17 CFR Part 249

Federal RegisterApr 26, 1994

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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

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(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