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Highlights of the November 9, 2023 virtual joint meeting of the IPTF and SEC Staff
us SEC - IPTF Committee
Joint Meeting with SEC Staff
November 9, 2023
November 9, 2023
NOTICE:
The Center for Audit Quality (CAQ) SEC Regulations Committee and its International Practices Task Force (the Task Force or IPTF) meet periodically with the staff of the SEC (the SEC staff or staff) to discuss emerging financial reporting issues relating to SEC rules and regulations. The purpose of the following highlights is to summarize the issues discussed at the meetings. These highlights have not been considered or acted on by senior technical committees of the AICPA and do not represent an official position of the AICPA or the CAQ. As with all other documents issued by the CAQ, these highlights are not authoritative and users are urged to refer directly to applicable authoritative pronouncements for the text of the technical literature. These highlights do not purport to be applicable or sufficient to the circumstances of any work performed by practitioners. They are not intended to be a substitute for professional judgment applied by practitioners
These highlights were prepared by a representative of the CAQ who attended the meeting and do not purport to be a transcript of the matters discussed. The views attributed to the SEC staff are informal views of one or more of the staff members present, do not constitute an official statement of the views of the Commission or of the staff of the Commission and should not be relied upon as authoritative. Users are urged to refer directly to applicable authoritative pronouncements for the text of the technical literature.
As available on this website, highlights of Joint Meetings of the SEC Regulations Committee and its International Practices Task Force and the SEC staff are not updated for the subsequent issuance of technical pronouncements or positions taken by the SEC staff, nor are they deleted when they are superseded by the issuance of subsequent highlights or authoritative accounting or auditing literature. As a result, the information, commentary or guidance contained herein may not be current or accurate and the CAQ is under no obligation to update such information. Readers are therefore urged to refer to current authoritative or source material.
The Center for Audit Quality (CAQ) SEC Regulations Committee and its International Practices Task Force (the Task Force or IPTF) meet periodically with the staff of the SEC (the SEC staff or staff) to discuss emerging financial reporting issues relating to SEC rules and regulations. The purpose of the following highlights is to summarize the issues discussed at the meetings. These highlights have not been considered or acted on by senior technical committees of the AICPA and do not represent an official position of the AICPA or the CAQ. As with all other documents issued by the CAQ, these highlights are not authoritative and users are urged to refer directly to applicable authoritative pronouncements for the text of the technical literature. These highlights do not purport to be applicable or sufficient to the circumstances of any work performed by practitioners. They are not intended to be a substitute for professional judgment applied by practitioners
These highlights were prepared by a representative of the CAQ who attended the meeting and do not purport to be a transcript of the matters discussed. The views attributed to the SEC staff are informal views of one or more of the staff members present, do not constitute an official statement of the views of the Commission or of the staff of the Commission and should not be relied upon as authoritative. Users are urged to refer directly to applicable authoritative pronouncements for the text of the technical literature.
As available on this website, highlights of Joint Meetings of the SEC Regulations Committee and its International Practices Task Force and the SEC staff are not updated for the subsequent issuance of technical pronouncements or positions taken by the SEC staff, nor are they deleted when they are superseded by the issuance of subsequent highlights or authoritative accounting or auditing literature. As a result, the information, commentary or guidance contained herein may not be current or accurate and the CAQ is under no obligation to update such information. Readers are therefore urged to refer to current authoritative or source material.
I. Attendance
Task Force Members
| Observers
|
|---|---|
Guilaine Saroul, Chair (PwC)
Steven Jacobs, Vice-Chair (EY)
Regina Croucher (KPMG)
Rich Davisson (RSM-US)
Rohit Elhance (GT)
Adam Dufour (EY)
Patrick Higgins (PwC)
Grace Li (BDO)
Kathleen Malone (Deloitte)
Paul Manos (KPMG)
Erin McCloskey (KPMG)
Ignacio Perez Zaldivar (Deloitte)
Sergey Starysh (BDO)
Cindy Williams (GT)
| SEC staff from the Division of Corporation Finance’s Office of Chief Accountant and Office of International Corporate Finance, and Office of the Chief Accountant
Annette Schumacher Barr (CAQ staff)
Erin Cromwell (CAQ staff)
|
II. Discussion with Division of Corporation Finance Director
The SEC staff and Task Force discussed various audit and reporting issues related to Foreign Private Issuers (FPIs) with the Division of Corporation Finance’s Director.
