SEC Company Response from Freedom Holding Corp. (FRHC) (CIK 0000924805) (FRHC) — Jul 17, 2009
Freedom Holding Corp. (FRHC) (CIK 0000924805)
Date: July 17, 2009 · CIK: 0000924805 · Accession: 0001038838-09-000218
AI Filing Summary & Sentiment
Referenced dates: July 1, 2009
Letter
United States Securities and Exchange Commission Division of Corporate Finance Form 10-K for the Fiscal Year Ended March 31, 2009 Filed June 15, 2009 Response letter filed May 20, 2009 File No.: 1-33034
Dear Mr. Schwall:
At the request of the management of BMB Munai, Inc., (the “Company” or “BMB Munai”) we are responding to comments raised by the staff at the Securities and Exchange Commission in your letter dated July 1, 2009. Following are the Company’s responses to your comments.
Form 10-K for the Fiscal Year Ended March 31, 2008
Note 21 - Significant Fourth Quarter Adjustments, page F-39
1.
We note your response to prior comment number 1 (c) which states that you were incorrect in previously stating that the tax law in the Republic of Kazakhstan changed during fiscal year 2008. Your response further states that the tax law ("Tax Code #2235'') which permits you to deduct qualifying capitalized exploration and development costs against revenues received during the exploration stage was enacted in April 1990. Based on your revised assertions, the estimated effective rate used to determine income tax expense (benefit) in your June 30, 2007, September 30, 2007 and December 31, 2007 financial statements should have included the provisions of Tax Code #2235. Therefore, you are required to account for this accounting change as the correction of an error pursuant to paragraphs 25
POULTON & YORDAN
TELEPHONE: 801-355-1341
324 SOUTH 400 WEST, SUITE 250
FAX: 801-355-2990
SALT LAKE CITY, UTAH 84101
POST@POULTON-YORDAN.COM
Mr. H. Roger Schwall
July 17, 2009
Page 2
and 26 of SFAS 154, not as a fourth quarter adjustment as if the accounting change were a change in estimate. Please restate your June 30, 2007, September 30, 2007 and December 31, 2007 financial statements to correct for this error. We believe it is necessary for you to amend each of your Forms 10-Q filed during the interim periods of fiscal 2008 and your March 31, 2009 Form 10-K to correct for this error and to include all disclosures required by SFAS 154. If you believe that restatement and amending your Form 10-K and Forms 10-Q is not required because the error is not material to your financial statements, please provide your complete analysis pursuant to SAB Topic 1:M which supports your conclusion.
As noted in the Current Report of the Company filed on July 8, 2009, and subsequently amended on July 13, 2009, the Company will be amending its annual reports for the fiscal years ended March 31, 2007, 2008 and 2009 and its quarterly reports for the 2008 and 2009 interim periods to correct the errors in accounting for deferred income tax and to provide the required disclosures as noted above.
2.
Please explain how you have calculated your revised interim tax rates for the quarters ended June 30, 2007, September 30, 2007 and December 31, 2007 and how your calculation complies with FIN 18. Please explain how you have appropriately considered interim deferred and US taxes when calculating your effective rate.
Note 9 of FIN 18 provides for the computation of interim period tax. Note 9 provides that the estimated annual effective tax rate be applied to the year-to-date ordinary income at the end of each interim period to compute the year-to-date tax applicable to ordinary income.
The Company calculated the revised interim tax rates for the quarters ended June 30, 2007, September 30, 2007 and December 31, 2007 based on the tax benefit from exploration stage for Kazakhstan operations and the projected operating loss from US operations. Based on these assumptions the estimated annual effective tax rate was zero and no tax expense was necessary.
3.
Please clarify how you have evaluated the fact that you failed to incorporate the provisions of Tax Code #2235 in calculating your income tax provisions when determining that your disclosure controls and procedures are effective as of June 30, 2007, September 30, 2007 and December 31, 2007. In addition, clarify what changes, if any, you have made to remediate this apparent control deficiency.
In light of the need to restate the financial statements for the periods ended June 30, 2007, September 30, 2007 and December 31, 2007 to correct errors in the accounting for its income tax provisions, the Company will revise its disclosure of controls and procedures in its amended reports for the periods in question to indicate that the Company’s controls and procedures related to accounting for income taxes were ineffective.
