U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

Speech by SEC Staff:
International Reporting Issues

Remarks by

Craig C. Olinger

Deputy Chief Accountant, Division of Corporation Finance
U.S. Securities & Exchange Commission

27th Annual National Conference on Current SEC Developments

December 8, 1999

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of Mr. Olinger and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the Commission's staff.


International Disclosure Standards - Revisions to Form 20-F


In September 1999 the Commission adopted rule changes1 intended to bring SEC non-financial disclosure requirements for foreign private issuers in line with the international disclosure standards endorsed by IOSCO in 1998. The rule changes incorporate the international disclosure standards into revised Form 20-F. While the IOSCO standards were specifically developed for equity offerings, the Commission has extended their applicability to other registered offerings, listings, and annual reports. Revised Form 20-F includes numerous added instructions that clarify when the particular provisions apply to each type of filing or report. The Commission also revised the definition of "foreign private issuer" to clarify how issuers should calculate their US ownership for purposes of the definition. The rule changes are effective for reports filed with respect to fiscal years ending on or after September 30, 2000. The rule changes largely affect non-financial statement disclosures. However, my remarks will focus on how the new rules will affect financial reporting.

Revised Form 20-F includes new Item 8 that specifies the form, content and age of financial statements of the registrant. New Item 8 supercedes Rule 3-19 of Regulation S-X. Items 17 and 18 of Form 20-F have been retained without substantive change. In general, the financial reporting requirements for foreign registrants will not change, except for the age of financial statements in a registration statement.

Age of Financial Statements

Revised Form 20-F effectively reduces the period before audited financial statements of the most recent fiscal year are required in a registration statement from 6 months after fiscal year end to 3 months. New Item 8 states that the latest year of audited financial statements may not be more than 15 months old at the time of the offering or listing. However, in response to public comments an instruction was added that retains the 18 month period (6 months after fiscal year end) for specified types of continuous offerings where the "blackout" period would be disruptive - outstanding warrants, dividend reinvestment plans, and outstanding convertible securities.

Also, Item 8 requires that audited financial statements in initial public offerings be no more than 12 months old at the time of filing. However, an instruction clarifies that this applies only where the registrant is not public in any jurisdiction. Further, the instruction indicates that the staff will waive the 12-month requirement where it is impracticable or involves undue hardship. Note that these requirements do not change the due date for filing an annual report on Form 20-F, which continues to be 6 months after fiscal year end.

New Item 8 effectively reduces the updating period for interim financial statements from 10 months after fiscal year end to 9 months after fiscal year end. If interim financial statements are required, they must cover a period of at least six months.

New Item 8 also requires financial information more current than the required interim period to be included in a registration statement if that information has been published. Instructions added to this item essentially retain the disclosure provisions of Rule 3-19(f).

Reference to US GAAS in Audit Reports

New Item 8 requires the annual financial statements to be audited "in accordance with a comprehensive body of auditing standards." An instruction clarifies that in SEC filings and reports the financial statements must be audited in accordance with US generally accepted auditing standards (US GAAS). Public commenters asked whether this clarification was intended to change the staff's practice of accepting audit reports that state the audit was conducted in accordance with local auditing standards that are "substantially similar" or "similar in all material respects" to US GAAS. As one commenter noted, that practice was adopted to accommodate audit report styles in different jurisdictions that differ from the audit report wording specified by US GAAS. The practice was not intended to relieve the auditor of the responsibility to perform all auditing procedures necessary under US GAAS. The staff does not intend to change our practice of accepting wording variations in audit reports to comply with local reporting formats. In all other respects, however, in order to avoid ambiguity, the report must say that the audit was performed in accordance with US GAAS. This guidance is intended to apply to all foreign private issuers other than those reporting under the Canadian Multi-Jurisdictional Disclosure System (MJDS).