III. Application of Rule 3-05(d) for a domestic registrant when it acquires a business that is not a foreign business but would qualify as a Foreign Private Issuer if it were the registrant
Before the amendments of Rule 3-05 in 2020, when a registrant acquired a business that could qualify as an FPI if it were the registrant but did not qualify to be a foreign business, the financial statements of the acquired business had to be prepared in accordance with U.S. GAAP or in accordance with a basis of accounting other than U.S. GAAP provided a reconciliation to U.S. GAAP under Item 18 of Form 20-F is included.
Following the 2020 amendments of Rule 3-05, Rule 3-05(d) states that:
“Financial statements of an acquired or to be acquired business that would be a foreign private issuer if it were a registrant.
Financial statements of an acquired or to be acquired business that is not a foreign business (as defined in §210.1-02(l)), but would qualify as a foreign private issuer (as defined in §230.405 and §240.3b-4) if it were a registrant may be prepared in accordance with IFRS-IASB without reconciliation to U.S. GAAP or, if the registrant is a foreign private issuer that prepares its financial statements in accordance with IFRS-IASB, may be prepared according to a comprehensive basis of accounting principles other than U.S. GAAP or IFRS-IASB and must be reconciled to IFRS-IASB or to U.S. GAAP. This reconciliation must generally follow the form and content requirements in Item 17(c) of Form 20-F…”
Following the amended Rule 3-05 requirements, if an acquirer is an FPI, then the financial statements of the acquiree, which does not meet the definition of a foreign business but would qualify as an FPI if it were the registrant, may be prepared according to a local GAAP with reconciliation to U.S. GAAP or IFRSIASB using the form and content requirements in Item 17(c) of Form 20-F. The revised Rule does not specify the reconciliation requirements when the acquirer is not an FPI that uses IFRS-IASB (i.e., a domestic registrant or an FPI that uses U.S. GAAP) and the acquiree is not a foreign business but would qualify as an FPI if it were the registrant.
The Task Force and staff discussed whether the reconciliation requirement would be different if the acquirer were a domestic filer or if the acquirer were an FPI that prepares its financial statements in accordance with U.S. GAAP (i.e., would the reconciliation from local GAAP to U.S. GAAP be prepared following the form and content requirements in Item 17(c) or Item 18 of Form 20-F?). The staff indicated that the rule amendments did not address these scenarios. As such the existing rules [Footnote 31 to SEC Release 33-7118] that would require reconciliation to Item 18 of Form 20-F in these scenarios have not been amended. The staff also indicated, however, that they would consider requests under Rule 3-13 of Regulation S-X to provide a reconciliation compliant with Item 17(c) of Form-20-F if the registrant can demonstrate the incremental information provided in an Item 18 reconciliation (e.g., incremental U.S. GAAP and/or Regulation S-X disclosures) was not necessary or useful to investors.
IV. Change in Registrant’s Certifying Accountants
Item 16F of Form 20-F requires the disclosure about “Change in Registrant’s Certifying Accountant.” The disclosure requirements consist of two parts – Paragraph (a) addresses the “basic disclosure requirements” when there is a change in the registrant’s certifying accountant and Paragraph (b) addresses situations when there is a disagreement. This issue only addresses the disclosure requirements of Paragraph (a) and only addresses the disclosure requirements of companies that are currently registrants.
The instructions to Item 16F describe situations in which the disclosure does not need to be repeated. See excerpt from Form 20-F below:
Instructions to Item 16F of Form 20-F:
2. The disclosure called for by paragraph (a) of this Item need not be provided if it has been previously reported, as that term is defined in Rule 12b-2 under the Exchange Act (§240.12b-2 of this chapter). The disclosure called for by paragraph (b) of this Item must be furnished, where required, notwithstanding any prior disclosure about accountant changes or disagreements.
Rule 12b-2 of the Exchange Act
Previously filed or reported. The terms “previously filed” and “previously reported” mean previously filed with, or reported in, a statement under section 12, a report under section 13 or 15(d), a definitive proxy statement or information statement under section 14 of the act, or a registration statement under the Securities Act of 1933: Provided, That information contained in any such document shall be deemed to have been previously filed with, or reported to, an exchange only if such document is filed with such exchange.
