Table of Contents
TOPIC ONE: REGISTRANT’S FINANCIAL STATEMENTS 1
- Financial Statements and Schedules in Registration and Proxy Materials 1-1
- Age of Financial Statements in a Registration Statement or Proxy 1-8
- Periodic Reporting Requirements (Exchange Act Filings) 1-12
- General Considerations (All Filings) 1-17
TOPIC TWO: OTHER FINANCIAL STATEMENTS REQUIRED 2-1
- Businesses Acquired or To Be Acquired 2-1
- Real Estate Acquisitions and Properties Securing Mortgages 2-25
- Financial Statements of Equity Investments not Consolidated 2-31
- Other Financial Statements Required 2-33
TOPIC THREE: PRO FORMA FINANCIAL INFORMATION, FORECASTS, AND FORWARD LOOKING INFORMATION 3-1
- Circumstances Requiring Pro Forma Presentations 3-1
- Preparation Requirements — Form and Content 3-3
- Special Problems and Issues 3-13
- Special Applications 3-14
- Alternative Presentation of Financial Forecast 3-17
- Other 3-17
TOPIC FOUR: INDEPENDENT ACCOUNTANTS’ INVOLVEMENT 4-1
- Qualification of Accountants 4-1
- Accountant’s Reports 4-2
- Review and Compilation Reports 4-6
- Change in Accountants; Disagreements 4-8
- "To Be Issued" Accountant’s Reports 4-9
- Other Matters 4-9
TOPIC FIVE: SMALL BUSINESS ISSUERS (Regulation S-B) 5-1
- Definition and Eligibility 5-1
- Other Eligibility Issues 5-3
- Form and Content Disclosure Required by Regulation S-K Are Not Applicable 5-5
TOPIC SIX: FOREIGN PRIVATE ISSUERS & FOREIGN BUSINESSES 6-1
- Definition and Basic Rules 6-1
- General Financial Statement Requirements for Foreign Private Issuers 6-2
- Reconciliation to U.S. GAAP 6-7
- Content of Reconciliation to U.S. GAAP 6-10
- Selection of a Reporting Currency 6-16
- Price-Level Adjusted Financial Statements and Effects of Hyperinflationary Environments 6-18
- Foreign Auditor Matters 6-20
TOPIC SEVEN: RELATED PARTY MATTERS 7-1
- General Disclosure Requirements 7-1
- Expenses Incurred on Behalf of Registrant 7-2
- Transfers and Receivables for Shareholders 7-3
- Components of Larger Entities 7-4
- Research & Development Arrangements 7-5
- Compensation Issues 7-5
TOPIC EIGHT: NON-GAAP MEASURES OF FINANCIAL PERFORMANCE, LIQUIDITY AND NET WORTH 8-1
- Disclosure of Non-GAAP Measures Such as Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") 8-1
- Ratio of Earnings to Fixed Charges 8-4
- Tangible Book Value per Share 8-5
APPENDIX A: FORM AND CONTENT OF FINANCIAL STATEMENTS A-1
- Balance Sheet Format and Classifications A-1
- Assets A-2
- Liabilities A-8
- Redeemable Stock and Other Equity A-13
- Statement of Operations A-16
- Statement of Cash Flows A-25
- Other Typical Disclosures A-25
- Disclosures in Interim Financial Statements A-28
APPENDIX B: REVERSE ACQUISITIONS B-1
- Accounting Issues B-1
- Reporting Issues B-2
APPENDIX C: EFFECTS OF SUBSEQUENT EVENTS ON FINANCIAL STATEMENTS REQUIRED IN FILINGS C-1
- General C-1
- Business Combination Accounted for as a Pooling of Interests C-1
- Business Combination Accounted for in a Manner Similar to a Pooling of Interests C-3
- Discontinued Operations C-3
- Stock Splits C-3
APPENDIX D: TENDER OFFERS D-1
- Regulatory Schemes D-1
- Documents Filed D-2
- Cash Offer Financial Statement Requirements D-2
- Item 1010 of Regulation M-A -- Financial Statements D-5
APPENDIX E: EMPLOYEE STOCK BENEFITS PLANS E-1
- Filing Requirements of Form S-8 and Form 11-K E-1
- Exchange Act Age of Financial Statements Requirements E-3
APPENDIX F: MULTI-JURISDICTIONAL DISCLOSURE SYSTEM F-1
- MJDS Offerings — Eligibility Requirements F-1
- Registration and Periodic Reporting under the Exchange Act F-2
- Tender Offers F-5
- Canadian Regulation F-6
Topic One: Registrant's Financial Statements
I. Financial Statements and Schedules in Registrations and Proxy Materials
A. AUDITED ANNUAL FINANCIAL STATEMENTS
1. Required audited financial statements for a domestic registrant in a registration statementor proxy materials:
Statement |
Regulation S-X [3-01, 3-02, 3-04] |
Regulation S-B [Item 310] * |
Special Notes |
Balance sheet |
2 years |
1 year | |
Income Statement |
3 years |
2 years | |
Stockholders’ Equity |
3 years |
2 years |
