SEC Material — Supplement — CAQ SEC Regulations Committee — March 31, 2022, Meeting Highlights

SEC Regulations Committee March 31, 2022 — Joint Meeting with SEC Staff

NOTICE:

The Center for Audit Quality (CAQ) SEC Regulations Committee meets periodically with the staff of the SEC to discuss emerging financial reporting issues relating to SEC rules and regulations. The purpose of the following highlights is to summarize the issues discussed at the meetings. These highlights have not been considered or acted on by senior technical committees of the AICPA and do not represent an official position of the AICPA or the CAQ. As with all other documents issued by the CAQ, these highlights are not authoritative and users are urged to refer directly to applicable authoritative pronouncements for the text of the technical literature. These highlights do not purport to be applicable or sufficient to the circumstances of any work performed by practitioners. They are not intended to be a substitute for professional judgment applied by practitioners.

These highlights were prepared by a representative of CAQ who attended the meeting and do not purport to be a transcript of the matters discussed. The views attributed to the SEC staff are informal views of one or more of the staff members present, do not constitute an official statement of the views of the Commission or of the staff of the Commission and should not be relied upon as authoritative. Users are urged to refer directly to applicable authoritative pronouncements for the text of the technical literature.

As available on this website, highlights of Joint Meetings of the SEC Regulations Committee and the SEC staff are not updated for the subsequent issuance of technical pronouncements or positions taken by the SEC staff, nor are they deleted when they are superseded by the issuance of subsequent highlights or authoritative accounting or auditing literature. As a result, the information, commentary or guidance contained herein may not be current or accurate and the CAQ is under no obligation to update such information. Readers are therefore urged to refer to current authoritative or source material.

I. ATTENDANCE

SEC Regulations Committee	Securities and Exchange Commission	Observers and Guests
Jonathan Guthart, Chair John May, Vice-Chair Kendra Decker Sam Eldessouky Fred Frank Marie Gallagher Paula Hamric Mike Henson Steven Jacobs Lisa Mitrovich Dan Morrill Steve Neiheisel Sandy Peters Mark Shannon Scott Wilgenbusch	Staff from the Division of Corporation Finance (Division) and Office of the Chief Accountant	Erin McCloskey, KPMG Annette Schumacher Barr, CAQ Observer Joey Bailey, CAQ Observer

II. RECENT UPDATES AND DEVELOPMENTS

> A. Staff Update

The staff provided an update of the following developments in the Division of Corporation Finance:

Liz Ann Eisen joined the Division as Deputy Director, Disclosure Program. The staff also noted that the Division will soon be posting an opening for a Professional Accounting Fellow in its Office of the Chief Accountant.
Work continues on numerous rulemaking initiatives. The Division is responsible for several of the rulemaking projects listed on the SEC's Reg Flex Agenda, including those relating to climate change, cybersecurity, SPACs, and others that have been issued since last fall.
The staff highlighted the posting of Staff Accounting Bulletin No. 121 regarding accounting for obligations to safeguard crypto-assets an entity holds for platform users.

> B. Recent Developments

The Committee members and staff discussed various reporting issues facing registrants as a result of the Russian government’s invasion of Ukraine. Committee members shared that some registrants are considering whether to reflect certain costs/losses resulting from the invasion in non-GAAP measures. Examples include:

Write-offs of inventory and property, plant and equipment destroyed or confiscated by governmental entities
Write-offs of receivables from entities with operations that have been significantly impacted by the invasion
Humanitarian efforts (charitable contributions for aid, etc.).

The staff reminded the Committee that the rules and guidance related to non-GAAP measures have not changed. They specifically highlighted the guidance released with respect non-GAAP measures related to COVID. They indicated that they are available to talk with registrants that have questions. The Committee relayed other financial reporting and disclosure issues related to the invasion, including 1) the direct impact of maintaining operations in Russia or Ukraine (noted above), and 2) the indirect impacts of the invasion, such as those relating to fluctuating commodity prices, increased risk of cybersecurity issues, shipping/supply chain challenges, etc. In addition, registrants will continue to evaluate the applicable consolidation requirements as they relate to operations in Russia/Ukraine. The staff indicated they too are closely monitoring the situation and its effects on registrants’ reporting and disclosures.

> C. Holding Foreign Companies Accountable Act (HFCAA)

The Committee and the staff shared observations regarding comment letters issued to domestic registrants and non-China-based FPIs regarding the HFCAA. The staff referred to its Sample Letter to China-Based Companies, issued in December, 2021, and noted that it applies to all registrants with significant operations in China regardless of domicile.

