[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: 94-9893]


[[Page Unknown]]

[Federal Register: April 26, 1994]



SECURITIES AND EXCHANGE COMMISSION

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SECURITIES AND EXCHANGE COMMISSION
 

17 CFR Part 249

[Release Nos. 33-7056; 34-33921; International Series Release No. 656; 
File No. S7-13-94]
RIN 3235-AG16

Reconciliation of the Accounting by Foreign Private Issuers for 
Business Combinations

AGENCY: Securities and Exchange Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commission is proposing today to amend Form 20-F to 
streamline the financial statement reconciliation requirements for 
foreign private issuers that have entered into business combinations. 
The proposed amendments would eliminate the requirement to reconcile 
certain differences attributable to the determination of the method of 
accounting for a business combination, and the amortization period of 
goodwill and negative goodwill, provided the financial statements 
comply with International Accounting Standards No. 22 ``Business 
Combinations'' as amended, regarding these items.

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

ADDRESSES: Comment letters should refer to File Number S7-13-94 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, Deputy Chief 
Accountant, Division of Corporation Finance at (202) 272-2553 or 
Richard J. Reinhard, Associate Chief Accountant, Office of Chief 
Accountant at (202-942-4400), U.S. Securities and Exchange Commission, 
Washington, DC 20549.

SUPPLEMENTARY INFORMATION: As described in detail below, the Commission 
is proposing to amend Form 20-F\1\ under the Securities and Exchange 
Act of 1934 (the ``Exchange Act'').\2\
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    \1\17 CFR 249.220f.
    \2\15 U.S.C. 78a et seq.
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I. Method of Accounting for Business Combinations

    Accounting principles in most countries prescribe two basic methods 
of accounting for business combinations. One method, called ``pooling 
of interests'' under U.S. generally accepted accounting principles 
(``GAAP'') and ``uniting of interests'' under International Accounting 
Standard No. 22, ``Business Combinations'', as amended in 1993 (``IAS 
22''), provides generally for the retroactive restatement of financial 
statements at the combined historical costs of the merging companies. 
The other method, called ``purchase'' under U.S. GAAP and 
``acquisition'' under IAS 22, provides generally for recognition of the 
acquired company's assets and liabilities at their fair value at the 
acquisition date. Under U.S. GAAP, as well as under IAS 22, the methods 
are not alternatives; rather, the selection of the method is based on 
specific criteria as they apply to the particular facts and 
circumstances. However, U.S. GAAP, IAS 22, and the accounting standards 
of most countries all employ different criteria for determining which 
of the two methods is applicable to a transaction.\3\
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    \3\In some jurisdictions, the pooling of interests method is not 
permitted, while in some other jurisdictions, issuers have a free 
choice as to the method to apply.
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    Depending on which of the two basic methods is used to account for 
a business combination, substantial differences in financial statements 
result. A business combination may be appropriately accounted for in 
the foreign issuer's primary financial statements by retroactive 
restatement at combined historical cost using accounting standards of 
the foreign jurisdiction, whereas, the same transaction would be 
accounted for as a purchase (fair value recognition at acquisition 
date) under U.S. GAAP. There currently is a requirement to quantify the 
effects on the financial statements of these two different methods of 
accounting for a business combination. This requirement has resulted in 
significant additional recordkeeping requirements, as well as complex 
and voluminous reconciling disclosures.
    The Commission proposes to eliminate the requirement that foreign 
private issuers quantify the effects of differences arising solely from 
the different criteria applied to the selection of the basic method of 
accounting for a business combination if the criteria used in the 
primary financial statements for determining the method are 
consistently applied and are consistent with IAS 22. However, the 
effects of differences in the procedures used to implement either the 
purchase or pooling of interests methods of accounting would continue 
to be quantified under the proposed amendment. For example, in applying 
the purchase method, if the amounts included in the primary financial 
statements did not assign the same fair value to tangible and 
intangible assets and liabilities as would be determined in accordance 
with U.S. GAAP, the difference would need to be addressed in the 
reconciliation.
    Under the proposed rule, a business combination which would be 
deemed a uniting of interests under IAS 22 and which was accounted for 
using that basic method in the primary financial statements may be 
deemed to be, for purposes of the reconciliation to U.S. GAAP, a 
pooling of interests, with quantification required only to the extent 
that the procedures used in the primary financial statements differ 
from the procedures required under U.S. GAAP for a pooling of 
interests. Similarly, a business combination which would be deemed an 
acquisition under IAS 22 and which was accounted for using that basic 
method in the primary financial statements may be deemed to be, for 
purposes of the reconciliation to U.S. GAAP, a purchase, with 
quantification required only to the extent that the procedures used in 
the primary financial statements differ from the procedures required 
under U.S. GAAP for a purchase.
    The proposal would not reduce the quality or comparability of 
financial information furnished to investors to a material extent, 
while the cost and burden of a foreign issuer's filing with the 
Commission would be substantially reduced. The Commission believes the 
IAS criteria to be well defined, reasonable, and sufficiently clear to 
ensure consistent application. It is expected that nearly all 
combinations that would be accounted for as purchases under U.S. GAAP 
would be deemed acquisitions under IAS 22. Some combinations that could 
qualify as pooling of interests under U.S. GAAP, however, will be 
deemed acquisitions under IAS 22, and some of the extremely few 
transactions that will qualify as uniting of interest under IAS 22 may 
be deemed purchases under U.S. GAAP.
    Comment is requested as to whether foreign private issuers should 
continue to quantify differences arising solely from differences in the 
criteria used to select the method of accounting for business 
combinations; whether certain forms or types of combinations (e.g., 
promoter transactions, leveraged buy-outs) should be excluded from the 
relief afforded by the proposed rule, and, if so, which ones; and 
whether consistency in application in the primary financial statements 
of the criteria for determination of the method of accounting should 
be, as is proposed, a condition of the relief granted under the rule. 
Comment also is requested regarding the need to quantify effects of 
differences in the procedures followed under the two basic methods of 
accounting.

