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Implications of SEC staff accounting bulletin 88 for foreign registrants.

With more foreign companies entering U.S. securities markets, the Securities and Exchange Commission last year offered guidance on the financial statement disclosures required of foreign registrants. This month, Richard Dieter, CPA, a partner of Arthur Andersen & Co. in Chicago, and John A. Heyman, CPA, a partner of BDO Seidman in Washington, D.C., explain the implications of SEC Staff Accounting Bulletin (SAB) no. 88. The authors are both members of the American Institute of CPAs SEC regulations committee.

SAB no. 88 was issued by the Securities and Exchange Commission in August 1990. In it, the SEC explained its position on the financial statement disclosures and quantitative reconciliations of net income and material balance sheet items required by item 17 of form 20-F, used by foreign registrants.



The provisions of item 17 allow a foreign registrant to prepare its financial statements on a comprehensive basis other than U.S. generally accepted accounting principles and to include a discussion of material variances from U.S. GAAP along with quantitative reconciliations of net income and material balance sheet items. SAB no. 88 says financial statements prepared in this way need not include disclosures required by U.S. GAAP or SEC regulation S-X (which outlines the form and content requirements of financial statements set by the SEC) that are not called for by the foreign accounting principles used by the registrant. SAB no. 88 concludes, however, that some matters routinely disclosed under U.S. GAAP or regulation S-X but omitted from item 17 financial statements may be at a level of materiality to require disclosure in management's discussion and analysis (MD&A).

The use of item 17 is not permitted in filings for offerings under the Securities Act of 1933 except for

* Offerings pursuant to dividend or interest reinvestment plans.

* Conversions and exercises of certain outstanding security rights.

* Form F-3 filings offering investment grade debt.

For other 1933 act filings, financial statements and related disclosures must comply with item 18's more comprehensive requirements.

Item 17 disclosures are a less costly approach for foreign registrants whose primary purpose in registering securities is to allow their shareholders to trade in U.S. markets. Savings result from not having to gather and present the incremental information required by U.S. GAAP and regulation S-X.



SAB no. 88 applies to clients that currently opt to file under item 17, but practitioners should also discuss this interpretation with all foreign registrants currently filing under item 18 to determine if filing under item 17 is possible or desirable.

SAB no. 88 represents a major change in the SEC's interpretation of the requirements of item 17. When the differences between items 17 and 18 were debated by the SEC in the late 1970s, the major focus was on segment reporting.

The current exemption under item 17 for providing incremental disclosures required by U.S. GAAP or regulation S-X in the financial statements is broad. Examples of information not required (unless required by the foreign country's own GAAP) include

* Supplemental oil and gas disclosures under Financial Accounting Standards Board Statement no. 69, Disclosures about Oil and Gas Producing Activities.

* Segment disclosures under FASB Statement no. 14, Financial Reporting for Segments of a Business Enterprise.

* Disclosure of postretirement healthcare and life insurance benefits under FASB Statement no. 81, Disclosure of Postretirement Health Care and Life Insurance Benefits, or those that will be required when FASB Statement no. 106, Employer's Accounting for Postretirement Benefits Other Than Pensions, becomes effective.

* Disclosures such as those required by FASB Statement no. 87, Employers' Accounting for Pensions, and FASB Statement no. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk.

SAB no. 88 does not exempt schedules required by regulation S-X and a statement of cash flows (assuming a statement of changes in working capital is provided under local GAAP). Consequently, foreign registrants filing under item 17 are required to file the applicable financial statement schedules of regulation S-X and provide (supplementarily) cash flow statements in accordance with FASB Statement no. 95, Statement of Cash Flows.


Filing under item 17 involves a subjective judgment of the relationship between (1) the level of materiality that would trigger a need for disclosure in MD&A and (2) the level that would otherwise require financial statement disclosure under U.S. GAAP or regulation S-X. An additional concern is the level of detail of MD&A disclosures.

The materiality threshold for MD&A disclosure generally is higher than the norms typically used for financial statement disclosure. In addition, the information disclosed in MD&A, if deemed material, can be less detailed than that required by U.S. GAAP or regulation S-X. FASB Statements nos. 87 and 105 are used below as examples of applying these concepts to specific GAAP disclosures.


The primary purpose of MD&A disclosure under Statement no. 87 is the impact on short- and long-term liquidity of the funding of pension obligations. Consequently, in most circumstances it is not necessary to provide details of the plan funded status and related reconciliation as required by Statement no. 87. The MD&A disclosure, if material, should focus on the materiality of the unfunded projected benefit obligation and the expected timing of contributions to fund these amounts as opposed to historical contributions.

Disclosure of the funded status may be necessary if the future amortization of either unrecognized transition amounts or prior service costs is likely to be highly material to operating results. The MD&A does not need to discuss the key assumptions used in pension calculations (discount rate, rate of return on plan assets or salary rate increases) unless such assumptions are significantly different from those used by other registrants in similar circumstances. If a change in one or more of those assumptions has a material effect on the entities' historical results of operations or is reasonably likely to have a material impact on future operations, it should be discussed.

FASB 105

MD&A disclosures under Statement no. 105 generally are limited to situations in which financial instruments have a material effect on the results of operations or liquidity or in which the market, credit or concentration of credit risk is reasonably likely to have a material effect on the future results of operation or liquidity. For example, discussion of an interest rate swap would not be required if it has no material effect on the historical results of operations and would not reasonably be likely to affect future operations or cash flows in a material way. Similarly, credit concentrations would be discussed in MD&A if they present a known uncertainty that is reasonably likely to have a future material effect.



SAB no. 88 is a partial attempt to reduce the problems foreign registrants have when listing their securities in the United States by clearly distinguishing the differences between items 17 and 18. Practitioners should take this opportunity to review the alternatives now available to foreign registrants.
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Author:Heyman, John A.
Publication:Journal of Accountancy
Date:Aug 1, 1991
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