Financial Statement Requirements in US Securities Offerings: What Non-US Issuers Need to Know 2010 Update

Transcription

1 Financial Statement Requirements in US Securities Offerings:

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3 Financial Statement Requirements in US Securities Offerings: Alexander F. Chen Kirk A. Davenprt Jel H. Trtter Latham & Watkins LLP Melanie F. Dlan KPMG LLP January 2010 Alexander F. Chen is a partner in the Washingtn, D.C. ffice f Latham & Watkins LLP; Kirk A. Davenprt is a partner in the New Yrk ffice f Latham & Watkins LLP; and Jel H. Trtter is a partner in the Washingtn, D.C. ffice f Latham & Watkins LLP. Melanie F. Dlan is a partner in the Department f Prfessinal Practice f KPMG LLP and is lcated in the Washingtn, D.C. ffice. Jasn Waldrn, a partner in KPMG LLP, als made significant cntributins t this publicatin. Any errrs r missins are, f curse, slely the respnsibility f the authrs. The views and pinins are thse f the authrs and d nt necessarily represent the views and pinins f Latham & Watkins LLP r KPMG LLP. Latham & Watkins perates as a limited liability partnership wrldwide with affiliated limited liability partnerships cnducting the practice in the United Kingdm, France and Italy and affiliated partnerships cnducting the practice in Hng Kng and Japan Latham & Watkins. All Rights Reserved KPMG LLP, a Delaware limited liability partnership and the US member firm f the KPMG netwrk f independent member firms affiliated with KPMG Internatinal Cperative, a Swiss entity. All rights reserved. Printed in the USA. KPMG LLP des nt prvide legal services. The infrmatin cntained herein is f a general nature and is nt intended t address the specific circumstances f any individual r entity. KPMG and the KPMG lg are registered trademarks f KPMG Internatinal Cperative, a Swiss entity.

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5 Financial Statement Requirements in US Securities Offerings: I. Intrductin... 1 II. Backgrund... 1 Page A. What is a Freign Private Issuer?... 1 B. Sme Key Ways in which Freign Private Issuers are Treated Differently than Dmestic US Issuers Freign Private Issuers May Use US GAAP, IFRS r Lcal GAAP Freign Private Issuers are nt Required t Reprt Quarterly r Use Frm 8-K Freign Private Issuers Make Cnfidential Submissin f First-Time Registratin Statements... 2 III. The Basics... 2 A. Backgrund t Financial Statement Requirements... 2 B. What Financial Statements Must be Included in Public Offerings?... 2 C. MD&A...5 D. Internal Cntrl Over Financial Reprting... 6 E. Using IFRS Withut Recnciliatin... 6 F. Interactive Data... 6 G. When Des Financial Infrmatin G Stale?... 7 H. Recnciliatin t US GAAP Annual Audited and Interim Unaudited Financial Statements Selected Financial Infrmatin MD&A I. Audit Reprts...10 J. Currency Translatin; Exchange Rates K. Additinal Financial Infrmatin That Is Typically Included Other Financial Data and Nn-GAAP Financial Measures Recent Financial Results Recent Develpments IV. Additinal Financial Infrmatin Fr Certain Specific Situatins A. Recent and Prbable Acquisitins Overview Definitin f Business Definitin f Prbable Significance Tests Summary f Financial Statement Requirements Exceptins t the Financial Statement Requirements fr Acquired Businesses Industry Rll-Ups and Operating Real Estate MD&A Pr Frma Financial Infrmatin i

6 B. Guarantr Financial Statements C. Secured Offerings D. Investments Accunted fr Under the Equity Methd E. Segment Reprting F. Supplemental Schedules fr Certain Transactins G. Industry Guides H. Quantitative and Qualitative Disclsure Abut Market Risk V. Item 18 vs. Item VI. Special Cnsideratins in Rule 144A Transactins VII. Cnclusin ii

7 Financial Statement Requirements in US Securities Offerings: I. Intrductin The mst frequently asked questin at all-hands meetings fr a securities ffering is What financial statements will be needed? The questin seems simple enugh. But the answer is rarely straightfrward. This User s Guide is designed t prvide a radmap t help navigate the financial statement requirements f the US federal securities laws. We fcus n the requirements fr public fferings by freign private issuers (a term that cvers mst nn-us issuers ther than freign gvernments) and als summarize briefly the practices in the Rule 144A market. 1 II. Backgrund A. What is a Freign Private Issuer? A freign private issuer means any issuer (ther than a freign gvernment) incrprated r rganized under the laws f a jurisdictin utside f the United States unless: 2 mre than 50 percent f its utstanding vting securities are directly r indirectly wned f recrd by US residents; and any f the fllwing applies: the majrity f its executive fficers r directrs are US citizens r residents; mre than 50 percent f its assets are lcated in the United States; r its business is administered principally in the United States. B. Sme Key Ways in which Freign Private Issuers are Treated Differently than Dmestic US Issuers Under the US federal securities laws and the rules and practice f the US Securities and Exchange Cmmissin (the SEC ), freign private issuers are nt regulated in precisely the same way as dmestic US issuers. 3 In particular, freign private issuers are allwed a number f key benefits nt available t dmestic US issuers. These include the fllwing. 1. Freign Private Issuers May Use US GAAP, IFRS r Lcal GAAP US dmestic cmpanies must file financial statements with the SEC in accrdance with US Generally Accepted Accunting Principles ( US GAAP ). 4 The financial statements f freign private issuers, hwever, may be prepared using US GAAP, Internatinal Financial Reprting Standards ( IFRS ), r lcal hme-cuntry generally accepted accunting principles ( lcal GAAP ). 5 In the case f freign private issuers that use the English-language versin f IFRS as issued by the Internatinal Accunting Standards Bard ( IASB IFRS ), n recnciliatin t US GAAP is needed. 6 By cntrast, if lcal GAAP r nn-iasb IFRS is used, the cnslidated financial statements (bth annual and interim) must include a nte recnciliatin t US GAAP. 7 1