Mr. H. Roger Schwall
July 17, 2009
Page 3
During the quarter ended March 31, 2008 the Company enhanced its controls over deferred tax by requiring its reporting manager to become more familiar with Kazakhstan taxation issues during exploration stage and requiring its reporting manager to specifically give consideration to taxation issues in connection with the preparation of annual and interim financial statements.
Form 10-K for the Fiscal Year Ended March 31, 2009
Controls and Procedures, page 53
4.
Please clarify how you have evaluated the fact that you failed to incorporate the provisions of Tax Code #2235 in calculating your income tax provisions when determining that your disclosure controls and procedures and internal controls over financial reporting are effective as of March 31, 2009. In addition, clarify what changes, if any, you have made to remediate this apparent control deficiency.
The Company did not fail to incorporate the provisions to Tax Code #2235 in calculating its income tax provisions during the fiscal year ended March 31, 2009. As has been previously disclosed, during the fourth quarter of fiscal 2008, the Company adjusted the way it was calculating its income tax provisions to incorporate the provisions of Tax Code #2235 and has been doing so since that time. Therefore, with respect to this issue, the Company believes no apparent control deficiency existed at March 31, 2009.
As noted above, the amendment to the annual report for the year ended March 31, 2008 will contain revised disclosure regarding the changes made to its controls and procedures in connection with the preparation of that annual report which should further clarify that the changes were made during the fiscal year ended March 31, 2008 and did not effect the fiscal year ended March 31, 2009.
Financial Statements
Consolidated Statements of Operations, page F-4
5.
We note that you did not record an impairment charge of your oil and gas properties during fiscal 2009 notwithstanding the recent volatility in oil and gas market prices. Please provide to us your analysis in accordance with Rule 4-10(c)(4) of Regulation S-X which supports your conclusion that the application of the ceiling test did not result in an impairment charge as of March 31, 2009. Please be as detailed as possible in your response.
Mr. H. Roger Schwall
July 17, 2009
Page 4
Rule 4-10(c)(4) of Regulation S-X requires an impairment charge in the event that capitalized costs, less accumulated amortization and related deferred income taxes, exceeds an amount equal to the sum of:
a.
The present value of estimated future net revenues computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus
b.
the cost of properties not being amortized pursuant to paragraph (i)(3)(ii) of this section; plus
c.
the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less
d.
income tax effects related to differences between the book and tax basis of the properties referred to in paragraphs (i)(4)(i)(B) and (C) of this section.
As of March 31, 2009 capitalized costs less accumulated amortization and related deferred income taxes was $231,509,194. This amount does not exceed:
a.
The present value of estimated future net revenues (taken from the Reserve Report of the Company's independent petroleum engineering firm as of March 31, 2009) - $254,597,000
b.
The cost of properties not being amortized - $40,580,015
c.
Lower of cost or estimated fair value of unproven properties - 0
d.
Income tax effects - $17,566,621
The total equals, $277,610,394, which exceeded capitalized costs less accumulated amortization and related deferred income taxes by $46,101,200. Therefore, the Company did not record an impairment charge of its oil and gas properties during fiscal 2009.
Note 13 – Income Taxes, page F-27
6.
Explain how you have determined that the error caused by failing to incorporate the provisions of Tax Code #2235 when accounting for your income taxes only relates to your interim periods in fiscal year 2008 and does not impact periods prior to fiscal year 2008. For example, please demonstrate how your income tax expense recorded for the year ended March 31, 2007 considers the provisions of this tax code.
As noted in the Current Report, the Company has determined that an error in its accounting for deferred income taxes that requires restatement occurred in the quarter ended March 31, 2007. The Company will file an amendment to its annual report for the fiscal year ended March 31, 2007 restating its financial statements to correct this error.
Mr. H. Roger Schwall
July 17, 2009
Page 5
7.
We note your response to prior comment number 2 and your disclosure here which states that the Exploration contract allows you to be exempt from Kazakhstan corporate income tax for the period of the exploration phase. Please clarify whether you are exempt from Kazakhstan income taxes or are only permitted to deduct qualifying capitalized exploration and development costs against revenues received during the exploration stage. In addition, clarify whether the Exploration contract or Tax Code #2235 permits you to deduct qualifying costs.
The Company is not exempt from Kazakhstan income taxes, which the Company will clarify in its "Income Taxes" note in its amended filings. The Company is required to accumulate capital expenditures, as well as operating and G&A expenses, and to deduct revenues from this accumulated amount. Since inception, the Company’s capital expenditures have been substantially greater than revenues for each fiscal year. Once the Company moves to the production stage, the accumulated amount of capital expenditures will then be deducted against taxable income received during the production stage.
