[Federal Register Volume 59, Number 80 (Tuesday, April 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9892]


[[Page Unknown]]

[Federal Register: April 26, 1994]



SECURITIES AND EXCHANGE COMMISSION

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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 229, and 249

[Release Nos. 33-7055; 34-33920; International Series No. 655; File No. 
S7-12-94
RIN 3235-AG17

 

Financial Statements of Significant Foreign Equity Investees and 
Acquired Foreign Businesses of Domestic Issuers and Financial Schedules

AGENCY: Securities and Exchange Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing for comment amendments to Regulation S-X, which governs the 
form and content of financial statements and schedules furnished by 
public companies in filings with the Commission. The proposed 
amendments would extend recently adopted accommodations for foreign 
issuers to domestic issuers that are required to provide financial 
statements for significant foreign equity investees or acquired foreign 
businesses. These accommodations address the age of financial 
statements, nature of reconciling information and thresholds for 
providing such reconciliations. The proposed amendments also would 
eliminate certain financial schedules that both domestic and foreign 
issuers are currently required to include in annual reports and 
registration statements filed with the Commission.

DATES: Comments should be received on or before July 25, 1994.

ADDRESSES: Comment letters should refer to File Number S7-12-94 and 
should be submitted in triplicate to Jonathan G. Katz, Secretary, U.S. 
Securities and Exchange Commission, 450 Fifth Street NW., Washington, 
DC 20549. The Commission will make all comments available for public 
inspection and copying in its Public Reference Room at the same 
address.

FOR FURTHER INFORMATION CONTACT: Wayne E. Carnall, (202) 272-2553, 
Office of the Chief Accountant, Division of Corporation Finance, or, 
with respect to investment company matters, Jim Volk, (202) 942-0637, 
Office of Disclosure and Review, Division of Investment Management, 
U.S. Securities and Exchange Commission, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is publishing for comment 
proposed amendments to Rules 1-02,\1\ 3-05,\2\ 3-09,\3\ 3-12,\4\ 4-
08,\5\ 5-02,\6\ 5-04,\7\ 6-07,\8\ 6-10,\9\ 7-05,\10\ 9-07,\11\ 12-
01\12\ of Regulation S-X,\13\ and Item 404\14\ and Item 601\15\ of 
Regulation S-K.\16\ In addition, the Commission is proposing to amend 
Form 20-F\17\ under the Securities Exchange Act of 1934 (``Exchange 
Act'').\18\
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    \1\17 CFR 210.1-02.
    \2\17 CFR 210.3-05.
    \3\17 CFR 210.3-09.
    \4\17 CFR 210.3-12.
    \5\17 CFR 210.4-08.
    \6\17 CFR 210.5-02.
    \7\17 CFR 210.5-04.
    \8\17 CFR 210.6-07.
    \9\17 CFR 210.6-10.
    \1\017 CFR 210.7-05.
    \1\117 CFR 210.9-07.
    \1\217 CFR 210.12-01.
    \1\317 CFR Part 210.
    \1\417 CFR 229.404.
    \1\517 CFR 229.601.
    \1\617 CFR 229.
    \1\717 CFR 249.220f.
    \1\815 U.S.C. 78a et seq.
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I. Introduction

    The Commission is proposing several amendments to the requirements 
governing financial statements of domestic companies required to report 
financial statements of significant foreign business acquisitions and 
foreign equity investees. These amendments would extend the same 
treatment for such foreign business acquisitions and investees as has 
been recently adopted for foreign registrants.19 Similarly, the 
Commission is proposing to streamline required financial schedules to 
parallel revisions made to the foreign issuer integrated disclosure 
system. An additional two schedules are proposed to be eliminated for 
both domestic and foreign registrants.
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    \1\9See Securities Act Release No. 7053 (April 19, 1994).
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    The initiatives proposed today continue the ongoing efforts of the 
Commission to simplify and lower the cost of registration and reporting 
by public companies in a manner that is consistent with investor 
protection.

II. Financial Statements of Significant Foreign Businesses Acquisitions 
and Foreign Equity Investees of Domestic Companies

    Domestic and foreign registrants alike are required to furnish 
audited financial statements of significant businesses that have been 
acquired or are likely to be acquired.20 Audited financial 
statements are required if the acquired business is significant at a 
level of 10 percent21 using tests based on the size of the 
registrant's investment in the business, the total assets of the 
business, and the business' pre-tax income relative to amounts reported 
in the registrant's most recent financial statements. Subject to the 
same tests of significance, separate audited financial statements of 
less than majority owned investees (``equity investees'') are required 
for each year that those entities exceed the significance level of 20 
percent.22
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    \2\017 CFR 210.3-05.
    \2\1The number of years depends on level of significance: one 
year at 10 percent, two years at 20 percent and three years at 40 
percent.
    \2\217 CFR 210.3-09.
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    The proposals made today with respect to these separate financial 
statements are based on the recognition that U.S. companies may have 
the same difficulties in, and costs, of obtaining reconciled financial 
statements for foreign acquisitions and foreign investments as foreign 
issuers for whom the Commission adopted revisions to the requirements 
today.