May be presented in a note to the financial statements. |
Cash Flow |
3 years |
2 years |
Presented for same periods as an income statement. Required by SX 3-02 whether or not an audited balance sheet is presented for the period. |
Comprehensive Income |
3 years |
2 years |
Display with same prominence as other financial statements with reclassification adjustments displayed either on the face of the financial statement or in the notes to the financial statements. |
* See Topic Five for S-B eligibility criteria.
NOTE: Financial statements included in Form 10-SB need only be audited for the most recent fiscal year if audited financial statements for the preceding year are not otherwise available. If this is the case, unaudited financial statements prepared in accordance with GAAP for the preceding year should be included in the filing. [Part F/S of Form 10-SB]
2. Exceptions and Special Cases
- Form 1-A (available forqualifying small stock issuances) requires two years of financial statements. They may be unaudited unless the issuer is otherwise required to file audited statements with the Commission.
- Unaudited fiscal year-end data may be provided if it is not otherwise required to be audited. [SAB 1C]
- An income statement may be omitted if income and expense through the balance sheet date are nominal, but an audited footnote should summarize any activity. [SP]
- A change in fiscal year requires transition period financial statements. Refer to III.3.
B. UNAUDITED INTERIM FINANCIAL STATEMENTS
Required unaudited interim financial statements [SX Article 10] for a domestic registrant to be presented in a registration statementmade effective or a proxy statementmailed 135 days or more after the fiscal year-end.
Statement |
Regulation SX and SB |
Special Notes |
---|---|---|
Balance Sheet |
As of interim date within 135 days of effectiveness or mailing | |
Income Statement and Cash Flow |
For period from the latest fiscal year end to the interim balance sheet date, and for the corresponding period in the prior fiscal year * | |
Stockholders’ Equity |
For period from the latest fiscal year end to the interim balance sheet date |
May be presented in a note to the financial statements |
Comprehensive Income |
Same as income statement |
Abbreviated disclosures may be presented in a note to the financial statements |
* Corresponding prior year interim period not required in Form 1-A
C. SUPPLEMENTAL SCHEDULES [ARTICLE 12]
1. Required for fiscal years or year-ends as specified by the applicable article of Regulation SX.
2. Not required for SB filers or Form 1-A.
Not required in proxies, except certain schedules required for insurance and real estate companies. [PR Item 13 Instruction 3]
D. PROXY MATERIALS
1. An annual report to shareholders containing audited financial statements for the most recently completed year must accompany or precede a proxy relating to an annual meeting at which officers and directors will be elected.
For what actions are financial statements required in proxy materials?
Financial statements are required where action is taken to authorize, issue, exchange or modify securities, or for a material merger or acquisition. For actions other than business combinations, financial statements are not required if they would not be material for the exercise of prudent judgment concerning the matter to be acted upon, like authorization or issuance of securities for cash. [Instructions to PR Item 13a.]
2. Business Combinations
In a proposed business combination, what financial statements are required in proxy materials?
The answer depends on who is voting and the nature of the consideration.
Voting Shareholders |
Consideration |
Financial Statements |
---|---|---|
Acquirer only |
Cash only |
Financial statements of the target are required since that information is material to a voting decision
· 3 years + interims under S-X
· 2 years + interims under S-B
Financial statements of the acquirer are not required, unless they are material to a voting decision, since shareholders are presumed to have access to information about their company.
