * Presenting adjustments that impact several balance sheet captions, such as purchase accounting, as one reconciling item. Items that impact several balance sheet accounts should be separately disclosed. * Recording adjustments for items such as property, plant and equipment or goodwill net of depreciation/amortization expense. These amounts should also be presented gross with separate disclosure of the amount of accumulated depreciation/amortization. 13. Registrants are encouraged to disclose the number of shares used to determine EPS under US GAAP as well as to describe differences in the methodology used to determine outstanding shares under US GAAP if different from the primary financial statements. 14. Registrants should supplementally prepare a statement of changes in shareholders' equity using balances determined under US GAAP as a proof that the reconciliation balances and provides appropriate disclosure on changes in the equity accounts on a US GAAP basis. By requesting this information, the staff continues to discover numerous errors in the US GAAP reconciliation. Unless easily determined from the information in the financial statements, the staff will request this information as part of the comment process. More and more registrants have elected to present a statement of changes in shareholders' equity using US GAAP balances in the financial statements. 15. The staff has noticed that foreign accounting firms are using their US affiliate on a more frequent basis to address US GAAP issues. The staff believes that this improved communication between foreign auditors and their US affiliates, or other advisors, is desirable. The staff encourages the use of advisors that are familiar with US GAAP in addressing and resolving issues that affect the presentation of US GAAP information. CONCLUSION Thank you, and I look forward to working with you during 1996.