A. Significant Threshold for Equity Investees

    The Commission is proposing to modify one of the three tests for 
significance made pursuant to Rule 3-09 of Regulation S-X to determine 
whether financial statements of an equity investee, foreign or 
domestic, must be provided.23 The Commission believes that, for 
purposes of this rule, the significance of an investee should be based 
on a comparison of the registrant's proportionate share of the 
investee's pre-tax income to that of the registrant and of the 
registrant's investment in the investee relative to the registrant's 
total assets. Comparison of the investee's total assets to the total 
assets of the registrant, as presently required, appears insufficiently 
relevant if the investee is less than majority owned and, therefore, 
its financial statements are not consolidated in the registrant's 
financial statements. Accordingly, the Commission proposes to amend 
Rule 3-09 of Regulation S-X to eliminate the requirement to consider 
total assets of a less than majority owned investee in the evaluation 
of its significance. Comment is requested as to whether the asset test 
should be eliminated.
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    \2\317 CFR 210.3-09.
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B. Reconciliation of Financial Statements of Significant Foreign Equity 
Investees and Foreign Acquirees

    Financial statements of significant foreign business acquisitions 
and foreign equity investees are required to be either presented on a 
U.S. generally accepted accounting principles (``GAAP'') basis or 
reconciled to U.S. GAAP. In the case of U.S. registrants, these 
financial statements are required to include all financial information 
required by U.S. GAAP and Regulation S-X, such as segments and pension 
information.
    The Commission is proposing to allow domestic registrants that are 
required to report financial statements of significant foreign business 
acquisitions or foreign equity investees the same ability as has been 
provided foreign registrants to provide such financials on a basis that 
complies with Item 17 of Form 20-F which does not require the 
disclosures prescribed by U.S. GAAP and Regulation S-X. Likewise, the 
proposed rules would incorporate the 30 percent threshold for providing 
such reconciling information as has been introduced for foreign 
registrants.24
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    \2\4See Securities Act Release No. 7053 (April 19, 1994). 
Reconciliation to U.S. GAAP would continue to be required for pro 
forma financial information depicting the effects of a registrant's 
acquisition of a foreign business. In circumstances where a 
registrant furnishes separate financial statements of an equity 
investee pursuant to Rule 3-09 of Regulation S-X, the staff has not 
required the registrant to also furnish summarized financial data of 
the investee pursuant to Rule 4-08(g) of Regulation S-X (17 CFR 
210.4-08(g)) (See Staff Accounting Bulletin No. 44, Topic 6:K (March 
3, 1983) [47 FR 10789]. However, a domestic registrant that 
furnishes separate financial statements of a foreign investee that 
are not reconciled pursuant to the proposed rule should furnish the 
summarized financial data pursuant to Rule 4-08(g) in accordance 
with U.S. GAAP in its primary financial statements.
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    The relief provided under the proposed amendment would be available 
with respect to financial statements furnished by domestic registrants 
if the investee or acquired business is a foreign business. A foreign 
business is defined as a business that is majority owned by persons who 
are not citizens or residents of the United States,25 is not 
organized under the laws of the United States or any state thereof, and 
either (a) more than 50 percent of its assets are located outside the 
United States or (b) the majority of its executive officers and 
directors are not United States citizens or residents. This standard 
includes tests which are similar to those used in the definition of 
foreign private issuer in Regulation C.26
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    \2\5Ownership is measured prior to the acquisition of the 
business.
    \2\6See Rule 405 of Regulation C [17 CFR 230.405].
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    Comment is requested regarding the appropriateness of permitting a 
domestic company subject to U.S. GAAP to provide financial statements 
that comply with Item 17 of Form
20-F with respect to its foreign equity investees and foreign business 
acquisitions. Are there situations in which the disclosures required by 
Item 18 of Form 20-F should be required? Comment is requested as to 
whether the 30 percent threshold under which reconciliation is not 
required is appropriate, or whether the threshold should be lower or 
higher with respect to domestic registrants. Comment is also requested 
regarding the appropriateness of the proposed definition of a foreign 
business for purposes of determining which businesses would qualify for 
relief under the proposed rule. For example, should the principal place 
in which the business is administered be a criteria? Comment is 
requested concerning whether modification of the test for significance 
with respect to equity investees is appropriate, or whether another 
test of significance would be more appropriate.

C. Age of Financial Statements of Significant Foreign Equity Investees 
or Foreign Acquired Businesses

    Finally, the proposed rules would permit the financial statements 
of significant foreign equity investees and acquired foreign businesses 
of domestic issuers to be updated on the same time schedule as for 
foreign private issuers registering or reporting under the federal 
securities laws.27 Registration statements of foreign private 
issuers need to include audited financial statements of the most 
recently competed fiscal year within six months after the year end; 
unaudited interim financial statements are required to the extent 
necessary to bring the most recent financial statements included in the 
filing to a date within ten months of effectiveness.28 The 
proposed relief would be available with respect to financial statements 
of a foreign business, defined as a business that is majority owned by 
persons who are not citizens or residents of the United States, is not 
organized under the laws of the United States or any state thereof, and 
either (a) more than 50 percent of its assets are located outside the 
United States or (b) the majority of its executive officers and 
directors are not United States citizens or residents.
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    \2\717 CFR 210.3-12.
    \2\817 CFR 210.3-19.
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    Comment is requested regarding whether the age of the financial 
statements included in the filing of a domestic company should be the 
same as the issuer regardless of whether the acquired business or 
investee is a foreign business. Comment is also requested as to whether 
the definition of a foreign business, for which this relief would be 
extended, is appropriate or should be modified.

