The month's MarketWatch briefs from the ACT look at new reporting ideas from the SEC, including a replacement of Edgar, roadmap to IFRS, the concept of materiality, pre-emption charges and amendments to IAS 39.

INTRODUCTION

By Martin O’Donovan, ACT Assistant Director, Policy and Technical

Risk management and counterparty risk in particular has been top of the list of issues for many months now. Unfortunately, the markets have moved on and the priority now must be to do some thinking ahead of time as to how to deal with a counterparty failure and the administration and legal processes that might come into play. The influence of contagion from the US markets is clear to see, but I assure you that it is pure coincidence that many of the technical news items that appear here this month are from the SEC.

The ACT has published its borrower's guide to the Loan Market Association (LMA) facilities agreement for leveraged transactions on the ACT website. Like the ACT's guide to the LMA documentation for investment-grade borrowers, the new guide explains the LMA's standard agreement in great detail. It flags those clauses where a borrower may want to negotiate improved terms, giving the rationale to support the case. Even borrowers who are not engaged in a leveraged transaction will benefit from the guide since there can be a cross-over of terms into other loan agreements for deals that are not leveraged.

The SEC is to amend disclosure requirements for foreign companies. The rule changes will be put through to make foreign companies' disclosures available to US investors more quickly, without cost, and in English. After a transitional period, foreign reporting companies will be required to file their annual reports with the SEC two months earlier (within four rather than six months of the end of the financial year). Foreign companies without SEC-registered securities will need to give investors instant electronic access to foreign company disclosure documents on the internet (in English) rather than submit paper disclosures.

The SEC has unveiled an interactive company data system which will eventually replace the EDGAR system that stores all SEC company filings. The new system is called IDEA, short for Interactive Data Electronic Applications. Currently, most SEC filings are available only in government-prescribed forms through EDGAR.  Investors looking for information must sift through one form at a time; a painstaking task. With IDEA, investors will be able instantly to collate information from thousands of companies and forms, and create their own tailored reports and analysis.

The SEC has formally proposed requiring US companies to provide financial information using interactive data, beginning as early as next year. Interactive data relies on computer tags that identify individual items in a company's financial disclosures. With every number on an income statement or balance sheet individually labelled, information about thousands of companies held on thousands of forms could be easily searched on the internet, downloaded into spreadsheets, reorganised in databases, and put to any number of other comparative and analytical uses by investors, analysts, journalists and financial intermediaries.

The SEC has released a roadmap towards adoption of IFRS, issuing proposals for public comment. The proposals set out several milestones that could lead to the use of IFRS by US issuers in their filings with the SEC, with a decision being made in 2011.  Two-thirds of US investors own securities issued by foreign companies that report their financial information using IFRS. SEC chairman Christopher Cox said: "An international language of disclosure and transparency is a goal worth pursuing on behalf of investors who seek comparable financial information to make well-informed investment decisions."

Under anti-money laundering laws, trust or company service providers (TCSPs) that provide their services 'by way of business' must comply with certain requirements, including registering with HM Revenue and Customs (HMRC). HMRC has published revised guidance on who needs to register as a TCSP, explaining that occupational pension scheme trustees are generally excluded from the need to register.

The materiality concept in accounting is explained in guidance issued by the Institute of Chartered Accountants in England and Wales (ICAEW). The guidance is for preparers of financial statements and is intended to help with the practical application of the definitions and explanations of materiality.

An amendment to IAS 39 on eligible hedged items was issued by the IASB on 31 July, and is effective retrospectively for annual periods beginning on or after 1 July 2009. This amendment differs from the exposure draft in September 2007, which included wider aspects of hedged risk and when an entity may designate a portion of the cashflows of a financial instrument as a hedged item. After considering the responses to the exposure draft, the IASB decided to focus on two situations:

• the designation of a one-sided risk in a hedged item
• the designation of inflation in particular situations

It added application guidance to show how to apply the principles underlying hedge accounting. It will not be allowable to include the time value of a purchased option in a hedged item, nor to separate the inflation element out of a fixed rate of interest. If inflation is separately specified in a contract, it may be designated as a hedged risk or a portion of a financial instrument.

Pre-emption changes: The statement of principles on the disapplication of pre-emption rights has been updated by the Pre-Emption Group. Changes include:

• a clarification that convertible instruments are to be counted within the guideline levels and when authority to issue the instruments is sought, not when they are converted; and
• authorities for non pre-emptive issues should be granted for no more than 15 months or until the next AGM, whichever is shorter. Shareholder consents are required to issue shares other than to existing shareholders. Consents above 5% pa or 7.5% on a rolling three-year basis may be requested, but will require good explanations and justifications.

The ACT supports the guidelines.