This supplement is for Canadian cross-border issuers that make filings with the SEC. It accompanies and should be read with our client memo no. 2003-19T, which discusses proposed changes to the continuous disclosure obligations of reporting issuers in Canada. This supplement discusses the ability of Canadian cross-border issuers to file U.S. GAAP financial statements under proposed National Instrument 52-107 – Acceptable Accounting Principles, Auditing Standards and Reporting Currency , and to file SEC forms in Canada under relief granted in National Instrument 51-102 – Continuous Disclosure Obligations.
A Canadian issuer will be able to file U.S. GAAP financial statements and file SEC forms in Canada if it has a class of securities that is registered under section 12 of the U.S. Securities Exchange Act of 1934 or is required to file reports under section 15(d) of the 1934 Act, and is not registered as an investment company under the U.S. Investment Company Act of 1940.
U.S. GAAP Financial Statements
Canadian cross-border issuers will be permitted to file financial statements prepared in accordance with U.S. GAAP. In the first two years of reporting under U.S. GAAP, the issuer will be required to (a) explain the material differences between Canadian and U.S. GAAP as they relate to recognition, measurement and presentation; (b) quantify the effect of material differences between Canadian and U.S. GAAP, including a tabular reconciliation of net income; and (c) provide disclosure consistent with Canadian GAAP to the extent that this disclosure is not already reflected in the financial statements.
If the issuer changes to U.S. GAAP financial statements mid-year, the previously filed Canadian GAAP interim financial statements must be restated in accordance with U.S. GAAP and filed with the Canadian securities regulators. The financial statements may also be audited under U.S. GAAS. The auditor’s report must identify the auditing standards used to conduct the audit and the accounting principles used to prepare the financial statements.
Although this proposal has not yet been formally adopted, securities regulators have indicated in CSA Staff Notice 52-305 – Optional Use of U.S. GAAP and U.S. GAAS by SEC Issuers, that they will grant exemptions on a case-by-case basis to permit issuers to use U.S. GAAP/GAAS financial statements for fiscal years beginning on or after January 1, 2003. Please refer to our client memo no. 2003-10T dated May 2, 2003 for a further discussion of this relief. At this time, many Canadian corporate statutes still require that Canadian GAAP/GAAS financial statements be presented to the shareholders. We expect that the impediments in the Canada Business Corporations Act and the Business Corporations Act (Ontario) will be removed shortly.
- MD&A – A Canadian cross-border issuer that prepares its annual or interim MD&A in accordance with Item 303 of Regulation S-K or S-B under the 1934 Act will be permitted to file that document in Canada in lieu of the Canadian form of MD&A. The document must be filed by the earlier of the date the SEC Issuer is required to file its financial statements in Canada and the date the document is filed with the SEC. In certain cases, the SEC Issuer must also prepare and file a supplement that restates any U.S. GAAP information to Canadian GAAP. This supplement is required only for those periods where a reconciliation to Canadian GAAP is required.
- AIFs – A Canadian cross-border issuer will be permitted to file its Form 10-K, Form 10-KSB or Form 20-F in Canada in lieu of the Canadian form of AIF. The applicable U.S. form must be filed by the earlier of 90 days after the end of the issuer’s financial year and the date the form is filed with the SEC.
- Documents filed with the SEC – Any document filed with or furnished to the SEC that contains information not included in filings made under another requirement of Canadian securities legislation must also be filed in Canada.
This article is a general discussion of certain legal and related developments and should not be relied upon as legal advice.