8 2. Freign Private Issuers are nt Required t Reprt Quarterly r Use Frm 8-K Unlike dmestic US issuers, freign private issuers are nt required t file quarterly reprts (including quarterly financial infrmatin) n Frm 10-Q. 8 They als are nt required t use Frm 8- K fr current reprts, and instead furnish (nt file) current reprts n Frm 6-K with the SEC. 9 Sme freign private issuers, hwever, chse (r are required by cntract) t file the same frms with the SEC that dmestic US issuers use. In that case, they must cmply with all the requirements f the frms fr dmestic issuers (fr example, they wuld file quarterly reprts n Frm 10-Q and current reprts n Frm 8-K, in additin t annual reprts n Frm 10-K) Freign Private Issuers Make Cnfidential Submissin f First-Time Registratin Statements Freign private issuers that are registering fr the first time with the SEC may generally submit registratin statements n a cnfidential basis t the SEC staff. By cntrast, dmestic US cmpanies must initially file their registratin statements publicly. Cnfidential submissins can be a significant advantage, because the prcedure allws the issuer t reslve the cmplicated issues ften encuntered in an initial SEC review befre making a public filing. A freign private issuer will still be required t file its registratin statement publicly prir t ging n a rad shw r selling its securities. Absent unusual circumstances, nce an issuer becmes a reprting freign private issuer, the staff will nt review its registratin statements cnfidentially and s it will have t file these registratin statements publicly. 11 III. The Basics A. Backgrund t Financial Statement Requirements Public securities fferings registered with the SEC under the US Securities Act f 1933 (the 1933 Act ) generally require the filing f a registratin statement with the SEC and the distributin f a prspectus in cnnectin with the ffering. The registratin statement and prspectus must cntain certain financial statements and ther financial infrmatin regarding the issuer s financial cnditin and results f peratins. The financial statement requirements fr registratin statements f freign private issuers are fund in Items 3, 8, 17 and 18 f Frm 20-F, and in Regulatin S-X ( S-X ). B. What Financial Statements Must be Included in Public Offerings? The fllwing tables summarize the scpe f the basic financial statement requirements fr issuers in registered fferings. 12 (We address the rules gverning timing requirements in Sectin III.G.) Nte that much f the basic infrmatin can be incrprated by reference fr issuers eligible t use Frm F-3, 13 and fr certain issuers filing a registratin statement n Frm F Issuers wh are eligible fr incrpratin by reference will want t cnsult their underwriters befre electing t incrprate all required financial infrmatin. Fr marketing purpses, it is ften desirable t prvide the financial infrmatin directly in the printed ffering dcument. The Basic Requirements fr Public Offerings Annual Audited Financial Statements Cnslidated annual audited financial statements f the issuer cnsisting f: 15 balance sheet; incme statements; statement f changes in equity; statement f cash flws; 2

9 related ntes and schedules required by the system f accunting under which the financial statements were prepared; and if nt included in the primary financial statements, a nte analyzing the changes in each captin f sharehlders equity presented in the balance sheet. Audited financial statements included in a registratin statement (r annual reprt) must be prepared in accrdance with: US GAAP; IASB IFRS; r lcal GAAP/nn-IASB IFRS recnciled t US GAAP, as described belw. 16 Audited financial statements must cver each f the latest three fiscal years, 17 with certain exceptins: if the issuer has been in existence less than the required three years, financial infrmatin cvering the issuer s predecessr entities (if any) may need t be prvided; 18 if a jurisdictin utside the United States des nt require a balance sheet fr the earliest year f the three-year perid, that balance sheet may be mitted; 19 and in an initial registratin statement, if the financial statements are presented in accrdance with US GAAP (rather than recnciled t US GAAP), the earliest f the three years f financial statements may be mitted if that infrmatin has nt previusly been included in a filing made under the 1933 Act r the 1934 Act. 20 This accmmdatin des nt apply t financial statements presented in accrdance with IASB IFRS unless the issuer is applying IASB IFRS fr the first time. 21 Under certain circumstances, audited financial infrmatin may cver nine t 12 mnths rather than a full fiscal year fr ne f the required years. 22 Audited financial statements must be accmpanied by an audit reprt, cvering each f the audited perids. 23 The auditr must be: Registered with the US Public Cmpany Accunting Oversight Bard (the PCAOB ); 24 and meet bth SEC and PCAOB standards fr independence. 25 The audit must have been cnducted in accrdance with PCAOB standards, althugh the Staff will nt bject if the audit reprt states that the audit was als cnducted in accrdance with hme-cuntry generally accepted accunting standards. 26 Interim Unaudited Financial Statements If a registratin statement becmes effective mre than nine mnths after the end f the last audited fiscal year, the issuer must prvide cnslidated interim financial statements. 27 3