II. Accounting for Goodwill and Negative Goodwill

    In a business combination accounted for as a purchase or 
acquisition, the excess of the cost of the acquired company over the 
fair value of the tangible and identifiable intangible assets acquired, 
reduced by the fair value of the liabilities assumed, is deemed 
``goodwill.'' If the fair value of net assets acquired exceeds the 
cost, ``negative goodwill'' arises. Goodwill and negative goodwill are 
accounted for differently under U.S. GAAP and IAS 22. Under U.S. GAAP, 
goodwill or negative goodwill must be amortized over its useful life 
except that the amortization period may not exceed forty years. Under 
IAS 22, goodwill or negative goodwill must be amortized over a period 
not exceeding five years, unless a longer period, not exceeding twenty 
years, can be justified. The effects of the differences in amortization 
periods should be sufficiently transparent that investors would be able 
to understand and compare financial results and condition company to 
company, and the acceptance of the amortization period in IAS 22 will 
ease the burden for foreign private issuers filing with the Commission. 
Accordingly, under the proposals, foreign private issuers that have 
consistently applied accounting policies which amortize goodwill and 
negative goodwill over periods which comply with the amended guidance 
in IAS 22, but which differ from the periods that would be permitted 
under U.S. GAAP, would not be required to quantify the effects of that 
difference in the reconciliation.
    In determining the amount of goodwill and negative goodwill that is 
subject to amortization for purposes of the reconciliation to U.S. 
GAAP, foreign private issuers would continue to be required to consider 
all other provisions of purchase accounting under U.S. GAAP. Issuers 
that write-off goodwill or negative goodwill directly to equity would 
need to record goodwill and the related amortization expense in 
accordance with U.S. GAAP in the reconciliation to U.S. GAAP.
    Comment is requested regarding the appropriateness of accepting the 
provisions of IAS 22 with respect to the amortization period of 
goodwill and negative goodwill. Comment also is requested as to whether 
additional disclosures should be required, such as the useful life 
determined in accordance with US GAAP.

III. Transitional Provisions

    IAS 22, as amended in 1993 becomes operative for financial 
statements covering periods beginning on or after January 1, 1995 with 
retroactive application encouraged but not required. The Commission 
believes that conformance with IAS 22, or reconciliation to U.S. GAAP, 
is necessary for all periods to provide investors with adequate 
information. The accounting should be consistently applied with respect 
to all business combinations that would affect reported income in the 
periods presented in the filing if accounted for in accordance with IAS 
22. Accordingly, the relief provided by the rule with respect to the 
determination of the method of accounting for business combinations and 
the amortization period for goodwill and negative goodwill is proposed 
to be available only if the method in the primary financial statements 
has been consistently applied and is consistent with the amended 
guidance in IAS 22.
    Comment is requested on the appropriateness of requiring issuers to 
conform with the amended guidance in IAS 22 for all periods to receive 
relief from the reconciliation requirement.

IV. Cost-Benefit Analysis

    To evaluate fully the costs and benefits associated with the 
proposed amendment to Form 20-F under the Exchange Act, the Commission 
requests comments to provide views and empirical data as to the costs 
and benefits associated with such proposals.