8.
Tell us whether the law in Kazakhstan will permit you to fully deduct depreciation and depletion expense in future years that relates to capitalized expenses already used to offset income during these exploratory phase years. If not, it appears that you should have recorded a deferred tax liability reflecting a temporary book-tax difference. Please advise.
The law in Kazakhstan will permit the Company to fully deduct depreciation and depletion expenses in future years that relate to capitalized expenses already used to offset income during exploratory stage and therefore there is no temporary difference related to this matter.
Mr. H. Roger Schwall
July 17, 2009
Page 6
9.
Please tell us and revise your disclosure to clarify how the exploration stage is defined in Tax Code #2235 and the Exploration contract and how you have determined that you are still in the exploration stage as of March 31, 2009. In addition, disclose when you anticipate that you will no longer be in the exploration stage and hence, no longer qualify for the tax benefit.
Exploration stage is not defined in Tax Code #2235. Rather, the term of exploration stage is set in the Company’s contract with the Republic of Kazakhstan, which specifies that the Company is in the exploration stage. Addendum #7 to the Company's contract, which is included as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2008, states that the Company is in exploration stage until January 2013. Currently, the Company anticipates it will be in exploration stage until that time.
In response to the Commission’s comments, the Company proposes to revise the “Incomes Taxes” note included in its financial statements for the fiscal year ended March 31, 2009 (and will include a similarly revised “Income Taxes” note in each of the other reports it is amending.) Rather than provide individual excerpts in response to the Commission’s comments, the Company felt it would be more convenient to provide the proposed revised “Income Taxes” note in its entirety. Also, for ease of reference in responding to specific comments below, the Company has numbered the paragraphs below. The paragraphs in the amendment will not be numbered.
NOTE 13 - INCOME TAXES
1.
The Company’s consolidated pre-tax income is comprised primarily from operations in the Republic of Kazakhstan. Pre-tax losses from United States operations of $12,937,563, $1,827,168 and $3,537,135, for the years ended March 31,
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POULTON & YORDAN
ATTORNEYS AT LAW
RICHARD T. LUDLOW
July 17, 2009
H. Roger Schwall
Assistant Director
United States Securities and Exchange Commission
Division of Corporate Finance
Washington, D.C. 20549
Re:
BMB Munai, Inc.
Form 10-K for the Fiscal Year Ended March 31, 2008
Filed on June 16, 2008
Form 10-K for the Fiscal Year Ended March 31, 2009
Filed June 15, 2009
Response letter filed May 20, 2009
File No.: 1-33034
Dear Mr. Schwall:
At the request of the management of BMB Munai, Inc., (the “Company” or “BMB Munai”) we are responding to comments raised by the staff at the Securities and Exchange Commission in your letter dated July 1, 2009. Following are the Company’s responses to your comments.
Form 10-K for the Fiscal Year Ended March 31, 2008
Note 21 - Significant Fourth Quarter Adjustments, page F-39
1.
We note your response to prior comment number 1 (c) which states that you were incorrect in previously stating that the tax law in the Republic of Kazakhstan changed during fiscal year 2008. Your response further states that the tax law ("Tax Code #2235'') which permits you to deduct qualifying capitalized exploration and development costs against
revenues received during the exploration stage was enacted in April 1990. Based on your revised assertions, the estimated effective rate used to determine income tax expense (benefit) in your June 30, 2007, September 30, 2007 and December 31, 2007 financial statements should have included the provisions of Tax Code #2235. Therefore, you are required to account for this accounting change as the correction of an error pursuant to paragraphs 25
POULTON & YORDAN
TELEPHONE: 801-355-1341
324 SOUTH 400 WEST, SUITE 250
FAX: 801-355-2990
SALT LAKE CITY, UTAH 84101
POST@POULTON-YORDAN.COM
Mr. H. Roger Schwall
July 17, 2009
Page 2
and 26 of SFAS 154, not as a fourth quarter adjustment as if the accounting change were a change in estimate. Please restate your June 30, 2007, September 30, 2007 and December 31, 2007 financial statements to correct for this error. We believe it is necessary for you to amend each of your Forms 10-Q filed during the interim periods of fiscal 2008 and your March 31, 2009 Form 10-K to
correct for this error and to include all disclosures required by SFAS 154. If you believe that restatement and amending your Form 10-K and Forms 10-Q is not required because the error is not material to your financial statements, please provide your complete analysis pursuant to SAB Topic 1:M which supports your conclusion.