III. Streamlining of Required Financial Statement Schedules

    Currently, domestic commercial and industrial issuers are required 
to file 14 financial schedules with their annual reports and 
registration statements. Six of these schedules have been eliminated 
for foreign private issuers, specifically:
    (1) Rule 12-02--Marketable Securities--Other Investments.
    (2) Rule 12-03--Amounts Receivable from Related Parties and 
Underwriters, Promoters and Employees Other Than Related Parties.
    (3) Rule 12-05--Indebtedness of and to Related Parties--Not 
Current.
    (4) Rule 12-06--Property, Plant and Equipment.
    (5) Rule 12-07--Accumulated Depreciation, Depletion and 
Amortization of Property, Plant and Equipment.
    (6) 12-08--Guarantees of Securities of Other Issuers.
    The Commission is proposing to eliminate these schedules for 
domestic issuers as well. In addition, the Commission is proposing to 
eliminate two additional schedules for both foreign and domestic 
issuers, namely
    (1) Rule 12-10--Short-term Borrowings.
    (2) Rule 12-11--Supplementary Income Statement Information.
    The proposals, as discussed under marketable securities below, 
would also eliminate Schedule XIII--Other Investments for commercial 
and industrial companies that is currently required for investments 
that are not included on the schedule required by Rule 12-02 of 
Regulation S-X.