III. CURRENT FINANCIAL REPORTING MATTERS

> A. Double Dummy structures used for a de-SPAC transaction

The Committee members observed that there has been an increase in the use of a Double Dummy structure to facilitate a de-SPAC transaction where a newco is established and acquires both a private operating company (“target”) and a SPAC at the same time. Because the legal form creates a new registrant and represents the newco’s initial public offering of equity securities (IPO), the requirements for such structure may differ, in certain respects, from a traditional SPAC merger transaction.

The Committee members asked the staff to confirm the Committee’s understanding of a number of SEC reporting matters relating to this structure and how the SEC’s rules and guidance might apply differently as compared to a non-Double Dummy SPAC/de-SPAC transaction. The staff noted that the Commission’s recent proposal Special Purpose Acquisition Companies, Shell Companies, and Projections incorporates current reporting practices and interpretations regarding various SPAC scenarios. The public is encouraged to review the approach outlined in the proposal and provide feedback. Commenters may wish to addressreasons for using a double dummy structure.

> B. Losing EGC Status

The Committee asked the following questions regarding the loss of EGC status in various scenarios:

Assume a target in a de-SPAC transaction qualified as an EGC at the time of the initial filing of a Form S-4/proxy but ceased to qualify as an EGC before the Form S-4/proxy is declared effective. What impact, if any, does this have on any EGC accommodations (e.g., relating to accounting standards adoption dates, financial statement periods, Critical Audit Matters (CAMs), etc.) used by the target for any filings made subsequent to the loss of EGC status (i.e., S-4 amendments, Super 8-K, and any future registration statements)?
Does the answer differ if both the SPAC and Target met the definition of an EGC as of the effective date of the Form S-4/proxy, which included Q3 interim financial information of both entities, but the Super 8-K will require annual financial information (i.e., Q3 financial statements are stale) and the target’s annual revenues exceed $1.07B, the EGC revenue threshold at the time of this question?

With respect to the de-SPAC Form S-4/proxy (including amendments through the effective date of the Form S-4 or mailing date of the proxy), the staff would not object to the company applying EGC accommodations to the target, including financial statement periods, the adoption of accounting standards, and CAMS. However, with respect to any filings made after the Form S-4 goes effective, once the company loses EGC status the company would not be eligible to apply the EGC accommodations. The ability to use accommodations applicable to EGCs in a Super 8-K depends on whether the company qualifies as an EGC as of the date of filing the Super 8-K. Committee members noted this could result in the financial statements in the Form S-4 being different than those that will be required in the Super 8-K. In the Super 8-K following loss of EGC status (in the above circumstances), the company would be required to, among other things, reflect the adoption of accounting standards applicable to public companies and report CAMsfor any applicable periods, which may include ones included in the Form S-4. For that reason, the staff encourages companies, although it is not required, to consider including in the Form S\u00024/proxy the financial statements and disclosures that will be required in the Super 8-K, rather than waiting until the Super 8-K to include them.

> C. Smaller Reporting Companies (SRC) considerations for a private operating company (target) in a SPAC transaction

The Committee noted that FRM 5110.1 indicates that an entity that is not an investment company, asset-backed issuer or majority-owned subsidiary of a parent that is not a smaller reporting company (SRC) qualifies as a SRC based on the public float and revenue criteria, as applicable. However, FRM 5110.4 states, in part:

“…If the issuer is a majority-owned subsidiary, the parent entity also must be a smaller reporting company. An entity that is to be spun off from its parent coincident with or prior to its initial registration may register as a smaller reporting company if it will otherwise qualify as a smaller reporting company upon consummation of the spin-off.”

When evaluating the form and content of a target’s financial statements in a de-SPAC transaction where the target is currently a majority-owned subsidiary of a non-SRC parent, the Committee asked the staff whether the guidance in FRM 5110.4 may be applied, by analogy, such that so long as all other criteria are met, the target can avail itself of the accommodations provided to SRCs?

The staff responded that the guidance in FRM 5110.4 is specific to a spin-off, would not extend to a merger with a SPAC, and therefore, should not analogized to for transactions with different facts and circumstances.