Pro forma information is required if it is material to a voting decision. |
Acquirer only |
Exempt securities only or a combination of exempt securities and cash |
Financial statements of the target are required since information is material to voting decision
· 3 years + interims under S-X
· 2 years + interims under S-B
Financial statements of the acquirer are not required, unless they are material to a voting decision, since security holders are presumed to have access to information about their company.
Pro forma information is required if it is material to a voting decision. |
Target only |
Cash only |
Financial statements of the target are not required since security holders are presumed to have access to information about their company, unless it is a going private transaction.
If the acquirer has demonstrated its financial ability to satisfy the terms of the transaction, its financial statements are generally not required. If required, need only 2 most recent fiscal years and interim periods.
No pro forma information is required. |
Target only |
Exempt securities only or a combination of exempt securities and cash |
Financial statements of the target are not required since security holders are presumed to have access to information about their company, unless it is a going private or a roll-up transaction.
Financial statements of the acquirer are generally required since that information is material to a voting decision.
· Need only 2 most recent fiscal years and interim periods.
Pro forma information is required, if material. |
NOTE: If the consideration issued in the business combination includes registered securities, registrants must comply with the financial statement requirements of Form S-4 or Form F-4. See Topic Two.
3. Audit Requirement
The audit requirements for nonreporting target companies have been relaxed. Financial statements for the latest fiscal year must be audited if practicable. Financial statements for prior years need not be audited if they were not previously audited.
E. BANK REORGANIZING UNDER NEWLY-FORMED HOLDING COMPANY
Form |
Financial Statement Requirements |
---|---|
Form S-4 to register common stock in exchange for all of a bank’s common stock in a transaction which satisfies all of the criteria stipulated in SAB 1F.* |
Financial statements may be omitted from a Form S-4, if the bank separately furnished to its shareholders financial statements prepared in accordance with GAAP (that need not be audited) for at least the most recently completed fiscal year. Similarly, Guide 3 data may be omitted from the registration statement. |
First Annual Report on Form 10-K |
Audited financial statements and Guide 3 data must be furnished for at least the two most recent fiscal years. |
* Generally, a reorganization with no changes in relative interests, no leverage, and no new classes of stock. In SAB 1F, "Form S-4" should be substituted for all references to "Form S-14".
1. Registrants marking the box on the cover of Form S-4 that are in compliance with General Instruction G to the Form are declared effective automatically. Failure to check the box or to meet all of the conditions of General Instruction G means that the registration statement will not be declared effective automatically.
2. General Instruction G requires that the transaction being registered involves the organization of a bank or savings holding company for the sole purpose of acquiring the stock of a bank or savings institution in addition to the requirements of SAB 1F. If the purpose of the transaction includes other actions by shareholders, the registrant may not satisfy the conditions of Instruction G. Even though the registration statement is not declared effective automatically, financial statements may not be required provided all of the conditions of SAB Topic 1F are met.
F. RECENTLY ORGANIZED REGISTRANT [SP]
In a filing to be made effective before the registrant is capitalized on other than a nominal basis: |
Registrant financial statements may be omitted unless the registrant will acquire or otherwise succeed to a business for which financial statements are required to be included. If omitted, the prospectus should include a statement that the entity has not commenced operations and has no (or nominal) assets or liabilities. Contingent liabilities and commitments should be described in sufficient detail. |
If the registrant is a "shell" into which an operating company will be recapitalized: |
Registrant financial statements may be omitted.
Complete audited financial statements of the operating company (as predecessor of the registrant) must be provided.
Example: A company wants to change its state of incorporation in order to facilitate an IPO. To do that, a new corporation incorporated in Delaware (Newco) was formed and all of the shareholders of the company will exchange their equity ownership interests in the company for identical interests in Newco. Separate financial statements of Newco are not required in the registration statement. |
If the registrant will succeed to a business in a transaction that is not a reorganization: |
Include the financial statements of both the acquired/predecessor business and the registrant in the filing |
What is a "shell" company?
A "shell" company is an entity with minimal net assets and operations.
