Certain SEC regulations and/or accommodations do not require the presentation of a complete set of financial statements, unlike IFRS as issued by the IASB (herein referred to as “IFRS”). Presented below are examples where a complete set of financial statements are not required by SEC regulations and/or accommodations granted under Rule 3-13 of Regulation S-X (“S-X 3- 13”), even though IFRS has a requirement for a complete set of financial statements, along with related Task Force and staff observations about the examples.

A foreign private issuer (“FPI”) (that does not qualify as an Emerging Growth Company (“EGC”)) with a December 31 year-end plans to submit a draft registration statement to conduct an Initial Public Offering (“IPO”) in May 2019. The registrant acquired an equity method investment (i.e., a foreign business using IFRS, but not considered a first-time adopter) in mid-April 2018, where the investment met the income significance test under Rule 3-09 of Regulation S-X (“S-X 3-09”) (greater than 20%) in 2018. For purposes of this example, the evaluation under Rule 3-05 of Regulation S-X (“S-X 3-05”) did not result in any requirement to present the investee’s financial statements for any period.

Financial Reporting Manual (“FRM”) 2405.4 states that “for purposes of S-X 3-09, the investee’s separate annual financial statements should only depict the period of the fiscal year in which it was accounted for by the equity method.” As a result, separate audited financial statements of the investee for the period from mid-April 2018 to December 31, 2018 (stub period) are required.

SX Rule 3-09 requires the presentation of the 2018 stub period, and does not permit the presentation of the comparative period prior to the date it was acquired and accounted for under the equity method. The presentation of financial statements without a comparative period would not comply with paragraph 38 of IAS 1. The Task Force asked the staff whether they would object to an audit report containing a qualified opinion with respect to the lack of comparative information similar to that as discussed in Appendix A. An example of the qualification is presented below:

Reference to IAS 1

As discussed in Note [X], the accompanying [consolidated] financial statements are  not  presented  in   accordance  with   International   Accounting   Standard  1, Presentation of Financial Statements, as they do not include comparative figures, which constitute a departure from International Financial Reporting Standards as issued by the International Accounting Standards Board

The staff indicated that they would not object to the inclusion of an audit report containing a qualified opinion with respect to the lack of comparative information in the S-X 3-09 financial statements described above.

In certain circumstances abbreviated financial statements may be used to satisfy the requirements of S-X 3-05 in lieu of full carve-out financial statements and are tailored to the informational needs determined by the SEC, based on compliance with SEC requirements or practices. In addition, the basis of presentation note would include:

The Task Force asked the staff if they would object to an audit report that includes the following:

The staff indicated that they would not object to the approach outlined in the bullets above for those circumstances where the staff did not object to the use of abbreviated financial statements prepared using IFRS to satisfy S-X 3-05. Refer to Appendix B for a Report example and related Basis of Presentation Note example.

Generally, in an IPO, the SEC has accepted a combination of pre and post-acquisition financial statements of an acquired business to satisfy the requirements under S-X 3-05 provided there are no gaps in audited periods. In such cases, the pre-acquisition financial statements are generally not required to include the balance sheet at the date of acquisition.

The Task Force asked the staff whether they would object to an audit report containing a qualified opinion with respect to the omission of a balance sheet, at acquisition date, under IFRS when pre and post-acquisition financial statements of an acquired business are used to satisfy S-X 3-05. An example of the audit report containing the qualified opinion is presented below:

The staff indicated that they would not object to the inclusion of an audit report containing a qualified opinion with respect to the omission of a balance sheet at acquisition date under IFRS when pre and post-acquisition financial statements of an acquired business are used to satisfy S-X 3-05 as described above.

Assume a domestic company acquires a foreign business (“Foreign Business”) and that the financial statements of the Foreign Business will be prepared in accordance with IFRS. Based on the significance tests under S-X 3-05, one year of financial statements will be required by S-X 3-05 for the year ended December 31, 2018.

The financial statements of the Foreign Business will be a carve-out of a parent company that prepares financial statements under IFRS. Financial statements of the Foreign Business, which will  have  the  same  basis  as  its  parent,  have  never  been  prepared. Accordingly, the Foreign Business would be subject to the disclosure requirements of IFRS 1.

As a first-time adopter of IFRS, the Foreign Business should provide a balance sheet at January 1, 2017, December 31, 2017 and December 31, 2018 and an income statement and cash flow statement for the two years ended December 31, 2018 under IFRS 1. In this fact pattern, S-X 3-05 only required financial statements at and for the year ended December 31, 2018 (i.e. one year).

The Task Force notes that if this company was not a first-time adopter of IFRS it could simply exclude the financial statements at and for the year ended December 31, 2017 and the audit report would have noted the departure from IAS 1 in not providing comparatives financial statements as discussed in Section II.A.

The Task Force asked the staff whether they would object to an audit report containing a qualified opinion for noncompliance with IFRS 1 with respect to the exclusion of the opening and comparative period balance sheet, which in this case is the opening balance sheet at January 1, 2017 and for the year ended December 31, 2017 that would be provided for a first-time adopter of IFRS. Similar to the accommodation discussed in Appendix A. An example of the explanation in the audit report containing the qualified opinion is presented below:

The staff indicated that they would not object to the inclusion of an audit report containing a qualified opinion with respect to the exclusion of the opening balance sheet and comparative balance sheet under IFRS 1 as described above.