AICPA SECPS Rules for Foreign Affiliates

Reflecting the importance of audit quality in filings by foreign issuers, the SEC Practice Section of the AICPA recently changed certain of its membership rules to address SECPS member firms with foreign associated firms that audit SEC registrants. Under the new rules, which become effective January 1, 2000, SECPS members must seek the adoption of policies and procedures by the international organization or the individual foreign associated firms that are consistent with SECPS objectives for audits of SEC registrants. The SECPS member will report to the AICPA the name and country of any foreign associated firms that demonstrate compliance with that objective. The foreign associated firm would be subject to scrutiny as part of the peer review process for the SECPS member firm. The new rules also establish minimum requirements for the review of SEC filings by a designated "filing reviewer" within the US firm or international organization knowledgeable about US GAAP, US GAAS, US auditor independence and SEC reporting requirements.

The filing reviewer requirement is modeled on procedures already in place at many firms. To complement this process, the staff has adopted certain procedures upon receipt of confidential filings received from foreign registrants audited by foreign associated firms. Prior to commencing review, the staff requests written confirmation that the SECPS member firm's review procedures were applied to the filing. We also request the name of the designated filing reviewer that the staff may contact with any questions concerning the application of those policies and procedures to the confidential filing. The staff's procedure is not intended to specify or alter the nature or scope of a firm's policies or procedures, nor to specify or alter how a firm selects its filing reviewers. The purpose of the procedure is to ensure that foreign associated firms appropriately involve their designated filing reviewer prior to submission of filings. The staff will consider deferring the review of a confidential filing where the application of the firm's established policies and procedures to that filing cannot be confirmed.


"True and Fair" Overrides

The staff has recently noted a number of circumstances where registrants that present their financial statements under UK GAAP or IAS reported an override of a prescribed accounting treatment in order to achieve a "true and fair view". In some cases, an override involving a UK registrant was necessary to address a conflict between the particular requirements of UK GAAP and the Companies Act. For example, Financial Reporting Standard 62 requires certain "group reconstruction" transactions (reorganizations of entities under common control in the US GAAP literature) to be recognized at historical cost. But under the Companies Act, all business combination transactions must be characterized as either acquisitions (purchases) or mergers (pooling of interests). Since a group reconstruction will ordinarily not meet the conditions for merger accounting, an override of the Companies Act provision is necessary to comply with UK GAAP. The staff may inquire about such a matter to ensure that it is adequately explained to US investors, but has not objected to this type of override.

However, in other situations registrants have overriden specific requirements of UK GAAP or IAS itself. Generally, the accounting treatments adopted instead of the prescribed treatment have been highly unusual. In most cases, the registrant's chosen method appeared to be unique and not identifiable as an accepted accounting practice in any system of GAAP with which the staff is familiar. For example, the staff has seen the following:

  • Recognition of a gain on "extinguishment" of debt to the extent of a company's operating losses under UK GAAP. However, the debt remained outstanding. The debt included a provision that allowed the debtholders to participate in the company's profits. Management concluded that it would be appropriate to charge the debtholders with the company's losses for financial reporting purposes, even though the debt instruments did not include such a provision.

  • Use of an "effective" foreign currency exchange rate calculated by the company and its advisors rather than the actual rate under IAS. The calculated rate was applied only in translating US dollar-denominated debt. Actual rates were used for translating all other balances.

In both examples, the staff objected to the treatment, and the financial statements were restated. Further, in both examples a US GAAP reconciling item had been provided. But in each case, there was no identifiable difference between US GAAP and the treatment specified by UK GAAP or IAS. The practical effect was to reconcile the adopted treatment back to the treatment that management concluded would not provide a true and fair view! The staff will challenge such reporting.

The staff has also challenged the adequacy of disclosure of true and fair overrides. Both UK GAAP and IAS have specific disclosure requirements3 that include identification of the required treatment from which the enterprise has departed, the nature of the departure, including the treatment that would be required, the reason why that treatment would not give a true and fair view, the treatment adopted and the financial impact of the departure on the enterprise's financial statements. Certain additional disclosures are required under IAS. The staff will expect full compliance with those requirements.

In particular the staff has noted poor disclosure about the adopted treatment and its effects. The adopted accounting treatments were unique to the registrant, and a US investor would have no framework to understand or evaluate them. Yet the disclosures were minimal. We would expect full and clear disclosure that not only discusses why an override is necessary, but also clearly describes the adopted treatment, explains how and when it is applied, discloses the key assumptions or estimates inherent in the method, and quantifies its effects on the financial statements.