G. PREDECESSOR FINANCIAL STATEMENTS
Financial information of a registrant’s predecessor is required for all periods prior to the registrant’s existence, with no lapse in audited periods or omission of other information required about the registrant. Any interim period of the predecessor prior to its acquisition by the registrant should be audited when audited financial statements for the period after the acquisition are presented. Schedules required by SX Article 12 are required for predecessor entities.
What is a predecessor entity?
The definition of "predecessor" at RC 405 is very broad. For purposes of financial statements, the staff generally does not require designation of an acquired business as a predecessor except where a registrant succeeds to substantially all of the business (or a separately identifiable line of business) of another entity (or group of entities) and the registrant’s own operations prior to the succession appear insignificant relative to the operations assumed or acquired. [SP]
H. DEVELOPMENT STAGE COMPANY [FAS 7]
1. What is a development stage company?
It is an entity devoting substantially all of its efforts to establishing a new business and either (a) its planned principal operations have not commenced, or (b) its planned principal operations have commenced but have not yet generated significant revenues.
2. Financial statements required to be presented for a development stage company:
- Statements identified as those of a development stage company. The first year after exiting the development stage, the company should disclose that it is no longer a development stage company.
- Balance sheet with cumulative net losses described as "deficit accumulated during the development stage."
- Income and cash flows statements for each period, plus a cumulative income statement from inception.
- Statement of stockholders’ equity showing each issuance of stock since inception.
- Ordinarily, a development stage company may omit financial statements of the prior comparable interim period. However, if the registrant remains in the development stage more than two years, comparable period information may be necessary to evaluate trends in administrative and other costs. [SP]
NOTE: Auditor association with the cumulative data is required on an annual basis as long as the registrant is in the development stage. If the cumulative column in a registration statement includes results from an unaudited interim period subsequent to the latest audited balance sheet date, the auditor’s report need not make reference to the cumulative data. The staff will consider requests for waiver of the requirement for audit of the cumulative data in annual statements where it is impracticable to obtain that audit. [SP] |
I. SUPPLEMENTAL FINANCIAL STATEMENTS
If a material business combination to be accounted for using the pooling-of-interests method has been consummated after the latest balance sheet date and post-combination operating results have not been published, a registrant may not reflect the business combination in its financial statements. However, the registrant may elect to provide, and may be required to provide in connection with registration statements or proxies, supplemental audited financial statements giving effect to the pooling of interests. See Appendix C for guidance applicable to supplemental or restated financial statements as a result of post-balance sheet events, including transactions accounted for in a manner similar to a pooling of interests.
II. Age of Financial Statements in a Registration Statement or Proxy [SX 3-12, SB 310(g)]
A. STAFF REVIEW
1. Staff should not commence review of a filing unless the registrant’s financial statements comply with the rules for age of financial statements and audit at the date of filing. The staff should evaluate compliance immediately upon assignment for review.
2. In certain circumstances, the staff will consider an issuer’s special processing needs for a transaction. However, the issuer is expected to discuss their particular needs with the Division’s staff in advance of filing.
B. AGE REQUIREMENTS
1. The following applies to both SX and SB filers.
a) General Rule |
Latest balance sheet must be as of a date less than 135 days (or 180 days on Form 1-A) before the effective date of the registration statement (or date the proxy is mailed).
Example: A Form S-1 with an audited December 31, 1997 balance sheet (fiscal year-end) cannot be declared effective after May 14, 1998 without updating. |
b) Rule for Initial Filers |
A registration statement should be not declared effective later than the 134th day after the latest balance sheet date, except that third quarter data is timely through the 45th day after the most recent fiscal year-end. After the 45th day, that fiscal year-end must be audited. SB issuers may be declared effective with third quarter financial information up to 90 days after year-end if the issuer expects to report income in the current year and has reported income in at least one of the two previous years.
Example: A Form S-1 for a registrant with a calendar year-end with an interim balance sheet as of the end of the first quarter (March 31) cannot be declared effective after August 12 without updating. A Form S-1 for a calendar year-end registrant with an interim balance sheet dated September 30 cannot be declared effective after February 14. |
c. Year-end Rule for Repeat Filers |
Repeat issuers do not need to update third quarter interim financial statements until the 90th day after their fiscal year end, if they satisfy the 3 conditions of SX 3-01(c) [SB 310(g) for SB filers]:
· Filed all Exchange Act reports due,
· Expect to report income in the year just completed, and
· Reported income in at least one of the two previous years.