> D. Rule 3-05 Significance Tests

The Committee asked the staff if it had views relating to how significance under S-X Rule 3-05 should be calculated in cases where a business is acquired by a registrant’s non-wholly-owned consolidated subsidiary (e.g. an Up-C structure). The staff discussed an example in which a consolidated 60%-owned subsidiary (“Sub”) acquires 100% of a business (“Acquiree”):

Specific to the asset test and the revenue component of the income test:
- 100% of Acquiree’s consolidated total assets (after intercompany eliminations) and consolidated total revenues from continuing operations (after intercompany eliminations) should be included in the numerator of the respective tests (that is, in the example, the 60% ownership of Sub would not be a factor when calculating the numerator)
- 100% of the registrant’s consolidated total assets (after intercompany eliminations) and consolidated total revenues from continuing operations (after intercompany eliminations) should be used as the denominator of the respective tests
Specific to the income component of the income test:
- The numerator should exclude an amount attributable to the non-controlling interest in Sub (in the example, 40% of Acquiree’s consolidated income or loss from continuing operations before income taxes (after intercompany eliminations) attributable to the controlling interests).
- The denominator is the registrant’s consolidated income or loss from continuing operations before income taxes (after intercompany eliminations) attributable to the controlling interests.

> E. Applicability of the revenue component of the income test under S-X Rule 1-02(w) when a registrant’s or a target’s two most recently completed fiscal years include results of a predecessor company as well as a successor

Regulation S-X Rule 1-02(w)(1)(iii) requires a registrant to calculate income and revenue components of the income test with significance measured using the lower result of the two components. However, the rule also indicates that the revenue component is only applicable when the registrant and acquired business both had material revenue in each of the two most recently completed fiscal years.

FRM 2025.10 states that a registrant that is a successor to a predecessor company may not have a full year of income statement information available to use as the denominator in the calculation in the income test. In this case, the income test should be calculated using only the results of operations of the successor company in the denominator unless the SEC staff grants a request by the registrant to perform the significance test using S-X Article 11 pro forma amounts as if the predecessor had been acquired at the beginning of the fiscal year being measured.

Further, FRM 2025.11 states that if audited successor financial statements of the acquired business (i.e., not the registrant) include less than twelve months of successor results, the income test should generally be calculated using S-X Article 11 pro forma results of operations as if the predecessor had been acquired at the beginning of the fiscal year being measured. In this case, the pro forma results of operations would be determined using the acquired successor’s basis, not the registrant’s subsequent new basis.

The Committee noted that while there is consistent understanding of the application of the income component of S-X Rule 1-02(w)(1)(iii) when a registrant or a target is a successor to a predecessor company, there is less clarity in the applicability of the revenue component in similar scenarios. With that in mind, the Committee asked the following questions:

When a registrant or a target is a successor to a predecessor company, can the registrant consider the revenues of both the predecessor and successor in evaluating the applicability of the revenue component of the income test described in S-X Rule 1- 02(w)(1)(iii) (i.e., whether there has been material revenue in the two most recently completed fiscal years)?
If the registrant or the target determines the revenue component is applicable (i.e., they are permitted to consider the predecessor entity revenues and determined the revenues are material for the two most recently completed fiscal years), how does the registrant or the target apply the revenue component of the income test when the successor (registrant or target) has less than one year of revenues? Should the registrant apply FRM 2025.10 by analogy and use only the successor’s revenue (unless a request is made of the staff (and granted) to use S-X Article 11 pro forma amounts)? Should the target apply FRM 2025.11 by analogy and use S-X Article 11 pro forma revenue?

In response, the staff noted that the registrant should consider the activity for the full relevant period (i.e., without regard to separation of predecessor and successor periods) in determining whether there is material revenue in the two most recently completed fiscal years. The revenue component would be applied consistent with the income component of the income test as described in the FRM.

> F. Applicability of the revenue component for purposes of applying S-X Rule 8-03(b)(3)

S-X Rule 8-03(b)(3) indicates the significance of equity investees for the purpose of SRC financial statement disclosure requirements should be measured on the basis of “a registrant’s consolidated assets, equity or income from continuing operations attributable to the registrant.”

FRM 2420.9 clarifies that an SRC registrant should compute significance in accordance with the three tests in S-X Rule 1-02(w). The Committee asked whether Note 2 to FRM 2420.9 should be read to include the revenue component of the income test described in Rule S-X Rule 1- 02(w)(1)(iii). The staff indicated that Note 2 to FRM 2420.9 should be read to encompass the revenue component of the income test.