Mutual Reliance Review System for Exemptive Relief Applications -- Relief from the requirement to provide a US GAAP reconciliation note for unaudited interim financial statements of an acquired business in a business acquisition report -- Relief required due to a change in Canadian GAAP that would result in a different presentation of the interim statements from the annual financial statements -- Management to provide certification outlining differences between Canadian GAAP and U.S. GAAP in respect of the interim statements.
National Instrument 51-102 -- Continuous Disclosure Obligations, Part 8.
National Instrument 52-107 -- Acceptable Accounting Principles, Auditing Standards and Reporting Currency, ss. 6.1, 7.1.
April 25, 2005
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ALBERTA, SASKATCHEWAN, MANITOBA, ONTARIO, QUEBEC, NOVA SCOTIA, NEW BRUNSWICK,
NEWFOUNDLAND AND LABRADOR, YUKON, NUNAVUT AND
THE NORTHWEST TERRITORIES (the Jurisdictions)
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
IN THE MATTER OF
STERLING CENTRECORP INC. (the Filer)
MRRS DECISION DOCUMENT
The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Filer for (i) a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption from the requirement contained in section 6.1 of National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency (NI 52-107) to provide a reconciliation note from United States generally acceptable accounting principles (U.S. GAAP) to Canadian generally acceptable accounting principles (Canadian GAAP) in the interim financial statements for the period ended June 30, 2004 in respect of the Property (as defined below) and which will be included in the business acquisition report to be filed regarding the Acquisition (as defined below), and (ii) in Quebec, for a revision of the general order that will provide the same result as an exemption order (the Requested Relief).
Under the Mutual Reliance Review System for Exemptive Relief Applications
(a) the Ontario Securities Commission is the principal regulator for this Application; and
(b) this MRRS decision document evidences the decision of each Decision Maker.
Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation subsisting under the Business Corporations Act (Ontario). Its head office is located in Markham, Ontario.
2. The Filer is a reporting issuer or the equivalent in each Jurisdiction and is not in default of any requirements of the Legislation, except for the requirement to file a business acquisition report (the BAR) under Part 8 of National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102).
3. On July 23, 2004, the Filer acquired (the Acquisition) an effective 50 percent ownership interest in the Mall of the Americas, a fully enclosed mall (the Property).
4. The total aggregate purchase price for the Property was US$51 million and was partially satisfied by first mortgage financing in the principal amount of US$40 million.
5. Pursuant to section 8.2 of NI 51-102, the Filer is required to file the BAR in respect of the Acquisition because the Acquisition is a "significant acquisition" for the purposes of section 8.3(2) of NI 51-102. The BAR was due on October 6, 2004.
6. Pursuant to section 8.4 of NI 51-102, the following financial statements for the Property must be filed with the BAR:
(i) an audited income statement, statement of retained earnings and a cash flow statement for the year ended December 31, 2003 (with applicable notes);
(ii) an audited balance sheet as at December 31, 2003 (with applicable notes);
(iii) an unaudited comparative income statement, statement of retained earnings and a cash flow statement for the six months ended June 30, 2004;
(iv) an unaudited comparative balance sheet as at June 30, 2004;
(v) a pro forma income statement for the year ended December 31, 2003 and the six months ended June 30, 2004; and
(vi) a pro forma balance sheet as at December 31, 2003 and June 30, 2004.
7. Pursuant to section 6.1 of NI 52-107, an acquisition financial statement included in a BAR may be prepared in accordance with generally accepted accounting principles (GAAP) of the United States provided that, among other things, where the GAAP of the acquisition statements differs from the GAAP used for the Filer's financial statements, the acquisition statements are reconciled to the Filer's GAAP and the notes to the acquisition statements provide disclosure with respect to the differences between the Filer's GAAP and the acquisition statement GAAP, as well as the effect of such differences.
8. Pursuant to section 7.1 of NI 52-107, pro forma financial statements must be prepared in accordance with the Filer's GAAP.
9. As the vendor is a pension fund, the financial statements for the Property have been prepared in accordance with U.S. GAAP using the "fair value" basis of accounting, consistent with industry practice, although generally not consistent with the principles of Canadian GAAP.
10. Pursuant to section 1100 of the Canadian Institute of Chartered Accountants Handbook, which requires prospective application for the period beginning January 1, 2004 in respect of the Filer, industry practice that is not consistent with the principles of Canadian GAAP is no longer acceptable under Canadian GAAP. Consequently, under Canadian GAAP, the interim financial statements for the period ended June 30, 2004 required in the BAR (the Interim Statements) must be prepared using the historical cost basis of accounting. Given the timing of this change, the annual financial statements for the year ended December 31, 2003 may be prepared using the "fair value" basis of accounting, consistent with industry practice.
11. The Filer has obtained the financial statements for the Property set forth above in representations 6(iii) and (iv), which have been prepared in accordance with U.S. GAAP.
12. The Filer is of the belief that there is no value to shareholders or investors in restating the Interim Statements to enable it to provide the required reconciliation note due to the fact that:
(i) the Filer will be including the Property in its books effective as of the acquisition date at the purchase price, which is the current fair value and not the historical cost value;
(ii) the pro forma statements to be included in the business acquisition report will adjust the Filer's financial statements for the acquisition based on the purchase price (i.e. fair value), not on the historical cost value, and will also calculate depreciation on this fair value amount; and
(iii) having all of the financial statements that are included in the business acquisition report prepared using the same method of accounting (i.e. fair value) will be more useful for investors and shareholders since it will aid a reader's ability to compare the results across the various sets of financial statements.
14. In lieu of a reconciliation note, management of the Filer has agreed to provide a certification that, to the best of their knowledge, there are no differences between U.S. GAAP and Canadian GAAP in respect of the Interim Statements, other than the change in the basis of accounting from the fair value basis to the historical cost basis.
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Makers under the Legislation is that the Requested Relief is granted provided that the Filer files a business acquisition report in respect of the Acquisition in accordance with Part 8 of NI 51-102, other than as otherwise exempted hereunder, together with the certification set out in representation 13 above and signed by the Chief Executive Officer and Chief Financial Officer of the Filer.