The Task Force noted that the concept of “previously reported” under Rule 12b-2 of the Exchange Act is not clearly defined and it is unclear whether it would include a furnished Form 6-K. Unlike domestic registrants that provide disclosures on Form 8-K, there is no way for an investor to easily identify the nature of a 6-K submission and there is diversity in practice in FPIs furnishing 6-Ks for changes in accountants that include all the disclosure requirements of Item 16F (including a letter from the former accountants).
Given this background the Task Force asked the staff the following questions. For Questions 1-3 - Assume a company provided all of the required disclosure of Item 16F - including the letter from the prior auditor on Form 6-K.
- Would the Staff consider this information to be “previously reported” under Rule 12b-2 even though Form 6-K is furnished?
Staff Response: Yes. This is consistent with a plain read of the rule and form. - If yes to question 1, would the disclosure need to be included in the next Form 20-F? That is, should the disclosure about the change in the Registrants Certifying Accountants be included at least once on Form 20-F – regardless of whether the change has been previously reported?
Staff Response: The disclosure would not be required to be repeated in the next Form 20-F. However, best practice would be to incorporate by reference in the Form 20-F to the Form 6-K where the full Item 16F disclosure is provided or provide the Item 16F disclosure from the Form 6-K in the Form 20-F. - If yes to question 1 – would this information need to be repeated in a Form F-3 or prospectus supplement? Specifically, can the information be omitted by applying the concept of Rule 12b2? As discussed above, does the requirement to provide this information in a Form F-3 or prospectus supplement assume the information was not previously reported under Rule 12b-2 and thus it does not need to be repeated if it was previously reported, or, alternatively, given its importance, does the disclosure need to be included in the F-3/prospectus supplement regardless of the disclosure being previously reported?
Staff Response: Generally, if the change in accountant happens after the fiscal year end, Item 5(a) of Form F-3 would apply and to satisfy this disclosure requirement, a registrant may either incorporate by reference the relevant Form 6-K with the Item 16F disclosure or include this disclosure in the body of the Form F-3.
How to satisfy the incorporation by reference requirement in Form F-3 is fact specific, so if there are specific fact-patterns or questions as it relates to this disclosure in the context of a Form F-3 or prospectus supplement and any related liability considerations, registrants may contact the staff.
V. SEC’s reporting expectations for FPIs when these registrants also comply with their local Corporate Social Responsibility (CSR) Reporting
The 2021 Sample Letter to Companies Regarding Climate Change Disclosures challenges companies that present non-financial information outside of their 10-K/20-F if that information is relevant for US shareholders as well and should be included in SEC filings.
1. We note that you provided more expansive disclosure in your corporate social responsibility report (CSR report) than you provided in your SEC filings. Please advise us what consideration you gave to providing the same type of climate-related disclosure in your SEC filings as you provided in your CSR report.
While the Commission’s 2010 Guidance Regarding Disclosure Related to Climate Change, Release No. 33- 9106 (February 2, 2010) considers solely climate change, the EU established new legislation requiring all large companies and listed SMEs (among others) to comply with Corporate Sustainability Reporting Directive (CSRD). Noting that some FPIs may be dual listed in the EU and the US, or may have subsidiaries in the EU, the Task Force asked how such FPIs should consider its EU CSRD compliant report, which is prepared using both investor and broader stakeholder materiality, when evaluating its SEC disclosure obligations. The Task Force provided the following illustrative scenarios:
- An FPI parent is headquartered in a non-EU country, however, has a subsidiary in the EU that complies with the EU CSRD.
- An FPI parent is head-quartered in a non-EU country, has a subsidiary in the EU that complies with the EU CSRD, but has an expanded global presence such that the EU-specific information may not be representative of the entire FPI’s corporate sustainability exposure.
- When an FPI issues an EU CSRD report including information beyond just climate change, what are the staff’s expectations of the FPI to provide information to the SEC beyond those highlighting climate change?
The Task Force also asked whether, if there are expectations for an FPI to provide additional information in its SEC filings, the SEC would object to the information being furnished in a Form 6-K, similar to other information that is made available to shareholders in another jurisdiction.
The proposed climate disclosure rule has not been adopted, but the 2010 guidance remains in effect. Additionally, information that is material for investor protection should be included in Form 20- F or Form 6-K in accordance with the form requirements.
VI. Next Meeting
The Task Force and staff will meet next on May 21, 2024.
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