[Federal Register Volume 59, Number 243 (Tuesday, December 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31037]


[[Page Unknown]]

[Federal Register: December 20, 1994]


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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 249

[Release Nos. 33-7119; 34-35095; FR 45; International Series Release 
No. 759; File No. S7-13-94]
RIN 3235-AG16

 

Reconciliation of the Accounting by Foreign Private Issuers for 
Business Combinations

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

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SUMMARY: The Commission is announcing the adoption of amendments to 
Form 20-F to streamline the financial statement reconciliation 
requirements for foreign private issuers that have entered into 
business combinations. The amendments eliminate the requirement to 
reconcile to U.S. generally accepted accounting principles certain 
differences attributable to the method of accounting for a business 
combination or the amortization period of goodwill and negative 
goodwill, provided the financial statements comply with International 
Accounting Standard No. 22, ``Business Combinations,'' as amended, 
regarding those items.

EFFECTIVE DATE: December 20, 1994.

FOR FURTHER INFORMATION CONTACT:
Wayne E. Carnall, Deputy Chief Accountant, Division of Corporation 
Finance at (202) 942-2960 U.S. Securities and Exchange Commission, Mail 
Stop 3-13, 450 Fifth Street NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to 
Form 20-F\1\ under the Securities 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. Introduction

    The Commission is adopting amendments to streamline the financial 
statement reconciliation requirements for foreign private issuers that 
have entered into business combinations. The amendments eliminate the 
requirement to reconcile to U.S. generally accepted accounting 
principles (``GAAP'') certain differences attributable to the method of 
accounting for a business combination or the amortization period of 
goodwill and negative goodwill, provided the financial statements 
comply with International Accounting Standard No. 22, ``Business 
Combinations,'' as amended (``IAS 22''), regarding those items.
    The amendments adopted today were proposed by the Commission on 
April 19, 1994.\3\ Comments received on the proposing release were 
divided almost evenly in their views.\4\ Commenters questioning the 
proposal expressed concern about the lack of comparability to U.S. GAAP 
that would result from adoption of the proposal, and observed that the 
reconciled balance sheet and net income information furnished under the 
proposed rule would be a hybrid of U.S. GAAP and International 
Accounting Standards (``IAS''). Those supporting the proposal cited the 
cost and complexity of reconciling the pervasive differences 
attributable to an issuer's method of accounting for business 
combinations and, in the case of a supporting letter from financial 
analysts, the lack of comparability which exists presently under the 
U.S. accounting rules applicable to business combinations.
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    \3\See Securities Act Release No. 7056 (April 19, 1994) (59 FR 
21821) (the ``Proposing Release'').
    \4\Nine comment letters on the proposal were received. Those 
letters and a summary of the comments are available for public 
inspection and copying in File No. S7-13-94 at the Commission's 
Public Reference Room in Washington, DC.
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    The Commission believes that acceptance of the guidance in IAS 22 
with respect to the particular matters addressed by the amendment, 
without reconciliation to U.S. GAAP, will not result in the loss of 
material information that is necessary for a U.S. investor to make an 
informed investment decision. Accordingly, the amendments are being 
adopted substantially as proposed, although certain modifications and 
clarifications are included in response to recommendations and other 
comments received.