10 Thse financial statements: may be unaudited but must be prepared in accrdance with US GAAP r IASB IFRS, 28 r lcal GAAP/nn-IASB IFRS if recnciled t US GAAP; 29 must cver at least the first six mnths f the fiscal year; shuld include a balance sheet, incme statement, statement f cash flws, statement f changes in equity and selected nte disclsures; may be in cndensed frm, as lng as they cntain the majr line items frm the latest audited financial statements and include the majr cmpnents f assets, liabilities and equity (in the case f the balance sheet), incme and expenses (in the case f the incme statement), and the majr subttals f cash flws (in the case f the statement f cash flws); and shuld include cmparative interim statements fr the same perid in the prir fiscal year, except that the requirement fr cmparative balance sheet infrmatin may be met by presenting the year-end balance sheet. 30 Selected Financial Infrmatin A registratin statement must include selected histrical financial infrmatin, cmprised f incme statement and balance sheet data fr each f the last five fiscal years (r such shrter perid as the issuer has been in peratin), with the fllwing exceptin: 31 selected financial data fr either r bth f the tw earliest years may be mitted if the issuer represents t the SEC in the review prcess that such infrmatin cannt be prvided, r cannt be prvided n a restated basis, withut unreasnable effrt r expense. 32 Financial infrmatin may be prepared based n US GAAP r IASB IFRS, r n the same basis used in the primary financial statements (that is, lcal GAAP/nn-IASB IFRS) with a recnciliatin t US GAAP. 33 As we discuss belw, that recnciliatin need nly cver (i) thse perids fr which the issuer is required t recncile its primary financial statements and (ii) any interim perids. 34 If interim unaudited financial statements are included, the selected financial data shuld be updated fr that interim perid and cmparative data frm the same perid in the prir fiscal year shuld be prvided. 35 Selected financial data shuld be presented in the same currency as the financial statements. 36 Acquired Cmpany Financial Infrmatin and Pr Frma Financial Infrmatin Depending n the size f the acquisitin and its significance t the issuer (which is measured in varius ways nt all f them intuitive), audited annual financial statements fr the mst recent ne, tw r three fiscal years, plus apprpriate unaudited interim financial statements, must be included. We discuss S-X Rule 3-05 in mre detail belw in Sectin IV.A. 4

11 Under S-X Article 11, when acquired cmpany financial statements are included in a registratin statement (and in certain ther instances) pr frma financial infrmatin must als be included. We discuss S-X Article 11 in mre detail belw in Sectin IV.A. Statement f Capitalizatin and Indebtedness A registratin statement must include a statement f capitalizatin and indebtedness. 37 Althugh the rules require the capitalizatin statement t be as f a date n earlier than 60 days prir t the date f the registratin statement, 38 the SEC staff will nt bject if a freign private issuer presents the statement as f the same date as the mst recent balance sheet required in the registratin statement. 39 If, hwever, there have been significant subsequent changes in capitalizatin (fr example, securities issuances), thse changes shuld be reflected in as adjusted clumns r ftntes t the table. 40 Rati f Earnings t Fixed Charges fr Debt If debt securities are being registered, a rati f earnings t fixed charges fr each f the last five fiscal years and fr the latest interim perid presented must be included. 41 Fr preferred securities, a rati f cmbined fixed charges and preference dividends t earnings must be shwn. 42 If the prceeds frm the sale f debt r preferred equity will be used t repay utstanding debt r t retire ther securities and the change in the rati wuld be 10 percent r greater, a pr frma rati must be included fr the mst recent fiscal year and the latest interim perid presented. 43 C. MD&A Registratin statements fr freign private issuers must cntain r incrprate by reference an Operating and Financial Review and Prspects, which cntains essentially the same infrmatin as the Management s Discussin and Analysis f Financial Cnditin and Results f Operatins sectin f a US registratin statement (the MD&A ). 44 The MD&A requirements fr US issuers are set ut in S-K Item 303. Fr purpses f this User s Guide, we refer t the Operating and Financial Review and Prspects sectin f a freign private issuer s registratin statement as the MD&A. The purpse f the MD&A is t prvide investrs with the infrmatin necessary t understand an issuer s financial cnditin, changes in financial cnditin and results f peratins. 45 It is the place where management interprets the financial statements fr investrs. A well-written MD&A will fcus n trends and uncertainties in the marketplace and will identify the key drivers f the issuer s results f peratins. It will explain the issuer s business as management sees it, frm separately discussing each segment s perfrmance t the business as a whle. It will identify and discuss the key metrics that management uses t evaluate the business perfrmance and financial health. Many MD&A sectins include a general discussin f the issuer s future prspects under a subheading such as Outlk, and sme issuers even g s far as t give specific guidance fr the fllwing quarter r the current r fllwing fiscal year. The SEC has steadily expanded the line item disclsure requirements fr the MD&A, adding specific requirements fr ff-balance sheet arrangements and lng-term cntractual bligatins, 46 certain derivatives cntracts and related-party transactins 47 as well as critical accunting plicies. 48 Drafting the MD&A sectin f the disclsure requires clse crdinatin amng the issuer s financial team, its 5

