(The article featured below is a selection from Federal Securities Law Reporter, which is available to subscribers of that publication.)

Staff Accounting Bulletin Conforms Guidance With FASB Pronouncements

The SEC's Office of the Chief Accountant and the Division of Corporation Finance issued Staff Accounting Bulletin No. 112 to make their interpretive guidance consistent with current accounting and auditing guidance and SEC rules and regulations. The bulletin brings the guidance into conformity with recent pronouncements by the Financial Accounting Standards Board on business combinations and noncontrolling interests in consolidated financial statements.

Under Topic 2, on business combinations, the staff retitled a previous reference to the purchase method since it is now referred to as the acquisition method. Other guidance was either amended or removed. The bulletin also amended or removed guidance under Topic 5 on miscellaneous accounting, and the Topic 6 interpretations of Accounting Series Releases and Financial Reporting Releases.

The bulletin contains a question and answer format under each of those topics which involve fact-specific scenarios. For example, the staff advised that when two or more businesses combine in a single combination just prior to or contemporaneously with an initial public offering, the guidance in Topic 5.G does not apply. The guidance in Topic 5.G is intended to address the transfer, just prior to or contemporaneously with an initial public offering, of nonmonetary assets in exchange for a company's shares. It is not intended to modify the requirements of Statement 141(R). The combination should be accounted for in accordance with Statement 141(R).

The guidance responds to five questions related to the financial statements of oil and gas exchange offers. The oil and gas industry periodically has experienced a significant number of exchange offers to form publicly held companies, take an existing private company public or increase the size of an existing publicly held company. The guidance addresses the prior financial results of these entities which should be reported.

The staff has permitted limited partnerships to omit from their Form 10-K certain oil and gas reserve value information and the supplemental summary of oil and gas activities in certain circumstances. These disclosures may not be omitted from the financial statements included in an exchange offering, according to the bulletin. Full disclosure of reserve data and related information is required. These disclosures may be presented on a combined basis if the entities are under common control.

The financial statements in an exchange offer registration statement should provide sufficient reserve quantity and value-based disclosures to enable offerees and secondary market public investors to evaluate the effect of the exchange proposal. The information must be presented as of the latest year-end on reserve quantities and the future net revenues associated with such quantities.

Where the exchange is accounted for using the acquisition method of accounting, the staff will consider, on a case-by-case basis, granting exemptions from the disclosure requirements for year-to-year reconciliations of reserve quantities, the requirements for a summary of oil and gas producing activities, and a summary of changes in the net present value of reserves. For example, the staff may consider requests for exemption where the properties that were acquired in the exchange transaction are fully explored and developed, particularly if the management of the emerging company has not been involved in the exploration and development of the properties.

If the exchange company plans to use the full cost method of accounting, the full cost ceiling limitation applies as of the date of the financial statements reflecting the exchange. In unusual circumstances, registrants may request an exemption if, as a result of a major purchase, a write-down would be required even though it can be demonstrated that the fair value of the properties clearly exceeds the unamortized costs.

Common control accounting requires that the various accounting methods followed by the offeree entities should be conformed to the methods adopted by the new exchange company. The bulletin advises that it is not appropriate to combine assets and liabilities accounted for on different bases. All of the oil and gas properties of the new entity must be accounted for on the same basis and applied retrospectively.

The bulletin outlines the pro forma financial information that is required in an exchange offer filing and the types of adjustments that typically are made. Generally, full historical financial statements are deemed necessary to enable offerees and secondary market investors to evaluate a transaction. However, the bulletin describes a number of exceptions that may apply. For example, the registrant may be able to demonstrate that full historical financial statements of the offeree businesses are not reasonably available, or the prior years' data may not be meaningful because the offerees had no material quantity of production. Whenever historical results are presented, the bulletin advised that it may be appropriate to explain why historical costs are not necessarily indicative of future expenditures.