The director of Corp Fin, Erik Gerding, and the SEC Chief Accountant, Paul Munter, have issued a new “Statement on the Application of IFRS 19, Subsidiaries without Public Accountability: Disclosures, in Filings with the SEC.” IFRS 19 permits reporting company subsidiaries “that do not have public accountability” to provide reduced disclosures in financial statements prepared under IFRS. But, Gerding and Munter assert, when financial statements that apply IFRS 19 are included in SEC filings, they believe that additional disclosures may well be necessary because the financial statements are “intended for use by investors in our public capital markets for making investment and voting decisions.”
Under SEC rules, foreign private issuers may file financial statements that are prepared in accordance with IFRS or their home country GAAP with reconciliation to U.S. GAAP. SEC rules also specify that preparing financial statements in accordance with these frameworks is “the minimum requirement”; registrants are “required to consider whether additional material information is needed so that the required financial statements are not misleading.” Similarly, IFRS 19 also specifies that an eligible sub that applies the exception “must provide additional material disclosures when it determines that information is necessary to enable financial statement users to understand the impact of transactions, events, and conditions on the subsidiary’s financial position and financial performance.”
Although, historically, the SEC has generally been supportive of many initiatives to reduce regulatory burdens on FPIs, in this case, Gerding and Munter believe that disclosures that are “fit for other purposes for entities without public accountability may not be sufficient to satisfy the needs of investors in the U.S. public securities markets.” Accordingly, the requirement in IFRS 19 to consider whether additional disclosures are necessary is “critical for investor protection purposes in U.S. public securities markets.”
To illustrate, Munter and Gerding look to the example of a merger between a foreign private issuer and a foreign business that qualifies for and elects to apply IFRS 19. The foreign business is required by IFRS 19 to consider whether additional material disclosures are necessary. In its SEC filings related to the transaction, the FPI must include the financial statements of the foreign business, the purpose of which is “to help investors better understand the nature and extent of the business being acquired and the resulting combined entity when making their voting or investment decisions.” In effect, “the needs of investors would likely be similar to the needs of investors in an entity with public accountability. In such a scenario, even though the foreign business may be eligible to and has elected to apply IFRS 19 in order to benefit from reduced disclosures, it should carefully consider whether it is nevertheless required to include additional material disclosures from other IFRS Accounting Standards to achieve the objectives of financial reporting given the use of those financial statements in a filing with the SEC.” [Emphasis added.]
Since the Statement does not go into much detail on the extent of the additional disclosures that may be required, companies may want to discuss the issue with the staff, which the Statement invites.