Unless all three conditions are met, registration statements declared effective after the 45t day following the fiscal year end must include audited financial statements for the most recent fiscal year end. A repeat issuer that has not filed its first Exchange Act report since an initial offering has not met condition (1) above.
NOTE: If the audited financial statements for the most recently completed fiscal year are available or become available prior to effectiveness or mailing, they must be included in the filing. |
d. Newly formed registrant |
Audited financial statements are required as of a date less than 135 days before the initial filing date of the registration statement. Subsequent updates to comply with the 135 day rule may be made on an unaudited basis, except that audited financial statements are required if the registration statement is to be made effective more than 45 days after the company’s fiscal year end, [SX 301(a)]
Example: A registrant with a December 31, 1997 year end was formed on May 1, 1997. A Form S-1 is filed on November 5, 1997. The Form S-1 must contain an audited balance sheet dated June 24, 1997 or later. |
e. Accommodation for timely filers |
The staff will declare a registration statement effective if:
· interim financial statements in the filing are at least as recent as the quarterly information that has been filed as required by the Exchange Act at the time of effectiveness, and
· the filer has filed all of its Exchange Act reports in the last 12 months in a timely fashion.
However, the issuer must confirm that the quarterly report will be timely filed after effectiveness and that there have been no material trends, events or transactions that arose subsequent to the date of the latest balance sheet included in the filing that would materially affect an investor’s understanding of the registrant’s financial condition and results of operations. A description of these items in the next quarter ordinarily will not suffice.
Example: A Form S-3 eligible registrant with a calendar year-end files a registration statement containing interim period financial statements as of June 30. Interim period financial statements as of September 30 would ordinarily be required under the 135 day rule on November 12. Since the registrant’s September 30 Form 10-Q would not be due until November 14 (45 days after September 30), the Form S-3 may be declared effective on November 12 or November 13 provided that the above representations are made. |
f. Continuous and Shelf Offering |
A prospectus must be updated by post-effective amendment if it is in use beyond nine months after its effective date and if the audited balance sheet is more than 16 months old. [33A-10(a)(3) & RC 427] |
g. Proxies |
Same as the guidance for registration statements, except substitute the date of mailing for date of effectiveness. |
h. Combination Form S-4 / Proxy |
Age of financial statements is determined with reference to the date of effectiveness of the Form S-4 and not the mailing of the proxy, unless mailing is delayed beyond the time necessary to prepare the material for mailing (generally no more than a few days after effectiveness of the S-4). |
i. Forms 10 and 10-SB |
Age of financial statements is determined by reference to the effective date of the filing. See Section III.A.4 for discussion of automatic effectiveness.
NOTE: During the period between initial filing and effectiveness, a registrant may update financial statements by amending the registration statement or by filing the applicable Exchange Act form (e.g., Form 10-Q). [SP] |
j. Post-effective Amendments |
All post-effective amendments that revise the prospectus are considered "new filings" and need to include updated financial statements meeting the requirements of Regulation SX at effectiveness of the amendment. [SK 512]
NOTE: Amendment of a registration statement to provide an exhibit does not amend the prospectus. |
k. Sticker Supplements and Post-Effective Amendments consolidating Sticker Supplements for Real Estate |
Sticker supplements and post-effective amendments that consolidate supplements are not considered new filings for purposes of updating the registrant’s financial statements if they are filed by real estate companies pursuant to Undertaking D of Guide 5 solely for the purpose of providing the financial statements of acquired properties. [R33-6405] |
l. Effect of Holiday or Weekend |
If the last day of the period after which financial statements must be updated (that is, the 134thday after the first, second or third quarter-end, or the 45thor 89thday following a fiscal year end) falls on a Saturday, Sunday or holiday, the filing may be made on the next following business day without updating the financial statements [RC 417]. The same rule holds true when an Exchange Act filing due date falls on a weekend or holiday. [EAR 0-3] |
III. Periodic Reporting Requirements (Exchange Act Filings)
A. COMPANIES REQUIRED TO REPORT
1. If a company has registered an offering of securities under the Securities Act, that Company is required to file reports for periods ending after the date of the last balance sheet included in the registration statement. [EAR 15d]
2. Companies are required to register securities and file periodic reports if they:
- have 500 or more shareholders and $10 million or more of assets as of the latest fiscal year-end [EAS 12(g)], or
- have shares traded on a national exchange. [EAS 12(b)]
3. A Company already reporting pursuant to Sections 13 or 15(d) may register under Section 12 of the Exchange Act by filing Form 8-A. Other U.S. companies must register on Form 10 (foreign companies register on Form 20-F). A Form 8-A filed concurrently with a Securities Act registration statement becomes effective automatically on the later of the filing of the Form 8-A, the effective date of the registration statement, or, if the securities will be listed on a U.S. stock exchange, receipt by the Commission of certification from the exchange.
