[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
