Be careful what you call a “foreign business.” The Securities and Exchange Commission says it is seeing too many instances of companies trying to call their joint ventures “foreign businesses” for financial reporting purposes. Perhaps that’s because the reporting requirements might be easier to meet.

In a joint meeting of SEC staff and the Center for Audit Quality’s International Practices Task Force, SEC staff said they see situations where joint ventures that were 50 percent owned by a U.S. company and 50 percent owned by someone who is not a citizen or resident of the United States reported as “foreign businesses.” The SEC says in such cases, the non-U.S. investor didn’t consolidate the joint venture but followed equity method accounting to represent the non-U.S. ownership interest.

In a summary of the meeting, which took place in late November but the highlights of which were just published, the CAQ says the staff noted such entities do not qualify as foreign businesses because they do not meet the criteria of Regulation S-X that says they are majority-owned by someone who is not a resident or citizen of the United States.

The SEC staff said if financial statements of a joint venture that does not qualify as a “foreign business” are required, then they must be prepared under U.S. GAAP or reconciled to U.S. GAAP via Form 20-F for all years. By comparison, if the entity qualified as a foreign business, those financial statements could be presented under a different item of Form 20-F, which limits the reconciliation to U.S. GAAP for acquiree or investee entities whose significance is greater than 30 percent. And if the financial statements are prepared under International Financial Reporting Standards unaltered by any home-country rules, they can be presented without reconciliation, regardless of significance.

The SEC staff also noted if an acquiree or investee that presents financial statements under IFRS as issued by the International Accounting Standards Board does not qualify as a foreign business, but does meet the definition of a foreign private issuer, the SEC will consider requests for relief from the US GAAP reconciliation requirement.

In addition to joint venture and foreign business criteria, SEC staff and the task force discussed growing questions around currency and inflation issues, with staff offering its views on whether various countries might be regarded as “highly inflationary” for financial reporting purposes. The discussions addressed situations in Argentina, Belarus, Iran, Malawi, Sudan, South Sudan, and Venezuela.

 

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