As noted in the Current Report of the Company filed on July 8, 2009, and subsequently amended on July 13, 2009, the Company will be amending its annual reports for the fiscal years ended March 31, 2007, 2008 and 2009 and its quarterly reports for the 2008 and 2009 interim periods to correct the errors in accounting for deferred income tax and to provide the required disclosures as
noted above.
2.
Please explain how you have calculated your revised interim tax rates for the quarters ended June 30, 2007, September 30, 2007 and December 31, 2007 and how your calculation complies with FIN 18. Please explain how you have appropriately considered interim deferred and US taxes when calculating your effective rate.
Note 9 of FIN 18 provides for the computation of interim period tax. Note 9 provides that the estimated annual effective tax rate be applied to the year-to-date ordinary income at the end of each interim period to compute the year-to-date tax applicable to ordinary income.
The Company calculated the revised interim tax rates for the quarters ended June 30, 2007, September 30, 2007 and December 31, 2007 based on the tax benefit from exploration stage for Kazakhstan operations and the projected operating loss from US operations. Based on these assumptions the estimated annual effective tax rate was zero and no tax expense was
necessary.
3.
Please clarify how you have evaluated the fact that you failed to incorporate the provisions of Tax Code #2235 in calculating your income tax provisions when determining that your disclosure controls and procedures are effective as of June 30, 2007, September 30, 2007 and December 31, 2007. In addition, clarify what changes, if any, you have made to
remediate this apparent control deficiency.
In light of the need to restate the financial statements for the periods ended June 30, 2007, September 30, 2007 and December 31, 2007 to correct errors in the accounting for its income tax provisions, the Company will revise its disclosure of controls and procedures in its amended reports for the periods in question to indicate that the Company’s controls and procedures
related to accounting for income taxes were ineffective.
Mr. H. Roger Schwall
July 17, 2009
Page 3
During the quarter ended March 31, 2008 the Company enhanced its controls over deferred tax by requiring its reporting manager to become more familiar with Kazakhstan taxation issues during exploration stage and requiring its reporting manager to specifically give consideration to taxation issues in connection with the preparation of annual and interim financial
statements.
Form 10-K for the Fiscal Year Ended March 31, 2009
Controls and Procedures, page 53
4.
Please clarify how you have evaluated the fact that you failed to incorporate the provisions of Tax Code #2235 in calculating your income tax provisions when determining that your disclosure controls and procedures and internal controls over financial reporting are effective as of March 31, 2009. In addition, clarify what changes, if any, you have made
to remediate this apparent control deficiency.
The Company did not fail to incorporate the provisions to Tax Code #2235 in calculating its income tax provisions during the fiscal year ended March 31, 2009. As has been previously disclosed, during the fourth quarter of fiscal 2008, the Company adjusted the way it was calculating its income tax provisions to incorporate the provisions of Tax Code #2235 and has been doing so
since that time. Therefore, with respect to this issue, the Company believes no apparent control deficiency existed at March 31, 2009.
As noted above, the amendment to the annual report for the year ended March 31, 2008 will contain revised disclosure regarding the changes made to its controls and procedures in connection with the preparation of that annual report which should further clarify that the changes were made during the fiscal year ended March 31, 2008 and did not effect the fiscal year ended March
31, 2009.
Financial Statements
Consolidated Statements of Operations, page F-4
5.
We note that you did not record an impairment charge of your oil and gas properties during fiscal 2009 notwithstanding the recent volatility in oil and gas market prices. Please provide to us your analysis in accordance with Rule 4-10(c)(4) of Regulation S-X which supports your conclusion that the application of the ceiling test did not result in an
impairment charge as of March 31, 2009. Please be as detailed as possible in your response.
Mr. H. Roger Schwall
July 17, 2009
Page 4
Rule 4-10(c)(4) of Regulation S-X requires an impairment charge in the event that capitalized costs, less accumulated amortization and related deferred income taxes, exceeds an amount equal to the sum of:
a.
The present value of estimated future net revenues computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future
expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus
b.
the cost of properties not being amortized pursuant to paragraph (i)(3)(ii) of this section; plus
c.
the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less
d.
income tax effects related to differences between the book and tax basis of the properties referred to in paragraphs (i)(4)(i)(B) and (C) of this section.