II. Method of Accounting for Business Combinations

    As adopted, the amendments eliminate the requirement that foreign 
private issuers quantify the effects of differences arising solely from 
the different criteria applied to the selection of the basic method of 
accounting for a business combination if the criteria used in the 
primary financial statements for determining the method are 
consistently applied and are consistent with IAS 22. The two basic 
methods of accounting can be summarized as either ``pooling of 
interests'' or ``purchase'' as determined under U.S. GAAP primarily 
pursuant to Accounting Principles Board Opinion No. 16, ``Accounting 
for Business Combinations'' (``APB 16''), or ``uniting of interests'' 
and ``acquisition'' under IAS 22.
    APB 16 and IAS 22 have a similar conceptual framework underlying 
the particular conditions they establish for determining which of the 
two basic accounting methods should be applied to a business 
combination. Both standards acknowledge limited circumstances under 
which remeasurement of an acquired company's assets and liabilities 
pursuant to the purchase or acquisition method is not appropriate, but 
the particular criteria qualifying a transaction for pooling of 
interests (under APB 16) and uniting of interests (under IAS 22) are 
different, with IAS 22 being generally more restrictive.
    The Commission believes that the criteria articulated in IAS 22 are 
sufficiently clear so that companies and their auditors can be expected 
to apply the guidance in a consistent manner to similar transactions. 
Although different from the criteria in U.S. GAAP, the criteria in IAS 
No. 22 provide a rational and effective basis for distinguishing the 
substantively unique transactions for which the special accounting 
treatment is appropriate. The criteria in IAS No. 22 appear 
sufficiently rigorous to restrict the use of uniting of interests 
accounting to a relatively small class of similar transactions. The 
Commission believes that financial statements of foreign private 
issuers that distinguish business combinations on the basis specified 
by IAS No. 22 will provide information that is sufficiently informative 
and useful to investors without a reconciliation of that departure to 
U.S. GAAP.
    In evaluating the concerns expressed about the effects on 
comparability of the proposed use of IAS 22, the level of comparability 
under current U.S. accounting principles needs to be examined. Although 
the two accounting methods of ``purchase'' and ``pooling'' prescribed 
by U.S. GAAP produce very significant financial reporting differences, 
many transactions that are accounted for in the U.S. as poolings of 
interests are difficult to distinguish economically or structurally 
from transactions accounted for as purchases. Because the criteria 
qualifying a transaction for pooling under U.S. GAAP are restrictive, a 
registrant is rarely if ever compelled to account for a transaction as 
a pooling if it does not want to do so. The registrant may elect to 
avoid pooling accounting through essentially nonsubstantive 
modifications of merger terms or other insignificant actions. Under IAS 
22, it is even more difficult to qualify a business combination as a 
uniting of interests, or pooling. Many transactions that would quality 
for pooling under U.S. GAAP would be accounted for as purchases under 
IAS 22. As under the U.S. rule, issuers could elect to avoid pooling 
accounting by the essentially subjective designation of an acquirer. On 
balance, it would appear that using the provisions of IAS 22 to 
determine whether a combination is accounted for as a purchase or 
pooling will not materially affect the comparability of financial 
statements.
    A substantial degree of comparability will be retained under the 
rules adopted today because they provide that the effects of 
differences in amounts determined upon application of either the 
purchase or pooling methods of accounting would continue to be 
quantified. For example, if the acquisition method is applicable to a 
business combination under IAS 22, differences between the amounts 
assigned in the issuer's primary financial statements to tangible and 
intangible assets and liabilities and those amounts as would be 
determined using the purchase method applied in accordance with U.S. 
GAAP must be identified and quantified in the reconciliation. If a 
determination has been made pursuant to the criteria in IAS 22 that the 
uniting of interest method is appropriate, then differences between the 
accounting used in the primary financial statements and the accounting 
that would be required for a pooling of interests under U.S. GAAP must 
be included in the reconciliation to U.S. GAAP. In response to 
comments, language in the amendment has been modified to more clearly 
describe the continuing requirement to reconcile the amounts that would 
be reported under U.S. GAAP for the particular method of accounting 
that was determined to be applicable using the criteria contained in 
IAS 22.
    As suggested by many commenters, the new provisions will not be 
available with respect to business combinations that are promoter 
transactions, leveraged buyouts, mergers of entities under common 
control, or reverse acquisitions. The final rule indicates that those 
types of transactions would continue to be required to be reconciled in 
full to U.S. GAAP. The rule also states that other business 
combinations that are not addressed by IAS 22 are not eligible for 
relief from reconciliation.

III. Accounting for Goodwill and Negative Goodwill

    The amendments also eliminate the requirement that foreign private 
issuers quantify the effects of differences arising from the period of 
amortization of both goodwill and negative goodwill, as proposed. Under 
IAS 22, goodwill and negative goodwill is amortized over a period not 
exceeding five years unless a longer period, not exceeding twenty 
years, can be justified. Accounting Principles Board Opinion No. 17, 
``Accounting for Intangibles'' (AFB 17''), requires the amortization of 
goodwill or negative goodwill over its useful life, except that the 
period cannot exceed forty years.
    Some commenters raised concerns about the proposed rule because the 
resulting amount would not be comparable to U.S. GAAP. However, if the 
primary financial statements reflect an amortization period that 
complies with IAS 22, a reconciliation of differences in goodwill 
amortization periods does not necessarily improve the comparability of 
financial statements in a material fashion. U.S. companies presently 
exercise substantial judgment in selecting an amortization period for 
goodwill, and significant differences among similarly situated 
companies can be seen among companies reporting to the Commission. The 
accounting differences between IAS 22 and APB 17 are not so opaque as 
to result in the loss of material information to investors. If the 
useful life of goodwill or amortization period of negative goodwill 
exceeds five years, justification of the longer period is required by 
paragraph 72 of IAS 22 to be furnished in a note to the primary 
financial statements. Registrants will continue to be required under 
both Item 17 and 18 of Form 20-F to describe the accounting 
differences, even where relief from quantification of differences is 
granted by this rule.
    The relief from reconciliation permitted under the adopted rule is 
applicable only to differences in the amortization period as it applies 
to aggregate amount of goodwill or negative goodwill that would be 
determined under U.S. GAAP. For example, negative goodwill under IAS 22 
(the amount by which the fair value of acquired net assets exceeds the 
purchase price) must be reconciled to negative goodwill determined 
under U.S. GAAP (the amount remaining after the excess over the 
purchase price has been applied to reduce the carrying value of non-
monetary noncurrent assets). In response to commenter's suggestion, 
Items 17 and 18 of Form 20-F have been modified to clarify that point.