A. Schedules Already Eliminated from Foreign Issuer Filings

1. Marketable Securities--Other Security Investments
    Commercial and industrial companies are required to furnish a 
schedule of marketable securities and other investments29 meeting 
specified thresholds.30 This schedule is not required of bank 
holding companies, insurance companies, or registered investment 
companies.31 Investments of commercial and industrial companies 
which are not required to be reported on this schedule must be 
disclosed in a schedule of ``other investments,'' unless the total 
amount does not exceed 5% of the registrant's total assets.32
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    \2\917 CFR 210.12-10.
    \3\0An aggregate carrying value of either marketable securities 
or of other investments exceeds 10% of total assets, or a combined 
carrying value of marketable securities and other investments 
together exceeds 15% of total assets. With respect to the securities 
of each issuer which have an aggregate market value exceeding 2% of 
the registrant's total assets, the schedule must include a 
description of the issuer and of each security along with its cost, 
market value, and carrying amount in the balance sheet. Securities 
that do not exceed 2% of assets may be grouped by political 
subdivision for governmental securities and by industry type and 
similarity of risks for corporate securities.
    \3\1Information comparable to the Sec. 12-02 schedule is 
required of bank holding companies pursuant to Industry Guide 3 [17 
CFR 231.801(c)] and Item 101 of Regulation S-K [17 CFR 229.101]. 
Insurance companies must furnish a financial information schedule, 
described at Section 12-15 of Regulation S-X, summarizing 
investments. Registered investment companies furnish a series of 
financial information schedules relating to investments, described 
at Sections 12-12-12-14 of Regulation S-X. No change is proposed 
with respect to disclosures by registrants in these industries.
    \3\217 CFR 210.5-04.
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    Much of the information contained in these two schedules also is 
required to be furnished today in notes to the financial statements 
pursuant to GAAP.
    Statement of Financial Accounting Standards No. 115, ``Accounting 
for Certain Investments in Debt and Equity Securities'' (``SFAS 115''), 
issued in May 1993 by the Financial Accounting Standards Board 
(``FASB''), expanded the disclosure requirements for all debt 
securities and for equity securities that have a readily determinable 
fair value. These securities must be classified into three categories: 
held to maturity (as to debt securities), available for sale, and 
trading account. With respect to securities classified as held to 
maturity and available for sale, SFAS 115 requires separate disclosure, 
grouped by major security type, of the fair value, gross unrealized 
holding gains, gross unrealized holding losses, and amortized cost 
basis, as well as maturity and other relevant information.
    Other pertinent disclosure requirements were established in March 
1990 upon the FASB's issuance of Statement of Financial Accounting 
Standards No. 105, ``Disclosure of Information about Financial 
Instruments with Off-Balance-Sheet Risk and Financial Instruments with 
Concentrations of Credit Risk,'' (``SFAS 105''). SFAS 105 requires 
disclosure of all significant concentrations of credit risk arising 
from an individual counterparty or groups of counterparties that would 
be similarly affected by changes in economic or other conditions, 
although SFAS 105 does not establish a quantitative guideline for the 
determination of a significant concentration. In addition, disclosures 
required by Item 303 of Regulation S-K33, ``Management's 
Discussion and Analysis'' (``MD&A''), include discussion of the 
material effects and uncertainties associated with concentrations and 
risks in the investment portfolio.34
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    \3\317 CFR 229.303.
    \3\4See Securities Act Release No. 6835 (May 18, 1989).
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    In view of the substantive disclosure required by GAAP and the 
MD&A, the Commission believes that the schedule of marketable 
securities--other investments35 may be eliminated without 
detriment to investor protection. Similarly, the Commission proposes to 
eliminate the requirement for ``other investments'' for commercial and 
industrial companies.36
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    \3\517 CFR 210.12-02.
    \3\6The Rule 12-12 of Regulation S-X schedule will continue to 
be required of registered investment companies and employee stock 
plans. See 17 CFR 210.6-10 and 17 CFR 210.6A-05.
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    Comment is requested as to whether the Commission should prescribe 
by rule the categories of securities into which marketable securities 
and other investments should be disaggregated for purposes of SFAS 115 
disclosures. Comment also is requested as to whether a rule specifying 
a quantitative threshold for disclosure of material counterparty risk 
or investment concentration is necessary, and, if so, what that 
threshold should be.
2. Amounts Receivable From Related Parties and Underwriters, Promoters 
and Employees Other Than Related Parties and Indebtedness of and to 
Related Parties
    Registrants, other than bank holding companies,37 must furnish 
a schedule,38 of material receivables from related parties, 
underwriters, promoters and employees. The schedule requires disclosure 
with respect to all such indebtedness exceeding the lesser of $100,000 
or one percent of total assets (excluding amounts that relate to the 
ordinary course of business). These companies also must furnish a 
schedule of indebtedness of and to related parties which is not 
classified as a current asset or liability.39 This schedule must 
be filed if the total amount of indebtedness to or from related parties 
exceeds 5% of total assets, with separate disclosure of any balance 
with a related party that exceeds 2% of total assets. Both schedules 
require disclosure of beginning and ending balances and changes 
occurring therein for each year that an income statement is provided.
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    \3\7Pursuant to Rule 9-03.7(e) of Regulation S-X, bank holding 
companies are required to disclose in financial statements the 
aggregate dollar amount and activity in the latest year with respect 
to loans exceeding $60,000 made to specified related parties, if 
such aggregate amount exceeds 5% of stockholders' equity. [17 CFR 
210.9-03.7(e)]
    \3\817 CFR 210.12-03.
    \3\917 CFR 210.12-05.
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    At the time that rules mandating these two schedules were adopted, 
the Commission indicated that the schedules codified for reporting 
purposes the auditing concepts of Statement of Auditing Standards No. 
6, ``Related Party Transactions'' (``SAS 6'') issued by the American 
Institute of Certified Public Accountants (``AICPA''). The Commission 
stated further that if comprehensive GAAP requirements for related 
party disclosures were developed by the FASB in the future, the need 
for the schedule would be reconsidered.40 Subsequently, the FASB 
issued Statement of Financial Accounting Standard No. 57, ``Related 
Party Transactions'' (``SFAS 57''). As discussed in the background 
information to that standard, the FASB applied the guidance in SAS 6 in 
determining the disclosure requirements of SFAS 57, with the intent to 
extend the reporting principles codified in Regulation S-X to companies 
that were not subject to the requirements of the Commission. SFAS 57 
requires material related party transactions to be disclosed in the 
financial statements, accompanied by such other information as deemed 
necessary for an understanding of their effects on the financial 
statements. Unlike the schedules, SFAS 57 does not set quantitative 
thresholds of materiality at which a particular transaction or amount 
must be disclosed.
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    \4\0See Securities Act Release No. 6233 (September 2, 1980) [45 
FR 63600] Accounting Series Release No. 280.
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    The Commission proposes to eliminate the requirement for the 
schedules of related party amounts. Regulation S-K, Item 404 ``Certain 
Relationships and Related Transactions''41 requires disclosure 
outside of the financial statements of any transaction between the 
registrant and any of its subsidiaries and certain other related 
parties42 in which the amount exceeds $60,000. In addition, 
Regulation S-X43 requires that material related party transactions 
be identified in the financial statements, with the amounts stated on 
the face of the balance sheet, income statement, or statement of cash 
flows. The Commission believes these requirements, in combination with 
the requirements of SFAS 57, should provide investors the necessary 
information about related party transactions.
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    \4\117 CFR 229.404.
    \4\2Parties for whom disclosures are required under Item 404 of 
Regulation S-K include any director or executive officer of the 
registrant; any nominee for election as a director; any security 
holder who is known to the registrant to own of record or 
beneficially more than five percent of any class of the registrant's 
voting securities; or any member of the immediate family of any of 
the foregoing persons.
    \4\3See 17 CFR 210.4-08(k).
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    Comment is requested as to whether quantitative disclosure 
thresholds should be established with respect to transaction amounts or 
balances involving related parities that must be disclosed in the 
financial statements, and, if so, what measure should be specified.
3. Property, Plant, and Equipment, and Accumulated Depreciation, 
Depletion, and Amortization
    Where the net amount of property, plant and equipment exceeds 25% 
of total assets, registrants must furnish schedules of the balances of 
and changes in property, plant and equipment accounts and the related 
accumulated depreciation.44 These schedules require presentation 
of additions, retirements and other changes for each major category.
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    \4\4See 17 CFR 210.12-06 and 12-07.
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    Some of the information that is included in these schedules is 
required to be included in financial statements pursuant to generally 
accepted accounting principles. Balances by major classification are 
required by Accounting Principle Board Opinion No. 12, (``Omnibus 
Opinion - 1967''). Information regarding total additions to property, 
plant and equipment can be determined from the statement of cash flows 
prepared in accordance with Statement of Financial Accounting Standards 
No. 95, ``Statement of Cash Flows'' (``SFAS 95''). While some analysts 
may use the more disaggregated data that includes retirements, 
transfers, currency exchange rate effects, and similar activity in the 
separate accounts, the data does not appear to be sufficiently useful 
to justify the cost incurred by many registrants in gathering this data 
and having it audited. Accordingly, the proposed rules would eliminate 
the requirement to furnish these schedules.
    Comment is requested regarding whether any additional breakout of 
balances and of changes in balances of asset and depreciation accounts 
should be disclosed in the financial statements, in lieu of furnishing 
the supplemental schedule.
4. Guarantees of Securities of Other Issuers
    Registrants also are required to furnish a schedule disclosing 
guarantees of securities of others.45 The schedule must include: 
the name of issuer and title of class of securities guaranteed; total 
amount guaranteed and outstanding; amount owned by person for which 
statement is filed; amount in treasury of issuer of securities 
guaranteed; nature of guarantee; and nature of any defaults.
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    \4\5See 17 CFR 210.12-08.
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    Subsequent to the Commission's adoption of rules mandating this 
schedule, the FASB issued Statement of Financial Accounting Standards 
No. 5, ``Accounting for Contingencies,'' (``SFAS 5'') which requires 
the disclosure of guarantees of indebtedness of others. A separate 
schedule should be unnecessary for issuers complying with SFAS 5. Under 
SFAS 5 disclosure should include a description of the issuer and class 
of securities guaranteed, the total amount guaranteed and outstanding, 
the nature of the guarantee, and any defaults by the issuer of the 
securities guaranteed.
    Comment is requested regarding whether it is necessary or 
appropriate for the Commission to specify by rule the particular 
disclosures related to guaranteed securities that must be furnished, 
and, if so, what items of disclosure would be appropriate and 
sufficient.