4. Certain registration statements go effective automatically as follows:
If Filed Under: |
Registration Statement Goes Effective: |
Section 12(g) |
60 days after the initial filing, or earlier if acceleration is requested and granted. |
Section 12(b) |
30 days after certification by the applicable exchange or earlier if acceleration is requested and granted. |
5. A Company may suspend its reporting requirement by filing a Form 15 if [EAR 12h-3, 12g-4]:
- the Company has less than 300 shareholders andhas filed at least one Form 10-K (not including a Special Report), or
- the company has
- Fewer than 500 shareholders,
- Less than $10 million in assets for the last three fiscal year-ends, and
- Has filed at least three Form 10-K’s since the most recent registered offering of its securities
B. FINANCIAL STATEMENTS REQUIRED
Forms 10 and 10-SB (for registration under Section 12) |
Same as described at I.A and B. |
Forms 10-K and 10-KSB (Annual Reports) |
Same as described at I.A. |
Forms 10-Q and 10-QSB (Quarterly Reports) * |
Same as described at I.B plus:
· Balance sheet as of last fiscal year-end for Form 10-Q only; and
· Statements of income for most recent quarter alone, and prior comparable quarter alone (a statement of cash flows for these quarters is not required). |
* Financial statements may be condensed and must be reviewed by an independent accountant prior to filing as described in SX Article 10.
1. Special Reporting Cases
- Inactive registrants may provide unaudited financial statements in Form 10-K.What is an inactive registrant?
A registrant whose gross receipts or expenditures do not exceed $100,000; no purchases, sales or distributions of securities; and no material changes (no bankruptcy, reorganization, etc.) (SX 3-11).
- Registrants Operating under the Protection of Bankruptcy Laws
- Such registrants may obtain relief from certain Exchange Act reporting requirements by writing to OCC prior to the due date for filing the report in which relief is requested. In certain circumstances, OCC has taken a no-action position when a registrant has filed only the information it filed with the Bankruptcy Court. See Staff Legal Bulletin 2.
- If relief is granted for filings while operating under the protection of the bankruptcy laws, the registrant is required to file an audited balance sheet as of the date of emergence.
- Even if prior relief from Exchange Action reporting obligations is granted, a subsequent Securities Act registration statement will not be declared effective if audited financial statements for all periods required by the Form, including pre-emergence periods, are not included. A registrant that has filed only Bankruptcy Court filings under relief would not be considered "current" in its Exchange Act reporting for Form S-2 or Form S-3 eligibility purposes.
- Mutual life insurancecompanies and certain mining companies in the exploratory stageare exempt from Part I disclosures required by Form 10-Q [EAR 13a-13(b)].
C. DUE DATES
1. Exchange Act reports are due as follows:
Annual Reports (Forms 10-K and 10-KSB) |
90 days after the fiscal year-end. |
Quarterly Reports (Forms 10-Q and 10-QSB) |
45 days after the quarter end. |
Other disclosures reportable under Form 8-K |
15 days after the event, except for changes in accountants and resignations of directors, which must be reported within 5 business days. |
2. Automatic extensions of due dates for periodic reports are available (up to 5 calendar days for quarterly reports and 15 calendar days for annual reports) if all or any portion of the report cannot be filed timely without unreasonable effort or expense. A registrant must file Form 12b-25 no later than one day after the due date of the form for which relief is requested. No further extensions are available.