12 accuntants and cunsel, and can be time-cnsuming. Fr the SEC s mst sweeping explanatin f the purpse f MD&A disclsure, see the guidance release that became effective n December 29, D. Internal Cntrl Over Financial Reprting An IPO will invlve clse scrutiny f a cmpany s internal cntrl ver financial reprting. Once a cmpany is public, Sectin 404 f the US Sarbanes-Oxley Act f 2002 ( Sarbanes-Oxley ) Sectin 404(a) f Sarbanes-Oxley requires an assessment by management f the issuer s internal cntrl ver financial reprting, while Sectin 404(b) requires an attestatin reprt f the issuer s independent auditrs n management s assessment. Cmpliance with Sectin 404 can be a majr undertaking fr a newly public cmpany, althugh the SEC has adpted rules t allw an IPO issuer t wait until its secnd annual reprt t prvide management s Sectin 404(a) assessment and an auditr s Sectin 404(b) attestatin. 50 Under the SEC s rules, reprting freign private issuers that are large accelerated filers r accelerated filers must cmply with bth Sectin 404(a) and 404(b). 51 By cntrast, freign private issuers that are nn-accelerated filers 52 currently are required nly t prvide management s assessment f internal cntrl under Sectin 404(a), and the SEC has delayed the requirement fr them t prvide a Sectin 404(b) auditr s attestatin until fiscal years ending n r after June 15, E. Using IFRS Withut Recnciliatin The SEC has adpted rules that allw certain freign private issuers t file financial statements prepared in accrdance with IASB IFRS withut recnciliatin t US GAAP. The rules apply t annual and interim financial statements fr the respective fiscal years and perids ending after Nvember 15, 2007 that are filed with the SEC after March 4, 2008, if the fllwing cnditins are satisfied: the issuer meets the definitin f freign private issuer under Rule 3b-4 f the 1934 Act; 54 the freign private issuer files its annual reprts n Frm 20-F; 55 the issuer s financial statements d nt include any deviatins frm IASB IFRS; 56 the issuer s financial statements state unreservedly and explicitly in an apprpriate nte t the financial statements that its financial statements are in cmpliance with IASB IFRS; 57 the auditr pines n cmpliance with IASB IFRS; the auditr s reprt cntains n qualificatin relating t cmpliance with IASB IFRS; and any interim perids fully cmply with Internatinal Accunting Standard ("IAS ) If a freign private issuer meets these requirements, it may reprt in IFRS and mit a US GAAP recnciliatin frm its annual audited, interim unaudited an selected financial statements. F. Interactive Data On January 30, 2009, the SEC adpted rules that require public cmpanies and freign private issuers that prepare their financial statements in accrdance with US GAAP r IASB IFRS t supplement their filed financial statements with financial statements frmatted in extensible Business Reprting Language ( XBRL ). 59 XBRL is a frm f electrnic cmmunicatin whse main feature includes interactive electrnic tagging f bth financial and nn-financial data. The SEC has adpted a three-year phase-in prgram fr XBRL, depending n the size f the issuer. Year ne includes filers using US GAAP with a wrldwide public flat f ver $5 billin; year tw includes all ther large accelerated filers (defined in the next sectin belw) using US GAAP; and year 6

13 three includes all remaining filers. Currently, the new rules d nt apply t freign private issuers wh d nt prepare their financial statements in accrdance with US GAAP r IASB IFRS. 60 Nte that the first required filing t include XBRL wuld be a quarterly reprt n Frm 10-Q (r an annual reprt n Frm 20-F r 40-F) cntaining financial statements. Similarly, cmpanies that becme subject t SEC reprting after year three will submit their first required XBRL exhibit with their first quarterly reprt n Frm 10-Q (r annual reprt n Frm 20-F r 40-F) cntaining financial statements. Generally, nce an issuer has submitted its first XBRL exhibit with its Frm 10-Q, Frm 20-F r Frm 40-F: 61 XBRL will thereafter be required as an exhibit t a 1933 Act registratin statement it files that cntains financial statements (such as Frm S-1 r Frm F-1), but will nt be required in an initial public ffering; in additin, use f XBRL will nly be required after a price r price range has been determined and any later time when the financial statements are changed; 62 XBRL will nt be required as an exhibit t a 1933 Act registratin statement that des nt cntain financial statements, such as a Frm S-3, Frm F-3 r ther frm filed by an issuer that incrprates by reference all required financial statements frm its peridic reprts; and XBRL will nt be required as an exhibit t a 1934 Act registratin statement. Belw is a chart utlining the three-year phase-in prgram and the first reprts fr which a filer wuld be required t include interactive data fr the cmpany s financial statements. 63 Type f filer Dmestic US and freign large accelerated filers using US GAAP with wrldwide public cmmn equity flat abve $5 billin as f the end f the secnd fiscal quarter f their mst recently cmpleted fiscal year All ther large accelerated filers using US GAAP All remaining filers using US GAAP Freign private issuers with financial statements prepared in accrdance with IASB IFRS First reprt requiring XBRL-frmatted data Quarterly reprts n Frm 10-Q r annual reprts n Frm 20-F r Frm 40-F cntaining financial statements fr a fiscal perid ending n r after June 15, 2009 Quarterly reprts n Frm 10-Q r annual reprts n Frm 20-F r Frm 40-F cntaining financial statements fr a fiscal perid ending n r after June 15, 2010 Quarterly reprts n Frm 10-Q r annual reprts n Frm 20-F r Frm 40-F cntaining financial statements fr a fiscal perid ending n r after June 15, 2011 Annual reprts n Frm 20-F r Frm 40-F fr fiscal perids ending n r after June 15, 2011 G. When Des Financial Infrmatin G Stale? Understanding the timing requirements fr the prvisin f financial statements is almst as critical as understanding the scpe f the financial infrmatin required. The determinatin f when financial statements g stale is sure t cme up at the all-hands meeting and planning t have the necessary financial infrmatin prepared n time is an essential part f the ffering prcess. Amng ther cnsideratins, the SEC Staff has a plicy against cmmencing review f a filing unless the financial statements in the filing cmply with the staleness rules n the filing date. 64 7

