On August 22, 2012, the SEC commissioners voted (by a 2 to 1 margin with recusals from Chairman Schapiro and Commissioner Paredes) to approve the final rule mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring resource extraction issuers to disclose certain payments made to governments. It is expected that the final rule will impact approximately 1,100 issuers. The final rule represents the culmination of a process that began in December 2010 when the SEC exposed a proposed rule for public comment, generating over 150 unique comment letters.This In brief article provides an overview of the new rule.
On August 22, 2012, the SEC commissioners voted (by a 2 to 1 margin with recusals from Chairman Schapiro and Commissioner Paredes) to approve the final rule mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring resource extraction issuers to disclose certain payments made to governments. It is expected that the final rule will impact approximately 1,100 issuers. The final rule represents the culmination of a process that began in December 2010 when the SEC exposed a proposed rule for public comment, generating over 150 unique comment letters.
The new rule affects all issuers that are required to file an annual report with the SEC and engage in the commercial development of oil, natural gas, or minerals. The final rule does not include exemptions for foreign issuers or smaller reporting companies.
Resource extraction issuers are required to disclose cash payments made to the US government or foreign governments that are both "not de minimis" and made to further the commercial development of oil, natural gas, or minerals. The rule defines commercial development to include exploration, extraction, processing, and export, or the acquisition of licenses for any such activity. The types of payments that must be considered include taxes, royalties, fees (including license fees), production entitlements, bonuses, dividends, and infrastructure improvements.
Payments to be considered by an issuer include those made by its consolidated subsidiaries as well other entities "controlled" by the issuer. The definition of "control" in the final rule is based on Exchange Act Rule 12b-2, which may differ from the definition of control used by some issuers to prepare their financial statements.
Definition of "not de minimis"
The rule defines "not de minimis" to mean any payment, whether made as a single payment or a series of related payments, that equals or exceeds $100,000. While not clear in the final rule, some believe the $100,000 threshold is meant to be applied to the summation of all payments made to either the US government or a foreign government (inclusive of subnational governments). Others believe that the $100,000 should be applied at one of the various disaggregated levels outlined below, most notably at the project level. Given that the $100,000 threshold is so low, the ultimate clarification of this point may not significantly affect the amounts disclosed.
Disaggregated disclosure requirements
The final rule requires issuers to provide disclosures of payments disaggregated by:
Method of disclosure
In-scope issuers must disclose the required information annually as Exhibit 2.01 to Form SD, which is a new SEC filing form created specifically for disclosures related to conflict minerals and resource extraction payments. Form SD must be filed no later than 150 days after an issuer’s fiscal year end, and resource extraction payment information must be electronically tagged using the XBRL format. Form SD is not subject to the officer certifications required by Rules 13a-14 and 15d-14 under the Exchange Act, and is not required to be incorporated by reference into registration statements. There is no audit or attest requirement related to the resource extraction payments disclosed in Form SD.
The rule is effective for fiscal years ending after September 30, 2013. The first report may be a partial report (i.e., only covering payments made after September 30, 2013) if the issuer's fiscal year begins before September 30, 2013. It is unclear if the $100,000 "not de minimis" threshold should be prorated when a partial period report is filed.
The final rule requires the disclosures of payments to be prepared on a cash basis of accounting, which ignores the principles of capitalization and accrual that are required to prepare financial statements under US GAAP or IFRS. Further, it is unlikely that issuers' current information systems are designed to capture information at the disaggregated levels required for disclosure. Accordingly, issuers will likely need to develop new information systems, processes, and controls to comply with the final rule. Further, many aspects of the final rule are unclear and will need to be clarified for the rule to be operational.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact Ken Miller (1-973-236-7336) in the National Professional Services Group.
Misael de Paz
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