B. Additional Schedules Proposed To Be Eliminated for both Foreign and 
Domestic Issuers

1. Short Term Borrowings
    Registrants, other than bank holding companies,46 are required 
to furnish a schedule of short-term borrowings.47 The schedule 
discloses the maximum outstanding during the year, average outstanding 
during the year, and weighted average interest rate during the period. 
Issuers have reported that the preparation of this information can be 
costly and burdensome for many registrants. For example, registrants 
with decentralized management of short-term borrowings incur 
significant cost to accumulate and obtain an audit of the maximum 
borrowing amount outstanding during a fiscal year. Furthermore, some 
registrants have indicated that the only practicable manner to 
determine the weighted average interest rate for the year is to base 
the calculation on borrowings outstanding at each month-end, but this 
measure may be of little value and potentially confusing in some 
circumstances. Also, differing currency exchange rates and rates of 
inflation may reduce the usefulness of the mathematical sums and 
weighted averages necessary for this schedule.
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    \4\6Bank holding companies must furnish information concerning 
short-term borrowings pursuant to Industry Guide 3 and Item 101 of 
Regulation S-K. See 17 CFR 229.801 and 229.101.
    \4\7See 17 CFR 210.12-10.
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    Accordingly, the proposed rules would eliminate the requirement for 
the schedule and require instead financial statement disclosure of the 
weighted average interest rate on borrowings outstanding as of each of 
the dates for which balance sheets are presented. This calculation, 
already currently furnished by many companies should reduce the cost of 
compliance and still provide relevant information concerning the 
registrant's historical and near-term cost of capital. Disclosure of 
interest rates embedded in balance sheet date borrowing, as proposed to 
be required, accompanied by the disclosures concerning the registrant's 
liquidity and capital resources that are required in the MD&A would 
appear to be sufficiently informational to permit elimination of the 
short term borrowing schedule.
    The proposal to eliminate the requirement for the Sec. 210.12-10 
schedule and the proposed new requirement for average interest rates as 
of the balance sheet date does not extend to investment companies. 
Because investment companies' liquidity needs are different from those 
of other registrants, borrowings for such purposes as redemptions and 
investments may change over a much shorter period. The Commission 
proposes to amend Regulation S-X by eliminating the Sec. 210.12-10 
schedule of short term borrowings from Sec. 210.6-10 and adding a 
requirement to Sec. 210.6-07.3. Although required outside the financial 
statements for certain registrants, the Commission believes disclosure, 
in footnotes or elsewhere in the financial statements, of the average 
debt outstanding and the weighted average interest rate for all 
borrowings during the period is appropriate.48
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    \4\8For example, the table required by item 3(b) of Form N-1A 
requires the average debt outstanding during each of the last ten 
fiscal years. Financial statements used in conjunction with that 
tabular data need not repeat that data.
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    Comment is requested regarding whether any data called for by the 
schedule should be retained, and whether the proposed amendment to 
obtain disclosure of the weighted average balance sheet borrowing rate 
in financial statements provides relevant material information and is 
necessary or appropriate.
2. Supplementary Income Statement Information
    Commercial and industrial companies are required to furnish a 
schedule of supplementary income statement information, if specified 
income statement items exceed 1% of revenues.49 These items 
include: maintenance and repairs; depreciation and amortization of the 
cost of intangible assets, preoperating costs and similar deferred 
costs; taxes other than payroll; royalties; or advertising costs.
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    \4\9See 17 CFR 210.12-11.
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    As a result of the AICPA's issuance of a Statement of Position 93-
7,50 disclosure of the amount of total advertising costs expensed 
in each period is now a generally accepted requirement for purposes of 
annual financial statements. Although other income statement items 
referenced by this schedule may not be disclosed on an ongoing basis by 
registrants, discussion of discretionary expenses and other items, 
quantified to the extent practicable, may be necessary in the company's 
MD&A in order to explain material trends and uncertainties that 
affected operating results, liquidity or financial condition of the 
registrant, or which may be reasonably likely to affect future results, 
liquidity or financial condition.51 Given that the MD&A 
requirements applicable to both domestic and foreign issuers should 
result in disclosure of material aspects of the items that would be 
reported in the schedule, the proposed rules no longer require the 
income statement item schedule. For example, a reduced level of 
maintenance expenditures in the current period as compared to the prior 
period should be discussed if it materially affected trends depicted in 
the financial statements or is reasonably likely to have an effect on 
operations, expenditures or trends therein in future periods.
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    \5\0Statement of Position 93-7, ``Reporting on Advertising 
Costs,'' December 29, 1993. Prepared by the Accounting Standards 
Executive Committee of the American Institute of Certified Public 
Accountants.
    \5\1See Financial Reporting Release 36 [FR 501].
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    Comment is requested regarding the need to require disclosure of 
any of the income statement amounts currently required to be scheduled, 
and, if a requirement should be retained, whether the disclosure should 
be made in the financial statements or in a financial schedule as 
presently required.
Comments on Financial Statement Schedules
    In addition to the comments requested above, comment is requested 
regarding whether any of the schedules or information therein proposed 
to be eliminated should be retained as a financial statement schedule 
or included as part of the primary financial statements, or whether 
other financial information schedules, not addressed by the proposed 
rules, should be eliminated or modified and the reason why a particular 
schedule should be eliminated or modified.