14 The fllwing tables summarize financial statement staleness requirements, measured by the number f days between the effective date f the registratin statement (r, by analgy, the pricing date f a Rule 144A ffering if the underwriter desires t mirrr SEC requirements) and the date f the financial statements in the filing. 65 Fr any f the time frames nted belw, if the last day befre the financial statements g stale is a Saturday, Sunday r US federal hliday, Rule 417 under the 1933 Act allws the filing t be made n the next business day, thereby effectively pstpning the staleness date. Staleness f Financial Statements Staleness f Annual Audited Financial Statements The last year f audited financial statements cannt be mre than 15 mnths ld at the time f the ffering r listing, subject t the tw exceptins listed belw. 66 This means that an issuer with a December 31 fiscal year end must have its registratin statement g effective befre March 31, r else annual audited financial statements fr the year just ended must be included. In the case f a registratin statement relating t an IPO, the audited financial statements must be as f a date nt lder than 12 mnths prir t the time the dcument is filed. 67 In ther wrds, an IPO issuer with a December 31 fiscal year end cannt file a registratin statement after January 1 withut including audited financial statements fr the year just ended (r audited financial statements as f an interim date less than 12 mnths prir t the filing). The SEC will, hwever, waive this requirement, and apply the 15-mnth rule, in an IPO where the issuer is able t represent that it is nt required t cmply with this requirement in any ther jurisdictin utside the United States and that cmplying with the requirement is impracticable and wuld invlve undue hardship. 68 In the case f a registratin statement relating t an ffering f securities (i) upn the exercise f utstanding rights granted pr rata t all existing security hlders f the applicable class, (ii) pursuant t a dividend r interest reinvestment plan r (iii) upn the cnversin f utstanding cnvertible securities r upn the exercise f utstanding transferable warrants, the financial statements may be up t 18 mnths ld at the time f ffering. 69 This means that an issuer with a December 31 fiscal year end must have its registratin statement fr these types f transactins g effective befre June 30, r else annual audited financial statements fr the year just ended must be included. Staleness f Interim Unaudited Financial Statements Interim unaudited financial statements f freign private issuers d nt generally g stale after a specific perid. If a registratin statement becmes effective mre than nine mnths after the end f the last audited fiscal year (e.g., September 30, in the case f an issuer with a December 31 fiscal year end) the issuer must prvide unaudited interim financial statements either in accrdance with, r recnciled t, US GAAP, r in accrdance with IASB IFRS, in either case cvering at least the first six mnths f the year. Hwever, if an issuer publishes interim financial statements that are mre current than thse required, it must include the mre current infrmatin in its registratin statement. 70 Fr example, if an issuer 8

15 with a fiscal year ending December 31 publishes first quarter infrmatin and des a securities ffering in July, it must include the first quarter infrmatin in its registratin statement. The mre current interim financial infrmatin (the first quarter infrmatin in the example abve) generally need nt be recnciled t US GAAP. Hwever, except fr financial infrmatin prepared in accrdance IASB IFRS, a narrative explanatin f differences in accunting principles shuld be prvided, and material new recnciling items shuld be quantified. 71 H. Recnciliatin t US GAAP 1. Annual Audited and Interim Unaudited Financial Statements Recnciliatin Annual Audited and Interim Unaudited Financial Statements Recnciliatin Requirements Annual and Interim Financial Statements Annual audited and interim unaudited financial statements in a registratin statement may be prepared using either US GAAP, IFRS r lcal GAAP. 72 If lcal GAAP r nn-iasb IFRS is used in the preparatin f the financial statements, the cnslidated financial statements (bth annual and interim) must include a recnciliatin t US GAAP. 73 Recnciliatin cmprises bth disclsure f the material variatins between lcal GAAP/nn-IASB IFRS, n the ne hand, and US GAAP, n the ther hand, as well as a numerical quantificatin f thse variatins. 74 In the case f registered fferings, the recnciliatin must meet Item 18 f Frm 20-F (discussed in mre detail belw). A freign private issuer registering fr the first time must recncile nly the tw mst recently cmpleted fiscal years (and any interim perid). 75 Items that frequently require discussin and quantificatin as a result f the recnciliatin requirements include stck cmpensatin, restructuring charges, impairments, deferred r capitalized csts, investments, freign currency translatin, deferred taxes, pensins, derivatives, cnslidatin, asset retirement bligatins, research and develpment and revenue recgnitin. 2. Selected Financial Infrmatin Recnciliatin Selected Financial Infrmatin Recnciliatin Requirements Selected Financial Infrmatin Required selected financial infrmatin prepared in lcal GAAP r nn-iasb IFRS must be recnciled t US GAAP. 76 A recnciliatin t US GAAP f lcal GAAP r nn-iasb IFRS selected financial infrmatin must cver (i) thse perids fr which the issuer is required t recncile its primary financial statements 9

16 and (ii) any interim perids. 77 S, fr example, a first-time registrant reprting in lcal GAAP r nn-iasb IFRS wuld nly need t recncile the mst recent tw years f its selected financial infrmatin (and any interim perids), and culd present the remaining three years in lcal GAAP r nn-iasb IFRS withut recnciliatin. If a first-time registrant prepares its primary financial statements in accrdance with US GAAP (rather than recnciling t US GAAP), it may present five years f selected financial infrmatin under lcal GAAP r nn-iasb IFRS withut recnciliatin if US GAAP financial data is nt available fr the ldest three years MD&A A freign private issuer s MD&A disclsure shuld fcus n its primary financial statements, whether thse statements are prepared in accrdance with US GAAP, lcal GAAP IASB IFRS r nn-iasb IFRS. 79 T the extent thse statements are prepared under lcal GAAP r nn-iasb IFRS, a discussin shuld be included f the recnciliatin t US GAAP and any differences between lcal GAAP/nn-IASB IFRS and US GAAP nt therwise discussed in the recnciliatin and needed fr an understanding f the financial statements as a whle. 80 I. Audit Reprts Audited financial statements must be accmpanied by an audit reprt, cvering each f the audited perids. 81 If the auditrs refuse t prvide a reprt r if the reprt cntains qualificatins, r if the auditrs disclaim an pinin, full disclsure f the refusal, qualificatins r disclaimer must be made. 82 The SEC will generally nt accept a disclaimer f an pinin r an audit reprt cntaining a qualificatin. 83 Nte that the audit reprt must state that the audit has been cnducted in cmpliance with PCAOB standards, althugh the SEC Staff will nt bject if the audit reprt states that the audit was als cnducted in accrdance with hme-cuntry generally accepted accunting standards. 84 In additin, an accunting firm (US r nn-us) that prepares r issues any audit reprt with respect t any issuer, r plays a substantial rle in the preparatin r furnishing f an audit reprt with respect t any issuer, must be registered with the PCAOB. 85 J. Currency Translatin; Exchange Rates Freign private issuers may state amunts in their financial statements in any currency they deem apprpriate (the reprting currency ), 86 althugh (except fr cmpanies perating in a hyperinflatinary envirnment) peratins shuld generally be measured using the currency f the primary ecnmic envirnment t measure transactins. 87 The reprting currency must be prminently disclsed n the face f the financial statements. 88 The issuer must als disclse if dividends will be paid in a different currency and any material exchange restrictins r cntrls relating t the reprting currency, the currency f the issuer s dmicile r the currency in which dividends will be paid. 89 If the reprting currency is nt the US dllar, US dllar-equivalent financial statements r cnvenience translatins are nt permitted t be included, except that an issuer may present a translatin f the mst recent fiscal year and any subsequent interim perid. 90 The exchange rate used fr any cnvenience translatins shuld be as f the mst recent balance sheet date included in the registratin statement, except where the exchange rate f the mst recent practicable date wuld yield a materially different result