U.S. GAAP (FASB ASC 932-235-50) requires supplemental disclosures about oil and gas reserves, changes in such reserves during the reporting period, capitalized costs related to oil and gas producing activities and standardized measures of future net cash flows (“the supplemental U.S. GAAP oil & gas disclosures”). When the SEC eliminated the reconciliation requirement for financial statements prepared in accordance with IFRS, it amended Item 18 of Form 20-F to require the supplemental U.S. GAAP oil & gas disclosures for all “issuers” filing financial statements under Item 18 irrespective of the basis of accounting on which they prepare their financial statements filed with the SEC (Instruction 2).

Item 18(b) of Form 20-F specifically exempts IFRS basis financial statements prepared to comply with S-X 3-05 and 3-09 from providing other information required by U.S. GAAP or Regulation S-X. Given that exemption, it is unclear how to apply Instruction 2 in the context of IFRS-basis financial statements of non-issuers such as significant acquirees or equity method investees (“IFRS-basis non-issuers”). Unlike the financial statements of an issuer, such IFRS-basis non- issuer financial statements may have already been prepared and issued outside the U.S. without such disclosures and in the case of S-X 3-05, may be filed by the SEC issuer only once.

FRM 2065.12 and Question 1 of Staff Accounting Bulletin Topic 2.D. Financial Statements of Oil and Gas Exchange Offers both require only a portion of the disclosures in ASC 932-235-50 for each full year of operations when they might not have otherwise been required; however, both appear to be written in the context of financial statements for an acquired oil and gas operation prepared under U.S. GAAP.

Considering the discussion above, the Task Force and SEC staff discussed whether financial statements prepared under IFRS provided to satisfy S-X 3-05 would be required to include the disclosures required by ASC 932-235-50 similar to what an FPI would be required to disclose if they use IFRS.

The SEC staff would expect such disclosures to be included. Registrants with acquisitions unable to provide all of the disclosures required by ASC 932-235-50 may contact the SEC staff to discuss.

Rule 2-03 of Regulation S-X (“S-X 2-03”) states that “Notwithstanding any requirements as to examination by independent accountants, the financial statements of any foreign governmental agency may be examined by the regular and customary auditing staff of the respective government if public financial statements of such governmental agency are customarily examined by such auditing staff.”

An agency, or business unit, of a foreign government, (“foreign government entity”), where the government auditing staff was the appointed auditor may be acquired by an issuer. The government auditing staff is not an auditor registered with the PCAOB and the audit of the foreign government entity had not been performed in accordance with PCAOB or US GAAS auditing standards. In such a situation, audited financial statements may be required for that foreign government entity either as predecessor financial statements or as required by S-X 3-05.

The Task Force asked the staff for their views on how S-X 2-03 may apply in these instances and whether a registration statement may include financial statements audited by the government auditing staff.

The SEC staff noted that registrants looking to present such financial statements should discuss their specific facts and circumstances with the staff prior to submission.

The summary of inflation data collected by the members of the IPTF can be found on the CAQ website.

The next meeting of the Task Force has been set for November 19, 2019.

Rule 3-05

Under Rule 3-05 of Regulation S-X, the period for which audited financial statements must be presented for a recently acquired business varies from one to three years depending upon its significance to the registrant. Some systems of GAAP, such as IFRS, specifically require prior year comparative financial statements to be presented when the most recent fiscal year is presented.

In situations where only one year is required by Rule 3-05, the staff would not object if the audit report includes a qualification under IFRS or home-country GAAP solely for the absence of comparative prior year financial statements.

To the Management of ABC Company

We have audited the accompanying combined financial statements of the Global XXX Business and Certain Other Assets of ABC Company, which comprise the combined statements of net assets acquired as of December 31, 20X7 and 20X6, and the related combined statements of revenues and direct expenses for each of the three years in the period ended December 31, 20X7.

Management is responsible for the preparation and fair presentation of the combined financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board relevant to such financial statements; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of special purpose combined financial statements that are free from material misstatement, whether due to fraud or error.

Our responsibility is to express an opinion on the combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the special purpose combined financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Global XXX Business and Certain Other Assets of ABC Company as of December 31, 20X7 and December 31, 20X6, and the results of their revenues and direct expenses for each of the three years in the period ended December 31, 2017, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board relevant to such financial statements.

The accompanying combined financial statements were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the Current Report on Form 8-K of XYZ Industries Ltd. as described in Note 1 and are not intended to be a complete presentation of the financial position or results of operations of the Global   XXX Business and Certain Other Assets of ABC Company in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Our opinion is not modified with respect to this matter.

The accompanying Combined Financial Statements (the “Financial Statements”) are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) relevant to such financial statements. These Financial Statements are prepared by management in consideration of the terms and conditions of the Purchase Agreement and the relevant guidance under SEC Rule 3-05, Significant Acquisition Carve-out Financial Statement Reporting Requirements. These combined financial statements are not intended to be a complete presentation of financial position, results of operations, or cash flows of the Global XXX Business in conformity with IFRS. Due to the extent to which the Global XXX Business has been integrated into ABC Company during the periods required to be covered by the Financial Statements, the presentation of full or carve-out financial statements for the Business in accordance with the Securities and Exchange Commission’s Regulation S-X, including a reasonable and appropriate allocation of corporate overhead, interest and taxes, is impracticable. Thus, Statements of Net Assets Acquired and Statements of Revenues and Direct Expenses have been prepared. The Financial Statements have been derived from the accounting records of ABC Company using historical results of operations and financial position and only present the net assets acquired and the associated revenues and direct expenses, including certain allocated expenses, of the Business. The net assets acquired include legal entities transferred and assets specifically identified in the Purchase Agreement. All significant intercompany accounts and transactions within the Business have been eliminated.