Financial Reporting for Foreign Private Issuers Before the SEC
By: Howard Jiang
Under the current rules of the US Securities and Exchange Commission (SEC), foreign issuers are allowed to use International Financial Reporting Standards (IFRS) financial statements in their registration statements and periodic reports (17 CFR Parts 210, 230, 239 and 249). This substantially reduces the burden on foreign private issuers compared to complying with US Generally Accepted Accounting Principles (GAAP) auditing standards. Compliance with US GAAP requires engaging a US Public Company Accounting Oversight Board (PCAOB) qualified auditing team and applying US accounting standards, which in many respects are very different from those of the foreign private issuer’s home country or IFRS. This typically increases the complexity and costs associated with the auditing process. The use of US GAAP also entails the use of the US dollar as the presentation currency, often distorting the actual business operation data generated in local currencies due to exchange rate fluctuations.
IFRS is a set of accounting standards developed by the International Accounting Standards Board (IASB) under the aegis of the IFRS Foundation to harmonize the differing national accounting standards and to provide consistency in accounting treatment of accounting items and issues globally. Currently over 125 jurisdictions are requiring IFRS or IFRS compliant reporting systems, with many others, such as the US, allowing use of IFRS. The Financial Accounting Standards Board (FASB) is in the process of harmonizing US GAAP with IFRS.
The foreign issuer has two choices in currency presentation for its IFRS financials under the current SEC rules. It can use the US dollar as well as a local currency, such as Euro and Renminbi. However, when the US dollar is used as the constant presentation currency, the local currency figures can only be presented alongside the data expressed in US dollars as reference currency data in the interim financials and the last audited fiscal year financial statement. When a local currency other than the US dollar is used, then only a convenience US dollar translation of the local currency data can be used, with required explanation of the application of the relevant exchange rate.
Still, the foreign private issuer is not completely free from US GAAP under the current SEC rules. The use of interim financials (typically unaudited, but reviewed by auditors) in their registration statements still requires that the auditors use US GAAP treatment standards, and that they themselves be qualified before the PCAOB in the US. This point should not be overlooked, as it can be very problematic for the presentation of interim financials before the SEC. It means that in the case of using interim financials in a registration statement, you have to have an auditing team which is qualified before the PCAOB, largely requiring that the foreign issuer engage an auditing team which includes both foreign and US qualified member firms or affiliates.
Another important aspect for preparing a registration statement for an IPO by a foreign private issuer is the staleness or timeliness of its financials. For a foreign private issuer filing a registration statement on Form F-1, the audited financial statements “go stale” 15 months after the date of the audited balance sheet. Pursuant to the requirements of Form F-1, a foreign private issuer should furnish financial statements meeting the requirements of Regulation S-X (Form F-1 Item 4.b., Form 20-F Item 18, Form 20-F 17(a)). Regulation S-X provides that any foreign private issuer may file financial statements whose age is specified in Item 8.A of Form 20-F (Rule 3-12(f) of Regulation S-X). Item 8.A.4 of Form 20-F requires that the last year of audited financial statements may not be older than 15 months at the time of the offering or listing. In calculating the 15‑month requirement for the age of financial statements, the age should be determined based on the period of time that has elapsed between the date of the balance sheet and “the time of the offering or listing,” which means the time the registration statement is declared effective. This is a very important aspect to take into consideration for planning and scheduling an IPO, as it may create major delays if the financial statements become stale prior to the registration statement being declared effective.
For more information on the foregoing or the process for taking a foreign private issuer public in the United States, please contact Howard Jiang (firstname.lastname@example.org; 212.714.3060; ) or any member of our Corporate and Securities or International Practice Groups.