17 In additin, issuers that d nt prepare their financial statements in US dllars must prvide disclsure f the exchange rate between the reprting currency and the US dllar. 92 That disclsure shuld shw: the exchange rate at the last practicable date; the high and lw exchange rates fr each mnth during the previus six mnths; and fr the five mst recent fiscal years, and any subsequent interim perid cvered by the financial statements, the average rates fr each perid (based n the average exchange rates n the last day f each mnth during the perid). 93 The exchange rate t use fr these purpses is the nn buying rate in New Yrk City fr cable transfer in nn-us currencies as certified fr custms purpses by the Federal Reserve Bank f New Yrk. 94 K. Additinal Financial Infrmatin That Is Typically Included In additin t the frmal requirements f Frm 20-F and Regulatin S-X, it is custmary t include certain ther infrmatin in the ffering dcument that may be material r cnvenient fr investrs in cnsidering the financial cnditin f the issuer. The three mst cmmn examples are described belw. 1. Other Financial Data and Nn-GAAP Financial Measures A page f summary financial data is rutinely included in the summary bx in the ffering dcument. Althugh there are n specific line item requirements fr this key marketing page, it usually cntains incme statement, balance sheet and ther financial data fr the last three t five fiscal years and the mst recent interim perid (as well as the cmparable interim perid in the prir year) cmparable t that required n the Selected Financial Data page that appears later in the disclsure dcument. Where apprpriate frm either a disclsure r marketing perspective, additinal peratinal metrics are als included in the summary under a heading such as Other Financial Data. These metrics will vary with the type f issuer and will be selected based n the criteria that management and the investment cmmunity mnitr t evaluate perfrmance r liquidity. Typical examples include cmparable stre sales data fr a retailer, capital expenditures fr a manufacturer and subscriber numbers fr a cable televisin cmpany. If nn-gaap financial measures are included in the summary (such as EBITDA r Adjusted EBITDA ) this is where they usually appear Recent Financial Results If a significant amunt f time has passed since the mst recent financial statements included in the ffering dcument, it may be apprpriate t include a summary f recent financial results in the summary bx. Examples f recent results disclsures are mst cmmn after a quarter r half year (depending n hw frequently the issuer reprts) is cmpleted but befre financial statements cncerning that quarter/half year have becme available. The issuer and the underwriters will want t tell the market as sn as pssible abut any psitive imprvement in perating trends at the cnclusin f a gd quarter/half year. If the recent results are negative, n the ther hand, recent results disclsure may be advisable t avid any negative surprises fr investrs when the full quarterly/half yearly numbers becme available. Fr example, the issuer may be aware that its sales are trending dwn in the current perid, r that significant charges will be taken in cnnectin with an acquisitin after it clses. Even if Wall Street analysts may be anticipating such an event, it is preferable t disclse this infrmatin in the ffering dcument itself. At the rad shw meetings, prspective investrs will be asking abut the results fr a quarter/half year just r almst cmpleted and presenting infrmatin in the ffering dcument will facilitate a discussin f these results

18 3. Recent Develpments T the extent material, the likely cnsequences f material recent develpments may be disclsed in the summary bx r the MD&A. Fr example, it is custmary t discuss a material recent r prpsed acquisitin in the MD&A sectin f the ffering dcument, whether r nt audited financial statements f the acquired r t-be-acquired business are required t be presented. This practice will ften result in a discussin f the impact f pending r recent acquisitins n margins, debt levels, etc., in a sectin f the MD&A labeled Overview, Impact f the Acquisitin r a similar title. The textual disclsure may include a discussin f any special charges r anticipated synergies expected t result frm the acquisitin r ther pending event. IV. Additinal Financial Infrmatin Fr Certain Specific Situatins A. Recent and Prbable Acquisitins 1. Overview In additin t financial statements f the issuer, registratin statements generally require inclusin f audited financial statements fr a significant acquisitin f a business that has taken place 75 days r mre befre the ffering, r, in the case f the mst material acquisitins, as sn as the acquisitin becmes prbable. 97 These requirements can be fund in S-X Rule In additin, where a material acquisitin has ccurred r is prbable, pr frma financial infrmatin cmplying with S-X Article 11 fr the mst recent fiscal year and the mst recent interim perid may als be required in the registratin statement. 2. Definitin f Business The SEC defines the term business t include an perating entity r business unit, but excludes machinery and ther assets that d nt generate a distinct prfit r lss stream. 98 It is imprtant t nte that the definitin f a business under US GAAP (and ptentially ther GAAPs) differs frm the SEC s definitin. Accrdingly, an acquisitin may be a business under US GAAP but nt fr SEC purpses, and vice versa. 3. Definitin f Prbable The term prbable is interpreted t mean mre likely than nt. The SEC staff has taken the general view that an acquisitin becmes prbable at least upn the signing f a letter f intent Significance Tests Whether financial statements fr recent and prbable acquisitins must be included in the filing als depends upn the significance f the acquisitin. Significance f an acquired business is evaluated under S-X Rule 3-05 based upn three criteria (which in turn are derived frm S-X Rule 1-02(w)): the amunt f the issuer s investment in the acquired business cmpared t the issuer s ttal assets; the ttal assets f the acquired business cmpared t the issuer s ttal assets; and the pre-tax incme 100 frm cntinuing peratins f the acquired business cmpared t the issuer s pre-tax incme frm cntinuing peratins; in each case, based n a cmparisn between the issuer s and the target s mst recent annual audited financial statements. Hwever, if the issuer has made a significant acquisitin subsequent 12