IV. Implementation and Transition

    Issuers will be permitted by the adopted rule to elect to apply the 
provisions of IAS 22 in the determination of the method of accounting 
for business combinations but not adopt its provisions for amortization 
of goodwill and negative goodwill. Similarly, issuers could adopt the 
provisions of IAS 22 with respect to goodwill amortization periods, but 
need not adopt that standard with respect to any other aspect of 
accounting for business combinations.
    Transition guidance in the 1993 amendment of IAS 22 calls for its 
new provisions to be implemented in financial statements for periods 
beginning on or after January 1, 1995, with retroactive application 
encouraged but not required. As originally proposed, the relief from 
reconciliation afforded by the rule would be available only to an 
issuer that implemented IAS 22, as amended, in its financial statements 
with respect to all current and prior business combinations for all 
financial reporting periods presented. At the suggestion of a commenter 
and in consideration of the difficulty of retroactive implementation of 
IAS 22, the rule as adopted would also provide relief from 
reconciliation for business combinations consummated on or after 
January 1, 1995, if, commencing by that date, the issuer accounts for 
all business combinations in its primary financial statements in 
accordance with IAS 22. For an issuer that does not retroactively 
implement IAS 22, full reconciliation to U.S. GAAP would be required 
with respect to business combinations consummated prior to January 1, 
1995.
    As requested by several commenters, the adopted rules clarify how 
issuers and their auditors should describe the balance sheet and income 
statement amounts which do not reflect full reconciliation to U.S. 
GAAP. Amounts reported in the reconciliation should be referred to as 
determined in accordance with U.S. GAAP except for the specific items 
for which there is a deviation; exceptions should be stated to be in 
accordance with Item 17 or 18 of Form 20-F, as applicable, and 
different than that required by U.S. GAAP.\5\
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    \5\The accommodation provided under the adopted rule is an 
exception to the requirement to reconcile to U.S. GAAP that is 
similar to the accommodation that had been provided previously to 
foreign private issuers that prepare price level adjusted financial 
statements. See Securities Act Release No. 7117.
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    The reconciliation provided pursuant to Item 17 or 18 of Form 20-F 
must be included in notes to the financial statements and, accordingly, 
must be considered by the auditor when expressing an opinion on the 
financial statements taken as a whole. The auditor's report is required 
to comply with Rule 2-02 of Regulation S-X, and need not refer 
specifically to the note containing the reconciliation. However, if the 
reconciliation furnished in the notes to the financial statements fails 
to include disclosure of all material departures from U.S. GAAP or the 
quantification of the effects of accounting differences is materially 
misstated, or, where applicable, is incorrectly stated to be determined 
pursuant to the special provisions afforded under Item 17 or 18 by the 
rules adopted today, the financial statements would be presumed to be 
materially misleading and an exception should be cited in the auditor's 
report.

V. Cost-Benefit Analysis

    No specific data were provided in response to the Commission's 
request regarding the costs and benefits of the amendment being adopted 
today. Several commenters noted that the proposal would address to a 
large extent the time and cost of additional recordkeeping and 
reporting resulting from having to reconcile different accounting 
methods for business combinations. The Commission believes costs will 
be reduced by this amendment. The Commission believes that the adoption 
of these rules will be beneficial to U.S. investors, as it will 
encourage more foreign companies to list their securities and raise 
capital in the United States and will be consistent with investor 
protection.

VI. Regulatory Flexibility Act Certification

    Pursuant to the Regulatory Flexibility Act (5 Act U.S.C. 605(b)), 
the Chairman of the Commission has certified that the proposed 
amendments will not have a significant impact on a substantial number 
of small entities. Members of the public who wish to obtain a copy of 
the Regulatory Flexibility Certification should contact Wayne E. 
Carnall, (202) 942-2960, Deputy Chief Accountant, Division of 
Corporation Finance, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549.

