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. CONFORMITY WITH U.S. GAAP 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. GUIDANCE FOR PRACTITIONERS 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. …