SEC Staff Revises its FAQs on Internal Control Reporting; Adds 4 New FAQs for Foreign Private Issuers

Scope of ICFR Evaluation Should be Based on Primary Financial Statements (New FAQ 12). Management of an FPI that files home country accounts with a US GAAP reconciliation should plan and scope its ICFR evaluation based on the primary financial statements (i.e., home country GAAP). However, the evaluation should consider controls related to the preparation of the US GAAP reconciliation.

Reference to “Interim Financial Statements” in Material Weakness Definition Does Not Apply to FPIs (New FAQ 13). Since home country requirements vary significantly and there are no uniform requirements requiring FPIs to file periodic interim financial statements, the reference to “interim financial statements” in the definition of material weakness does not apply to FPIs (unless they are filing on domestic forms).

Treatment of Entities for ICFR Evaluation Purposes Should Track Treatment in Primary Financial Statements (New FAQ 14). If an entity is treated differently under primary GAAP (i.e., home country GAAP) than it is in the US GAAP reconciliation (e.g., consolidated in the home country accounts but equity method under US GAAP), the ICFR evaluation should be based on how the entity is treated in the primary financial statements.

Scope Limitation Permitted for Certain Proportionately Consolidated Entities (New FAQ 15). Some FPIs are required under home country GAAP to account for certain entities on a proportionate consolidation basis. Management’s ICFR report ordinarily should include all consolidated entities, even if they are consolidated on a proportionate basis. However, in cases where the company does not have the right or authority to evaluate internal controls of the proportionately consolidated entity and lacks the access necessary in practice to make that evaluation, the proportionately consolidated entity’s internal controls may be excluded from the scope of management’s assessment. (Management must still evaluate controls over the recording of amounts relating to the proportionately consolidated entity in the company’s consolidated financial statements). The FAQ specifies certain disclosure that must be provided regarding the exclusion of the internal controls of these entities from the scope of the ICFR assessment.