Disclosures about Derivatives and Market Risks - UK FRS 13 versus Item 9A of Form 20-F

UK Financial Reporting Standard 13 (FRS 13)4 requires numerous disclosures about derivative financial instruments to be included in or cross-referenced to annual financial statements under UK GAAP. The disclosures encompass not only the terms and fair values of financial instruments but also certain forward-looking information such as narrative discussions about market risks and quantitative measures of value at risk. Financial institutions must include all the specified information in their financial statements, while companies in other industries may omit the forward-looking items. If the disclosures specified by FRS 13 are included or cross-referenced into the financial statements, the information must be audited.

Item 9A of Form 20-F requires similar qualitative and quantitative disclosures about market risks, but specifically requires those disclosures to be presented outside the financial statements. The disclosures are not required to be audited. As a result, there are conflicts between the reporting and audit requirements under UK GAAP and SEC rules.

To resolve the conflicts, the staff will waive the instruction to Item 9A that requires the market risk disclosures to be outside the financial statements, to the extent necessary to permit registrants to comply with UK GAAP and their auditors to render unqualified audit reports.

In some cases, the requirements of FRS 13 may be met by cross-referencing into the financial statements disclosures located elsewhere in a filing. The staff expects registrants and their auditors to clearly state which disclosures are considered part of the financial statements and covered by the audit.

Application of FASB Statement 130 to Foreign Registrants

At the November 1998 AICPA International Practices Task Force meeting the staff noted that the requirements of FASB Statement 1305 would apply to both Item 17 and 18 filers and that the statement could be provided under either home-country GAAP or US GAAP. In practice, however, it may be difficult to determine what represents "other comprehensive income" for the purpose of home-country GAAP. Statement 130 only requires changes in balances of items under Statements 52, 80, 87 and 1156 that are reported directly as a separate component of equity to be reported in a statement of other comprehensive income. Other items are not to be reported as components of comprehensive income.

With respect to the practical application of Statement 130 to foreign filer situations, the Task Force concluded that:

  • A Statement of Total Recognized Gains and Losses prepared by a UK entity in accordance with UK Financial Reporting Standard 37, should be regarded as being consistent with Statement 130; and

  • If a registrant recognizes revaluations of assets in conformity with home country GAAP or IAS, the statement of other comprehensive income should include such changes.

Impact of FASB Statement 131 on MD&A Segment Discussion

In some situations, the application of the management approach under FASB Statement 1318 may result in identification of reportable segments different from those under home-country GAAP. Item 9 of Form 20-F requires MD&A discussion of business segments. The staff has recently dealt with issues regarding the extent to which MD&A discussion based on the Statement 131 segments is necessary in addition to that based on the home-country GAAP segments.

Item 9 of Form 20-F permits the MD&A discussion to be based on the primary financial statements. However, Instruction 11 to Item 9 and Staff Accounting Bulletin 88 (SAB 88)9 require discussion of matters relating to differences between home-country GAAP or IAS and US GAAP that impact an understanding of the financial statements taken as a whole. If the Statement 131 segment information provides new and additional information as to how management views the business, or indicates material trends or relationships not apparent from the home-country GAAP segmental disclosures, it would be necessary and appropriate for that to be discussed within MD&A.

Highlighting Significant US GAAP Differences in MD&A and Selected Financial Data

Recently, the staff encountered several situations where we

concluded that the unusual nature or highly material amount of a particular US GAAP reconciling item warranted further MD&A disclosure based on the guidance in SAB 88. In these situations, the following factors indicated the need for additional MD&A disclosure:

  • Differences in key financial indicators not ordinarily required to be reconciled, such as revenues or operating income.

  • Differences resulting in a significant divergence of trends between home-country or IAS and US GAAP amounts.

  • Differences that are likely to grow significantly in future periods because they relate to outstanding long-term contracts with fixed terms.

  • Differences related to specialized industry accounting that may be unfamiliar to US investors, particularly where home-country GAAP or IAS would not ordinarily be expected to produce significant differences.