19 t its latest fiscal year end and filed a reprt n Frm 8-K that included all f the financial statements fr the perids required by S-X Rule 3-05 (r included thse financial statements in a nn-ipo registratin statement), the test fr a subsequent acquisitin may, at the issuer s ptin, be based upn the S-X Article 11 pr frma amunts fr the issuer s latest fiscal year included in the Frm 8-K (r the registratin statement) rather than the histrical amunts fr the latest fiscal year. 101 It remains an pen questin whether a Frm 6-K submissin by a freign private issuer will accmplish the same result. Acquisitins f related businesses are treated as a single acquisitin fr purpses f the significance tests. Businesses are cnsidered related if they are wned by a cmmn seller r under cmmn management, r where the acquisitin f ne business is cnditined upn the acquisitin f each ther business r a single cmmn event. 102 Generally: if the acquired business exceeds 20 percent f any f the three significance criteria, then ne year f audited financial infrmatin is required, as well as the interim financial infrmatin that wuld be required under S-X Rules 3-01 and 3-02; 103 if it exceeds 40 percent, then tw years f audits and the apprpriate interim financial infrmatin are required; 104 and if it exceeds 50 percent f any f the three criteria (r if securities are being registered t be ffered t the security hlders f the acquired business), three years f audited and the apprpriate interim financial infrmatin are required Summary f Financial Statement Requirements Financial Statements Required in Cnnectin with Acquisitins The fllwing table summarizes the general rules fr an acquisitin that ccurred mre than 75 days befre the ffering. Acquisitin Scenari 1. Individual acquisitin at r belw the 20 percent significance level. 2. Individual acquisitin (r multiple acquisitins f related businesses, as described abve) in excess f the 20 percent significance level, but nt abve the 40 percent level. 3. Multiple acquisitins f unrelated businesses belw the 20 percent significance level individually, but aggregating in excess f the 50 percent level f significance. 4. Individual acquisitin (r multiple acquisitins f related businesses, as described abve) in excess f the 40 percent significance level, but nt abve the 50 percent level. Reprting Requirement 1. N requirement t include audited r interim financial statements. 2. Audited financial statements fr the mst recent fiscal year f the acquired business must be included. Unaudited interim financial statements may need t be included, depending n the time f year that the ffering takes place. 3. Audited financial statements fr the mst recent fiscal year will be required fr a substantial majrity f the individually insignificant acquisitins. Unaudited interim financial statements may need t be included, depending n the time f year that the ffering takes place. 4. Audited financial statements fr the tw mst recent fiscal years f the acquired business (including ne balance sheet) must be included. Unaudited interim financial statements may need t be included, 13

20 5. Individual acquisitin abve the 50 percent significance level. depending n the time f year that the ffering takes place. 5. Audited financial statements fr the three mst recent fiscal years f the acquired business (including tw balance sheets) must be included. This requirement als applies t acquisitins f this size that have clsed within the 75-day perid prir t the ffering r are prbable at the time f the ffering. Hwever, audited financial statements fr the earliest f the three fiscal years required may be mitted if net revenues reprted by the acquired business in its mst recent fiscal year are less than $50 millin. Unaudited interim financial statements may need t be included, depending n the time f year that the ffering takes place. Nte that: The permitted age f financial statements f an acquired r sn-t-be acquired business is generally determined by lking t the staleness rules that apply t its financial statements (rather than the staleness rules applicable t the financial statements f the acquiring cmpany). 106 In ther wrds, yu need t determine whether the acquired cmpany is, fr example, a large accelerated filer, an accelerated filer r an initial filer, and then analyze the dates n which its financial statements g stale under the rules summarized abve. 107 Belw the 50 percent significance level, n audited financial statements are required in the ffering dcument fr prbable acquisitins r fr cmpleted acquisitins cnsummated up t 74 days befre the date f the ffering. 108 The cmmitment cmmittees f sme financing surces may, hwever, require at least a ne-year audit f the acquired cmpany in this situatin tgether with histrical pr frma financial infrmatin, even if the 74-day grace perid has nt yet expired. When a freign business 109 is acquired, S-X Rule 3-05(c) effectively allws fr the inclusin f lcal GAAP/nn-IASB IFRS financial statements withut recnciliatin t US GAAP when the acquired business is belw the 30 percent level fr all f the significance tests; at r abve 30 percent, recnciliatin t US GAAP must be included fr the mst recent tw fiscal years and interim perids (althugh this recnciliatin need nly meet the requirements f Item 17, nt Item 18, f Frm 20-F). 110 N US GAAP recnciliatin is required fr the inclusin f financial statements f an acquired freign business where that business uses IASB IFRS. 111 The amunts used fr these calculatins must be determined n the basis f US GAAP (fr issuers that file their financial statements in accrdance with r prvide a recnciliatin t US GAAP) r IASB IFRS (fr freign private issuers that file their financial statements in accrdance with IASB IFRS) rather than lcal GAAP r nn-iasb IFRS Exceptins t the Financial Statement Requirements fr Acquired Businesses There are a number f exceptins t the requirement t prvide separate financial statements f acquired businesses. 14