IV. Cost Benefit Analysis

    To evaluate fully the costs and benefits associated with the 
proposed amendments to Rules 3-05, 3-09 and 3-12 of Regulation S-X and 
the elimination of certain financial schedules specified by Rules 5-04, 
6-10, 7-05 and 9-07 of Regulation S-X, the Commission requests 
commenters to provide views and empirical data as to the costs and 
benefits associated with such proposals.

V. Request for Comments

    Any interested person wishing to submit written comments on any 
aspect of the amendments to forms and rules that are subject to this 
release are requested to do so. The Commission also requests comments 
on whether the proposals, if adopted, would have an adverse effect on 
competition that is neither necessary nor appropriate in furthering the 
purposes of the Exchange Act. Comments will be considered by the 
Commission in complying with its responsibilities under section 23(a) 
of the Exchange Act.52 Comments should be submitted in triplicate 
to Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission, 450 Fifth Street NW., Washington, DC. 20549 and should 
refer to File No. S7-12-94.
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    \5\215 U.S.C. 78w(a).
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VI. Summary of the Initial Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``IRFA''), pursuant to the requirements of the Regulatory 
Flexibility Act,53 regarding the proposed rules. The IRFA notes 
that the proposed amendments are intended to provide issuers greater 
flexibility and efficiency in accessing the public securities markets. 
The proposed amendments would not impose any new reporting, 
recordkeeping or compliance requirements on any entities. No 
alternatives to the proposed amendments consistent with their 
objectives and the Commission's statutory mandate were found.
---------------------------------------------------------------------------

    \5\35 U.S.C. 603 (1988).
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    It is expected that the overall effect of the proposed rules will 
provide issuers greater flexibility and increased efficiency in raising 
capital from the public securities markets. The proposals to eliminate 
certain financial schedules and to streamline financial statement 
requirements relating to significant foreign business acquisitions and 
foreign equity investees could apply to any domestic issuer, including 
small entities registering or offering securities for public sale. To 
the extent that these proposals have an effect on small entities, it is 
believed that the proposals would reduce the compliance burdens 
associated with Securities Act or Exchange Act registration for such 
entities, as they would for any other issuer. A copy of the IRFA may be 
obtained from Wayne Carnall, Division of Corporation Finance, 
Securities and Exchange Commission, 450 5th Street NW., Mail Stop 3-13, 
Washington, DC 20549, (202) 272-2553.

VII. Statutory Basis for Rules

    The amendments to the Commission's rules and forms are being 
proposed pursuant to sections 3(b), 4A, 12, 13, 14, 15, 16 and 23 of 
the Securities Exchange Act of 1934.

List of Subjects in 17 CFR Parts 210, 229 and 249

    Accounting, Reporting and recordkeeping requirements, Securities.

Text of Proposals

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL 
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 
1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT 
COMPANY ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

    1. The authority citation for Part 210 is revised to read as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77aa(25), 
77aa(26), 78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79e(b), 79j(a), 
79n, 79t(a), 80a-8, 80a-20, 80a-29, 80a-30, 80a-37a, unless 
otherwise noted.

    2. By amending Sec. 210.1-02 by redesignating paragraphs (l) 
through (aa) as paragraphs (m) through (bb), and adding paragraph (l) 
to read as follows:


Sec. 210.1-02  Definitions of terms used in Regulation S-X (17 CFR part 
210).