3. After a registrant’s first registration statement is declared effective, a Form 10-Q for the quarter following the period included in the registration statement is due the later of 45 days after effectiveness or the date the Form 10-Q would otherwise be due. [EAR 15d-13]
Example: If a registrant’s fiscal quarter ended June 30 and the registration statement went effective on July 14, the Form 10-Q for the quarter ended June 30 is due 45 days from July 14, which is August 28. If the registration statement went effective on June 24, the Form 10-Q is due on the date it would ordinarily be due (45 days from the end of the quarter), which is August 14.
4. When an IPO is made effective within 45 days (90 days for a Small Business Issuer) after the fiscal year-end, but does not include the audited statements of the just recently completed year, the following reporting requirements apply:
If the registrant files a Form 8-A to register under Sections 12(b) or 12(g) of the Exchange Act |
File an Annual Report on Form 10-K within 90 days after its fiscal year-end. |
If the registrant is subject to the Exchange Act reporting requirements by virtue of Section 15(d) |
File a Special Report* on Form 10-K within 90 days of effectiveness containing audited statements for that year. A complete Annual Report on Form 10-K is not required until the following fiscal year. [EAR 15d-2] |
* This Special Report does not need to include MD&A or other narrative disclosures ordinarily required in a Form 10-K, but registrants are encouraged to provide that information. To comply with rules of the exchange on which they are listed (not Commission rules), companies may need to file a complete Form 10-K, rather than a special report. Even if omitted from a special report, MD&A and other omitted information would need to be included in any subsequent registration statement or proxy statement.
D. LENGTH OF FISCAL YEAR
1. Fiscal years may not exceed 12 months. Under SX 3-06, nine to twelve months of audited financial statements will meet the requirement for one year of audited financial statements:
- for financial statements of an acquired business, or
- when a registrant has changed its fiscal year (see immediately below).
NOTE: These criteria also apply to SB filers. |
2. A registrant cannot substitute nine months of results in satisfaction of a requirement for one year in other circumstances without prior consultation with DCAO.
E. CHANGES IN FISCAL YEAR
1. When a company changes its fiscal year it is required to file a report covering the transition period. [EAR 13a-10, 15d-13 & FRC 102.05]
What is a transition period?
The period between the closing of the registrant’s most recent fiscal year and the opening date of its newly selected fiscal year.
2. Transition reporting requirements are as follows:
If the transition period is: |
File a transition report: |
6 months or more |
On Form 10-K within 90 days after the later of the election to change the fiscal year or the end of the transition period. The transition period financial statements must be audited. |
Less than 6 months |
On Form 10-K as above, or on Form 10-Q within 45 days after the later of the election or transition period-end. The transition period may be unaudited in Form 10-Q, but the next Form 10-K must contain audited financial statements of the transition period. |
One month or less |
No separate filing is required. However, the one month transition period must be audited and included in the next Form 10-K. |
3. Other notes regarding changes in fiscal periods:
- Transition reports must include prior year information comparable to the transition period. Comparable year information may be unaudited and may be provided on a condensed basis and in the footnotes to financial statements instead of separate statements. [FRR 35] All information responsive to the textual items of the reporting form (i.e., SK Items 101, 103 and 303 for Form 10-K) must be provided in the transition report. [FRR 35]
- No audited reporting period, under any circumstances, may exceed 12 months for domestic issuers.
- Even if an issuer complies with Exchange Act requirements following an election to change the fiscal year, it may be required to provide more current audited financial statements in a Securities Act registration statement by the form’s instructions.
- A business combination accounted for as a reverse acquisition may result effectively in a change in fiscal year. See Appendix B.