21 Exceptins t the Financial Statement Requirements fr Acquired Businesses Exceptins t the Requirement t Prvide Financial Statements f Acquired Businesses Separate financial statements fr an acquired business d nt need t be presented nce the perating results f the acquired business have been included in the issuer s audited cnslidated financial statements fr at least nine mnths unless the financial statements have nt been previusly filed by the issuer r unless the acquired business is f such significance t the issuer that missin f such financial statements wuld materially impair an investr s ability t understand the histrical financial results f the registrant. 113 Where the acquired business met at least ne f the significance tests at the 80 percent level, the incme statements f the acquired business shuld nrmally cntinue t be furnished. 114 This rule means that financial statements fr majr acquisitins at the highest level f materiality may be required fr subsequent securities fferings, even thse unrelated t the financing f the riginal acquisitin. A single audited perid f 9, 10 r 11 mnths may cunt as a year fr an acquired business in certain circumstances Industry Rll-Ups and Operating Real Estate Staff Accunting Bulletin N. 80 ( SAB 80 ) prvides a special interpretatin f S-X Rule 3-05 fr initial public fferings f businesses that have been built by the aggregatin f discrete businesses that remain substantially intact after acquisitin (i.e., industry rll-ups). SAB 80 (which was recdified, with slight mdificatins, in Staff Accunting Bulletin N. 103) allws first-time issuers t cnsider the significance f businesses recently acquired r t be acquired based n the pr frma financial infrmatin fr the issuer s mst recently cmpleted fiscal year. While cmpliance with this interpretatin requires an applicatin f SAB 80 s guidance and examples n a case-by-case basis, the plicy is t allw currently insignificant business acquisitins t be excluded frm the financial statement requirements while still ensuring that the registratin statement will include nt less than three, tw and ne year(s) f financial statements fr nt less than 60 percent, 80 percent and 90 percent, respectively, f the cnstituent businesses f the issuer. 116 The acquisitin r prbable acquisitin f perating real estate prperty is subject t a different set f disclsure requirements under S-X Rule 3-14, which addresses incme-prducing real estate such as apartment huses and shpping malls. In cmparisn, where real estate is merely incidental t the service prvided by a business, as fr example in the case f a htel, the regular S-X Rule 3-05 requirements wuld apply. S-X Rule 3-14(a) requires that audited incme statements must be prvided fr the three mst recent fiscal years fr any such acquisitin r prbable acquisitin that wuld be significant (generally, that wuld accunt fr 10 percent r mre f the issuer s ttal assets as f the last fiscal year end prir t the acquisitin). S-X Rule 3-14(a) als requires certain variatins frm the typical frm f incme statement and allws fr nly ne year f incme statements t be prvided if the prperty is nt acquired frm a related party and certain additinal textual disclsure is made MD&A Whenever histrical financial statements f an acquired business (r prbable acquisitin) are included in the ffering dcument, the registrant will need t cnsider whether a separate MD&A sectin discussing thse financial statements is apprpriate. Althugh there is n specific line item requiring that a secnd MD&A be included, it is nt uncmmn fr registrants t interpret 1933 Act Rule t require a full discussin and analysis f the financial statements f an acquired business (r prbable acquisitin), particularly where it exceeds 50 percent n any f the three significance criteria discussed abve. 15

22 9. Pr Frma Financial Infrmatin As nted abve, where a material acquisitin has ccurred r is prbable that wuld trigger the need fr acquired business financial statements under S-X Rule 3-05, pr frma financial infrmatin cmplying with S-X Article 11 must als be included. Pr frma financial infrmatin is intended t illustrate the cntinuing impact f a transactin, by shwing hw the specific transactin might have affected histrical financial statements had it ccurred at the beginning f the issuer s mst recently cmpleted fiscal year. In particular, S-X Article 11 requires: 119 a cndensed pr frma balance sheet 120 as f the end f the mst recent perid fr which a cnslidated balance sheet f the issuer is required, unless the transactin is already reflected in that balance sheet; 121 and a cndensed pr frma incme statement 122 fr the issuer s mst recently cmpleted fiscal year and the mst recent interim perid f the issuer, unless the histrical incme statement reflects the transactin fr the entire perid. 123 S-X Article 11 als requires pr frma financial infrmatin in a number f ther situatins, such as: certain significant dispsitins that are nt fully reflected in the financial statements f the issuer included in the prspectus; 124 acquisitin f certain investments accunted fr under the equity methd; 125 and ther events r transactins fr which disclsure f pr frma financial infrmatin wuld be material t investrs. 126 S-X Article 11 prvides extensive specific requirements fr the cntent f pr frma financial infrmatin, including thse set ut in the fllwing table. 127 Pr Frma Financial Infrmatin Certain Key Cntent Requirements Cntent Requirements Pr frma adjustments related t the pr frma cndensed incme statement must include adjustments which give effect t events that are: directly attributable t the transactin; expected t have a cntinuing impact n the issuer; and factually supprtable. 128 As a result, adjustments fr expected future synergies and cst savings that are nt expressly mandated by the acquisitin dcuments will generally nt be permitted. Pr frma cndensed incme statements shuld be presented using the issuer s fiscal year end. 129 If the mst recent fiscal year end f the acquired cmpany differs frm that f the issuer by mre than 93 days, the acquired cmpany s fiscal year end shuld be brught up t within 93 days f the issuer s fiscal year end (if practicable). 130 Pr frma financial infrmatin shuld be based n the accunting used by the issuer. 131 Hwever, if the issuer s primary financial statements are prepared using lcal GAAP r nn-iasb IFRS, then pr frma financial infrmatin shuld be recnciled t US GAAP 132 r prepared n a US GAAP basis. 133 Recnciliatin f pr frma 16