* * * * *
    (l) Foreign business. A business that is majority owned by persons 
who are not citizens or residents of the United States and is not 
organized under the laws of the United States or any state thereof, and 
either:
    (1) More than 50 percent of its assets are located outside the 
United States or
    (2) The majority of its executive officers and directors are not 
United States citizens or residents.
* * * * *
    3. By amending Sec. 210.3-05 by revising the last sentence of the 
introductory text of paragraph (b)(1) and adding paragraph (c) to read 
as follows:


Sec. 210.3-05  Financial statements of businesses acquired or to be 
acquired.

* * * * *
    (b) Periods to be presented. (1) * * * The periods for which such 
financial statements are to be filed shall be determined using the 
conditions specified in the definition of significant subsidiary in 
Sec. 210.1-02(w) as follows:
* * * * *
    (c) Financial statements of foreign businesses.
    If the business acquired or to be acquired is a foreign business, 
financial statements of the business meeting the requirements of Item 
17 of Form 20-F (Sec. 249.220f of this chapter) will satisfy this 
section.
    4. By amending Sec. 210.3-09 by revising the last sentence of 
paragraph (a), revising the last two sentences of paragraph (b) and 
adding paragraph (d) to read as follows:


Sec. 210.3-09  Separate financial statements of subsidiaries not 
consolidated and 50 percent or less owned persons.

    (a) * * * Similarly, if either the first or third condition set 
forth in Sec. 210.1-02(w), substituting 20 percent for 10 percent, is 
met by a 50 percent or less owned person accounted for by the equity 
method either by the registrant or a subsidiary of the registrant, 
separate financial statements of such 50 percent or less owned person 
shall be filed.
    (b) * * * However, these separate financial statements are required 
to be audited only for those fiscal years in which either the first or 
third condition set forth in Sec. 210.1-02(w), substituting 20 percent 
for 10 percent, is met. For purposes of a filing on Form 10-K 
(Sec. 249.310 of this chapter), if the fiscal year of any 50 percent or 
less owned person ends within 90 days before the date of the filing, or 
if the fiscal year ends after the date of the filing, the required 
financial statements may be filed as an amendment to the report within 
90 days, or within six months if the 50 percent or less owned person is 
a foreign business, after the end of such subsidiary's or person's 
fiscal year.
    (c) * * *
    (d) If the 50 percent or less owned person is a foreign business, 
financial statements of the business meeting the requirements of Item 
17 of Form 20-F (Sec. 249.220f of this chapter) will satisfy this 
section.
    5. By amending Sec. 210.3-12 by adding a second sentence to 
paragraph (f) to read as follows:


Sec. 210.3-12  Age of financial statements at effective date of 
registration statement or at mailing date of proxy statement.

* * * * *
    (f) * * * Financial statements of a foreign business which are 
furnished pursuant to Secs. 210.3-05 or 210.3-09 because it is an 
acquired business or a 50 percent or less owned person may be of the 
age specified in Sec. 210.3-19.
    6. By amending Sec. 210.4-08 by revising paragraph (g) to read as 
follows:


Sec. 210.4-08  General notes to financial statements.

* * * * *
    (g) Summarized financial information of subsidiaries not 
consolidated and 50 percent or less owned persons. (1) The summarized 
information as to assets, liabilities and results of operations as 
detailed in Sec. 210.1-02(bb) shall be presented in notes to the 
financial statements on an individual or group basis for: (i) 
Subsidiaries not consolidated; or
    (ii) For 50 percent or less owned persons accounted for by the 
equity method by the registrant or by a subsidiary of the registrant, 
if the criteria in Sec. 210.1-02(w) for a significant subsidiary are 
met:
    (A) Individually by any subsidiary not consolidated or any 50% or 
less owned person; or
    (B) On an aggregated basis by any combination of such subsidiaries 
and persons.
    (2) Summarized financial information shall be presented insofar as 
is practicable as of the same dates and for the same periods as the 
audited consolidated financial statements provided and shall include 
the disclosures prescribed by Sec. 210.1-02(bb). Summarized information 
of subsidiaries not consolidated shall not be combined for disclosure 
purposes with the summarized information of 50 percent or less owned 
persons.
* * * * *
    7. By amending Sec. 210.5-02 by adding a sentence following the 
first sentence to paragraph 19.(b) to read as follows:


Sec. 210.5-02  Balance sheets.

* * * * *
    19. Accounts and notes payable * * *
    (b) * * * The weighted average interest rate on short term 
borrowings outstanding as of the date of each balance sheet presented 
shall be furnished in a note. * * *
* * * * *
    8. By amending Sec. 210.5-04 to: revise paragraph (a); remove 
Schedule I, Schedule II, Schedule IV, Schedule V, Schedule VI, Schedule 
VII, Schedule IX, Schedule X, and Schedule XIII of paragraph (c) and 
redesignate the remaining schedules in paragraph (c) to read as 
follows: Schedule III as Schedule I, Schedule VIII as Schedule II, 
Schedule XI as Schedule III, Schedule XII as Schedule IV, Schedule XIV 
as Schedule V.


Sec. 210.5-04  What Schedules are to be filed.

    (a) Except as expressly provided otherwise in the applicable form:
    (1) The schedules specified below in this Section as Schedules II 
and III shall be filed as of the date of the most recent audited 
balance sheet for each person or group.
    (2) Schedule II shall be filed for each period for which an audited 
income statement is required to be filed for each person or group.
    (3) Schedules I and IV shall be filed as of the date and for 
periods specified in the schedule.
* * * * *
    9. By amending Sec. 210.6-07.3 by adding the following sentence to 
read as follows:


Sec. 210.6-07  Statements of operations.

