SEC Staff Seeing Misreporting Of Joint Venture Entities, Release Says

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Jan. 26 — The Securities and Exchange Commission has “observed instances” in which joint venture entities were misreported as foreign businesses, according to the Center for Audit Quality.

In a Jan. 23 release on issues discussed between the SEC staff and the CAQ's International Practices Task Force during a November meeting, CAQ said that the staff has seen instances in which joint venture entities not incorporated in the U.S. that were 50 percent owned by a U.S. company and 50 percent owned by a non-U.S. resident or citizen were reported as if they were “foreign businesses” under Regulation S-X Rule 3-09.

The provision requires separate financial statements for certain subsidiaries.

CAQ also noted that in its review of the SEC's disclosure requirements, the staff is looking at ways to improve the disclosures provided to investors about non-issuer entities such as acquirees and investees.

Majority Ownership 

According to the CAQ release, the SEC staff said the joint venture entities in question did not qualify as foreign businesses because they were not majority-owned by non-U.S. citizens or residents, as required under Reg S-X.

If a joint venture that is not a foreign business is required to provide financial statements under Rule 3-09 or Rule 3-05, such statements must be prepared under U.S. generally accepted accounting principles or reconciled to U.S. GAAP under Item 18 of Form 20-F for all years, CAQ said.

Meanwhile, the Division of Corporation Finance is reviewing the SEC's disclosure requirements with an eye to making them more effective. 

According to the CAQ release, in its review of disclosures about non-issuer entities, the staff “is exploring whether more emphasis should be given to pro forma rather than historical information. In addition, the staff is exploring potential options to change the way significance is tested.”

CAQ is a nonprofit group that advocates for high-quality auditing standards. It said its meeting releases “are not authoritative positions or interpretations issued by the SEC or its staff.”

The CAQ release is available at

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