  • Differences reflected in the separate financial statements of a recently acquired business that are not yet fully reflected in the registrant's financial statements.

  • Differences reflected in the separate financial statements of an equity method investee, whose effects are not fully apparent in the registrant's financial statements.

The staff believes that an expanded presentation of selected financial data on a US GAAP basis may also be necessary in these circumstances to highlight unusual or highly material matters that might not otherwise be disclosed with sufficient prominence.

Dual Pro Forma Presentations - Purchase versus Pooling of Interests

Pro forma information presented by a foreign registrant under Article 11 of Regulation of S-X is required to either be prepared on a US GAAP basis or reconciled to US GAAP. The staff recently considered situations in which a foreign registrant sought to present the US GAAP pro forma information for a business combination both on the basis that (a) the transaction would be accounted for as a purchase and (b) the transaction would be accounted for as a pooling of interests.

Article 11 of Regulation S-X requires alternative pro forma presentations in circumstances where the terms of a business combination may result in a range of outcomes. For example, the level of shareholder acceptance of an exchange offer may not be known at the time of filing. If all other conditions for a pooling of interests will be met, pro forma information on a pooling of interests basis may be necessary to reflect acceptance of 90 percent or greater, with alternative pro forma information on a purchase basis to reflect lower acceptance.

However, alternative pro forma presentations for purchase and pooling of interests should not be used as a substitute for the timely identification and resolution of accounting issues related to the business combination. Purchase versus pooling issues should ordinarily be resolved prior to effectiveness of the registration statement. The staff encourages pre-filing consultations on difficult business combination issues.

Age of Pro Forma Information in a Cross-border Business Combination

The age of the pro forma financial information included in a registration statement should be based on the age of financial statements requirement applicable to the registrant. If a foreign private issuer files a Form F-4 and the target company is a US domestic registrant, the age of the pro forma information may be determined by reference to Rule 3-19 of Regulation S-X (or new Item 8 of Form 20-F). That is, the pro forma information need only be as current as the most recent balance sheet date required for the registrant under Rule 3-19, which could be as much as 10 months old at the time of effectiveness. By contrast, if a US domestic registrant files a Form S-4 and the target company is a foreign private issuer, the age of the pro forma information must be determined by reference to Rule 3-12 of Regulation S-X. That is, the pro forma information would generally need to be current within 135 days at the time of effectiveness.

Depending on the fiscal year ends of a domestic registrant and a foreign target company, application of the age of financial statement rules may require the foreign target company to include a period in the pro forma information that would be more current than its separate historical financial statements. Article 11 of Regulation S-X permits the ending date of the periods included for the target company to differ from those of the registrant by up to 93 days, and may provide sufficient relief. The staff also will consider combinations of periods that involve overlaps or gaps in the information of the target company of up to 93 days, provided that the resulting annual and interim periods are of the same length required for the registrant, and there are no overlaps or gaps in the registrant's information. However, the staff would not permit a registrant to omit an interim pro forma presentation because of different fiscal periods.

1 INTERNATIONAL DISCLOSURE STANDARDS, Release Nos. 33-7745; 34-41936; International Series Release No. 1205.

2 Financial Reporting Standard 6, Acquisitions and Mergers.

3 UITF 7, True and fair override disclosures; International Accounting Standard 1, Presentation of Financial Statements.

4 Financial Reporting Standard 13, Derivatives and other financial instruments; disclosures.

5 Statement of Financial Accounting Standards 130, Reporting Comprehensive Income.

6 Statement of Financial Accounting Standards 80, Accounting for Futures Contracts; Statement of Financial Accounting Standards 87, Employers' Accounting for Pensions; and Statement of Financial Accounting Standards 115, Accounting for Certain Investments in Debt and Equity Securities.

7 Financial Reporting Standard 3, Reporting Financial Performance.

8 Statement of Financial Accounting Standards 131, Disclosures about Segments of an Enterprise and Related Information.

9 Staff Accounting Bulletin 88, Disclosures Required of Companies Complying with Item 17 of Form 20-F.