V. Regulatory Flexibility Act Certification

    Pursuant to the Regulatory Flexibility Act [5 U.S.C 605(b)], the 
Chairman of the Commission has certified that the proposed amendments 
will not have a significant impact on a substantial number of small 
entities. Members of the public who wish to obtain a copy of the 
Regulatory Flexibility Certification should contact Wayne E. Carnall, 
(202) 272-2553, Office of Chief Accountant, Division of Corporation 
Finance, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington D.C. 20549

VI. General 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. 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 number S7-13-94.

VII. Statutory Bases

    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 Part 249

    Accounting, Reporting and recordkeeping requirements, Securities.

Text of Rule and Form Amendments

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

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

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

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
    2. By amending Form 20-F (referenced in Sec. 249.220f) by adding 
paragraph (viii) to Item 17(c)(2) and adding Instruction 6 to Item 17 
and adding paragraph (viii) to Item 18(c)(2) and adding Instruction 5 
to Item 18 to read as follows:

    Note: The Form 20-F Does not Appear and the Amendments Will not 
Appear in the Code of Federal Regulations.

Form 20-F

* * * * *

Item 17. Financial Statements

* * * * *
    (c) * * *
    (2) * * *
    (viii) Issuers that prepare financial statements on a basis of 
accounting other than U.S. generally accepted accounting principles 
and which basis conforms for all periods presented in the filing 
with amended guidance in International Accounting Standards No. 22, 
as amended in 1993, with respect to the period of amortization of 
goodwill and negative goodwill may omit the disclosures specified by 
paragraphs (c)(2)(i), (c)(2)(ii), and (c)(2)(iii) of this Item 
regarding the effects of differences attributable solely to the 
period of amortization.

Instructions

* * * * *
    (6) A business combination which would be deemed a uniting of 
interests under International Accounting Standards No. 22, as 
amended in 1993 (``IAS 22''), and was accounted for using that basic 
method in the primary financial statements may be deemed to be, for 
purposes of the reconciliation to U.S. GAAP, a pooling of interests, 
with quantification required only to the extent that the procedures 
used in the primary financial statements differ from the procedures 
required under U.S. GAAP for a pooling of interest. A business 
combination which would be deemed an acquisition under IAS 22 and 
was accounted for using that basic method in the primary financial 
statements may be deemed to be, for purposes of the reconciliation 
to U.S. GAAP, a purchase, with quantification required only to the 
extent that the procedures used in the primary financial statements 
differ from the procedures required under U.S. GAAP for a purchase; 
Provided That, the relief from reconciliation permitted pursuant to 
this instruction is not available unless the method used in the 
primary financial statements for determining the basic method of 
accounting for business combinations has been consistently applied 
and is consistent with the amended guidance in IAS 22.

Item 18. Financial Statements

* * * * *
    (c) * * *
    (2) * * *
    (viii) Issuers that prepare financial statements on a basis of 
accounting other than U.S. generally accepted accounting principles 
and which basis conforms for all periods presented in the filing 
with amended guidance in International Accounting Standards No. 22, 
as amended in 1993, with respect to the period of amortization of 
goodwill and negative goodwill may omit the disclosures specified by 
paragraphs (c)(2)(i), (c)(2)(ii), and (c)(2)(iii) of this Item 
regarding the effects of differences attributable solely to the 
period of amortization.

Instructions

* * * * *
    (5) A business combination which would be deemed a uniting of 
interests under International Accounting Standards No. 22, as 
amended in 1993 (``IAS 22''), and was accounted for using that basic 
method in the primary financial statements may be deemed to be, for 
purposes of the reconciliation to U.S. GAAP, a pooling of interests, 
with quantification required only to the extent that the procedures 
used in the primary financial statements differ from the procedures 
required under U.S. GAAP for a pooling of interest. A business 
combination which would be deemed an acquisition under IAS 22 and 
was accounted for using that basic method in the primary financial 
statements may be deemed to be, for purposes of the reconciliation 
to U.S. GAAP, a purchase, with quantification required only to the 
extent that the procedures used in the primary financial statements 
differ from the procedures required under U.S. GAAP for a purchase; 
Provided That, the relief from reconciliation permitted pursuant to 
this instruction is not available unless the method used in the 
primary financial statements for determining the basic method of 
accounting for business combinations has been consistently applied 
and is consistent with the amended guidance in IAS 22.
* * * * *
    Dated: April 19, 1994.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-9893 Filed 04-25-94; 8:45 am]
BILLING CODE 8010-01-P