As of March 31, 2009 capitalized costs less accumulated amortization and related deferred income taxes was $231,509,194. This amount does not exceed:
a.
The present value of estimated future net revenues (taken from the Reserve Report of the Company's independent petroleum engineering firm as of March 31, 2009) - $254,597,000
b.
The cost of properties not being amortized - $40,580,015
c.
Lower of cost or estimated fair value of unproven properties - 0
d.
Income tax effects - $17,566,621
The total equals, $277,610,394, which exceeded capitalized costs less accumulated amortization and related deferred income taxes by $46,101,200. Therefore, the Company did not record an impairment charge of its oil and gas properties during fiscal 2009.
Note 13 – Income Taxes, page F-27
6.
Explain how you have determined that the error caused by failing to incorporate the provisions of Tax Code #2235 when accounting for your income taxes only relates to your interim periods in fiscal year 2008 and does not impact periods prior to fiscal year 2008. For example, please demonstrate how your income tax expense recorded for the year ended
March 31, 2007 considers the provisions of this tax code.
As noted in the Current Report, the Company has determined that an error in its accounting for deferred income taxes that requires restatement occurred in the quarter ended March 31, 2007. The Company will file an amendment to its annual report for the fiscal year ended March 31, 2007 restating its financial statements to correct this error.
Mr. H. Roger Schwall
July 17, 2009
Page 5
7.
We note your response to prior comment number 2 and your disclosure here which states that the Exploration contract allows you to be exempt from Kazakhstan corporate income tax for the period of the exploration phase. Please clarify whether you are exempt from Kazakhstan income taxes or are only permitted to deduct qualifying capitalized exploration and
development costs against revenues received during the exploration stage. In addition, clarify whether the Exploration contract or Tax Code #2235 permits you to deduct qualifying costs.
The Company is not exempt from Kazakhstan income taxes, which the Company will clarify in its "Income Taxes" note in its amended filings. The Company is required to accumulate capital expenditures, as well as operating and G&A expenses, and to deduct revenues from this accumulated amount. Since inception, the Company’s capital expenditures have been
substantially greater than revenues for each fiscal year. Once the Company moves to the production stage, the accumulated amount of capital expenditures will then be deducted against taxable income received during the production stage.
8.
Tell us whether the law in Kazakhstan will permit you to fully deduct depreciation and depletion expense in future years that relates to capitalized expenses already used to offset income during these exploratory phase years. If not, it appears that you should have recorded a deferred tax liability reflecting a temporary book-tax difference. Please
advise.
The law in Kazakhstan will permit the Company to fully deduct depreciation and depletion expenses in future years that relate to capitalized expenses already used to offset income during exploratory stage and therefore there is no temporary difference related to this matter.
Mr. H. Roger Schwall
July 17, 2009
Page 6
9.
Please tell us and revise your disclosure to clarify how the exploration stage is defined in Tax Code #2235 and the Exploration contract and how you have determined that you are still in the exploration stage as of March 31, 2009. In addition, disclose when you anticipate that you will no longer be in
the exploration stage and hence, no longer qualify for the tax benefit.
Exploration stage is not defined in Tax Code #2235. Rather, the term of exploration stage is set in the Company’s contract with the Republic of Kazakhstan, which specifies that the Company is in the exploration stage. Addendum #7 to the Company's contract, which is included as an exhibit to the Company’s Quarterly Report on Form 10-Q for the
quarter ended December 31, 2008, states that the Company is in exploration stage until January 2013. Currently, the Company anticipates it will be in exploration stage until that time.
In response to the Commission’s comments, the Company proposes to revise the “Incomes Taxes” note included in its financial statements for the fiscal year ended March 31, 2009 (and will include a similarly revised “Income
Taxes” note in each of the other reports it is amending.) Rather than provide individual excerpts in response to the Commission’s comments, the Company felt it would be more convenient to provide the proposed revised “Income Taxes” note in its entirety. Also, for ease of reference in responding to specific comments below, the Company
has numbered the paragraphs below. The paragraphs in the amendment will not be numbered.
NOTE 13 - INCOME TAXES
1.
The Company’s consolidated pre-tax income is comprised primarily from operations in the Republic of Kazakhstan. Pre-tax losses from United States operations of $12,937,563, $1,827,168 and $3,537,135, for the years ended March 31,