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Release No. 33-7056 Release No. 34-33921 International Series No. 656 Fed. Reg. April 26, 1994
Reconciliation of the Accounting by Foreign Private Issuers for Business Combinations
ACTION: Notice of proposed rulemaking. 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-F1 under the Securities and Exchange Act of 1934 (the ''Exchange Act'').2 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
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.
1 17 CFR 249.220f.
2 15 U.S.C. 78a et seq.
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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