VII. Statutory Bases

    The Commission's rules and forms are amended pursuant to section 19 
of the Securities Act of 1933 and sections 3(b), 4A, 12, 13, 14, 15, 
16, and 23 of the Securities Exchange Act of 1934.

VIII. Effective Date

    The amendment to Form 20-F shall be effective immediately upon 
publication in the Federal Register, in accordance with the 
Administrative Procedure Act, which allows effectiveness in less than 
30 days after publications for, inter alia, ``a substantive rule which 
grants or recognizes an exemption or relieves a restriction.'' 5 U.S.C. 
553(d)(1).

List of Subjects in 17 CFR 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 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;


Sec. 249.220f  [Amended]

    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 with the guidance in International 
Accounting Standards No. 22, as amended in 1993, with respect to the 
period of amortization of goodwill and negative goodwill may omit 
the disclosures specified by paragraphs (c)(2)(i), (c)(2)(ii), and 
(c)(2)(iii) of this Item regarding the effects of differences 
attributable solely to the period of amortization. Goodwill and 
negative goodwill that is subject to the amortization period under 
IAS 22 is based on the amount determined in accordance with U.S. 
GAAP.

Instructions

* * * * *
    (6)(a) A business combination which would be deemed a uniting of 
interests under International Accounting Standards No. 22, as 
amended in 1993 (``IAS 22''), and was accounted for using that 
method in the primary financial statements may be deemed to be, for 
purposes of the reconciliation to U.S. GAAP, a pooling of interests. 
A business combination which would be deemed an acquisition under 
IAS 22 and was accounted for using that method in the primary 
financial statements may be deemed to be, for purposes of the 
reconciliation to U.S. GAAP, a purchase. This paragraph is not 
applicable for promoter transactions, leveraged buyouts, mergers of 
entities under common control, reverse acquisitions and other 
transactions not addressed by IAS 22. Once the method of accounting 
is determined, the reconciliation to U.S. GAAP should quantify 
differences between the balances in the primary financial statements 
and the amounts determined in accordance with U.S. GAAP as required 
by this Item.
    (b) To obtain relief from the reconciliation requirement 
regarding the method of accounting, or the amortization period of 
goodwill or negative goodwill, the primary financial statements 
should apply the respective provisions of IAS 22 to all business 
combinations consummated on or after January 1, 1995. issuers can 
either retroactively adopt IAS 22 in the primary financial 
statements for all business combinations consummated prior to 
January 1, 1995, or provide a full reconciliation to U.S. GAAP for 
such prior business combinations.
    (c) If the method of accounting for a business combination and/
or the provisions for amortization of goodwill or negative goodwill 
complies with IAS 22, a statement to that effect must be included in 
the financial statements. The reconciliation shall state that the 
amounts presented comply with Item 17 of Form 20-F and are different 
from that required by U.S. GAAP.

Item 18. Financial Statements

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

Instructions

* * * * *
    (5)(a) A business combination which would be deemed a uniting of 
interests under International Accounting Standards No. 22, as 
amended in 1993 (``IAS 22''), and was accounted for using that 
method in the primary financial statements may be deemed to be, for 
purposes of the reconciliation to U.S. GAAP, a pooling of interests. 
A business combination which would be deemed an acquisition under 
IAS 22 and was accounted for using that method in the primary 
financial statements may be deemed to be, for purposes of the 
reconciliation to U.S. GAAP, a purchase. This paragraph is not 
applicable for promoter transactions, leveraged buyouts, mergers of 
entities under common control, reverse acquisitions and other 
transactions not addressed by IAS 22. Once the method of accounting 
is determined, the reconciliation to U.S. GAAP should quantify 
differences between the balances in the primary financial statements 
and the amounts determined in accordance with U.S. GAAP as required 
by this item.
    (b) To obtain relief from the reconciliation requirement 
regarding the method of accounting, or the amortization period of 
goodwill or negative goodwill, the primary financial statements 
should apply the respective provisions of IAS 22 to all business 
combinations consummated on or after January 1, 1995. Issuers can 
either retroactively adopt IAS 22 in the primary financial 
statements for all business combinations consummated prior to 
January 1, 1995, or provide a full reconciliation to U.S. GAAP for 
such prior business combinations.
    (c) If the method of accounting for a business combination and/
or the provisions for amortization of goodwill or negative goodwill 
complies with IAS 22, a statement to that effect must be included in 
the financial statements. The reconciliation shall state that the 
amounts presented comply with Item 18 of Form 20-F and are different 
from that required by U.S. GAAP.

    By the Commission.

    Dated: December 13, 1994.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-31037 Filed 12-19-94; 8:45 am]
BILLING CODE 8010-01-P-M