* * * * *
    3. Interest and amortization of debt discount and expense. Provide 
in the body of the statements or in the footnotes, the average dollar 
amount of borrowings and the average interest rate.
* * * * *
    10. By amending Sec. 210.6-10 to: remove Schedule IV and Schedule 
VII from paragraph (c) and redesignate the remaining schedules in 
paragraph (c) as follows: Schedule V as Schedule IV and Schedule VI as 
Schedule V; remove Schedule VI, Schedule VII, Schedule VIII, Schedule 
IX, and Schedule X in paragraph (e)(2) and redesignate Schedule XI as 
Schedule VI and Schedule XII as Schedule VII.
    11. By amending Sec. 210.7-05 to: revise paragraph (a); remove 
Schedule II, Schedule IV, Schedule VII, and Schedule IX of paragraph 
(c) and redesignate the remaining schedules in paragraph (c) as 
follows: Schedule III as Schedule II, Schedule V as Schedule III, 
Schedule VI as Schedule IV, Schedule VIII as Schedule V, and Schedule X 
as Schedule VI.


Sec. 210.7-05  What Schedules are to be filed.

    (a) Except as expressly provided otherwise in the applicable form:
    (1) The schedule specified below in this section as Schedule I 
shall be as of the date of the most recent audited balance sheet for 
each person or group.
    (2) The schedules specified below in this section as Schedule IV 
and V shall be filed for each period for which an audited income 
statement is required to be filed for each person or group.
    (3) Schedules II, III and V shall be filed as of the date and for 
periods specified in the schedule.
* * * * *
    12. By removing and reserving Sec. 210.9-07.
    13. By revising Sec. 210.12-01 to read as follows:


 Sec. 210.12-01  Application of Secs. 210.12-01 to 210.12-29.

    These sections prescribe the form and content of the schedules 
required by Secs. 210.5-04, 210.6-10, 210.6A-05, and 210.7-05.
    14. By removing and reserving Secs. 210.12-02, 210.12-03, 210.12-
05, 210.12-06, 210.12-07, 210.12-08, 210.12-10, and 210.12-11.

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

    15. The authority citation for Part 229 continues to read in part 
as follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 
77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e, 79n, 
79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted.
* * * * *
    16. By revising instructions 2(C) and 3(C) of the Instructions to 
Paragraph (b) of Sec. 229.404 to read as follows:


Sec. 229.404  (Item 404) Certain relationships and related 
transactions.

* * * * *

Instructions to Paragraph (b) of Item 404

* * * * *
    2. * * *
    C. Payments made or received by subsidiaries other than significant 
subsidiaries as defined in Rule 1-02(w) of Regulation S-X [Sec. 210.1-
02(w) of this chapter], provided that all such subsidiaries making or 
receiving payments, when considered in the aggregate as a single 
subsidiary, would not constitute a significant subsidiary as defined in 
Rule 1-02(w).
    3. * *  *
    d. Indebtedness incurred by subsidiaries other than significant 
subsidiaries as defined in Rule 1-02(w) of Regulation S-X [Sec. 210.1-
02(w) of this chapter], provided that all such subsidiaries incurring 
indebtedness, when considered in the aggregate as a single subsidiary, 
would not constitute a significant subsidiary as defined in Rule 1-
02(w).
* * * * *
    17. By revising the second sentence in paragraph (b)(21)(ii) of 
Sec. 229.601 to read as follows:


Sec. 229.601  (Item 601) Exhibits.

* * * * *
    (b) * * *
    (21) Subsidiaries of the registrant.
    (i) * * *
    (ii) * * * (See the definition of ``significant subsidiary'' in 
Rule 1-02(w) (17 CFR 210.1-02(w)) of Regulation S-X.) * * *
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    18. The authority citation for Part 249 continues to read in part 
as follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
    19. By amending Form 20-F (referenced in Sec. 249.220f) by revising 
paragraph (a) to Item 17 and paragraph (a) to Item 18 to read as 
follows:

    Note: The text of form 20-F is not and the amendments will not 
appear in the Code of Federal Regulations.

Form 20-F

* * * * *

Item 17. Financial Statements.

    (a) The registrant shall furnish financial statements for the 
same fiscal years and accountants' certificates that would be 
required to be furnished if the registration statement were on Form 
10 or the annual report on Form 10-K. Schedules designated by 
Secs. 210.12-04, 210.12-09, 210.12-15, 210.12-16, 210.12-17, 210.12-
18, 210.12-28, and 210.12-29 of this chapter shall be furnished if 
applicable to the registrant.
* * * * *

Item 18. Financial Statements.

    (a) The registrant shall furnish financial statements for the 
same fiscal years and accountants' certificates that would be 
required to be furnished if the registration statement were on Form 
10 or the annual report on Form 10-K. Schedules designated by 
Secs. 210.12-04, 210.12-09, 210.12-15, 210.12-16, 210.12-17, 210.12-
18, 210.12-28, and 210.12-29 of this chapter shall be furnished if 
applicable to the registrant.
* * * * *
    By the Commission.

    Dated: April 19, 1994.

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-9892 Filed 4-25-94; 8:45 am]
BILLING CODE 8010-01-P