[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