IV. General Consideration (All Filings)
A. BASIS OF REPORTING
1. Regulation S-X and GAAP must be followed. Financial statements not prepared in accordance with GAAP are presumed to be inaccurate or misleading. [SX 4-01(a)(1)]
Exceptions to compliance with S-X are:
a) Small Business Issuer |
Follow Regulation S-B and not S-X. S-X differs from GAAP and S-B primarily in its requirement for supplemental schedules and in its designation of specific formats and quantitative levels of materiality for many disclosures. Auditor reporting and independence requirements of SX Article 2 and the full cost oil and gas disclosures required by SX 4-10 apply to Small Business Issuer forms. Small business issuers should comply with the requirements of SB 310(d), but may wish to consider the guidance in SX Article 11. |
b) Annual Report to Shareholders |
Does not need to include the separate financial statements, pro forma data, or schedules required by Articles 3, 11 and 12 of Regulation SX, or predecessor audit reports. [PR 14a-3] |
c) Royalty Trusts |
May report on a different basis pursuant to SAB 12E. |
d) Mutual Life Insurance Companies |
May present financial statements on statutory basis. [SX 7-02] For periods after December 31, 1995, statutory basis financial statements can no longer be characterized as being in conformity with GAAP. However, a mutual insurance company converting to stock form must follow GAAP for stock companies for all periods presented. |
B. CONSOLIDATED FINANCIAL STATEMENTS [SX 3A-02]
Generally, majority owned subsidiaries should be consolidated but that presumption may, in some circumstances, be overcome. Careful analysis of the facts and circumstances should be applied to evaluate the existence of a controlling financial interest equivalent to majority ownership of voting stock, notwithstanding the absence of legal ownership of a majority of voting stock. [FRC 105, ARB 51, FAS 94 and EITF 96-16]
Certain changes in equity ownership are reflected in the financial statements as follows:
Condition |
Accounting |
Change from consolidation or equity method to cost method |
Results in the establishment of a new cost basis, prospectively. For periods prior to the change, continue to present the investment on a consolidated basis or under the equity method, whichever was applicable. |
Change from equity method to consolidation or from consolidation to equity method |
Usually NOT reflected retroactively. Change is accounted for prospectively from the date of change.[1] Generally, the staff has not objected to retroactive presentation from the beginning of the fiscal year in which the change occurs. It is generally inappropriate to restate prior fiscal years, although pro forma information may be useful in MD&A. |
Change from cost method to equity method |
Typically reflected on a retroactive basis in the financial statements. [APB 18.19] |
C. GUARANTEED SECURITIES
A guarantee of a security is considered a security, and the guarantor is subject to the reporting and registration requirements applicable to other issuers. Relief from separate reporting and financial statement requirements is available for guarantors in certain limited circumstances. [See Topic Two, IV.A]
D. LIQUIDATION BASIS FINANCIAL STATEMENTS
In unusual circumstances, it may be appropriate to present financial statements on a liquidation basis. Audit reports on those statements are described in AU 9508.33-37.
E. FISCAL YEARS DIFFERING BY 93 DAYS OR LESS
1. Consolidation of a parent and subsidiaries with year-end differences not exceeding 93 days is permissible (accompanied by disclosure of the different closing date and its justification). However, intervening events that materially affect financial position or operating results should be disclosed. [ARB 51] Where fiscal years differ by more than 93 days, statements of the subsidiary should be adjusted to a period that more nearly corresponds with the fiscal period of the parent.
2. In connection with a retroactive combination of financial statements of an entity following a pooling, the financial statements of the combining entities may be combined even if their respective fiscal periods do not end within 93 days of each other. However, in this instance, the financial statements of the latest fiscal year (i.e., the fiscal year in which the pooling is consummated), shall be recast to dates which do not differ by more than 93 days. The "catch-up" period is reflected as an adjustment to shareholders’ equity. In the absence of other circumstances, where practicable, we believe that the most preferable presentation usually will combine twelve sequential months of the conforming company’s results while minimizing the number of days that are omitted from, or counted twice in, the restated financial statements. The staff will object to methods of retroactively combining the financial statements that do not result in a fair representation of historical results of the combined entities.
3. Financial Statement Disclosures
- The periods combined and the revenues, net income before extraordinary items and net income of any interim periods excluded from, or included more than once in, the results of operations as a result of recasting;
- The operating, investing and financing cash flows of any interim period excluded from, or included more than once in, the recast financial statements on the face of the statement of cash flows, or in the notes to the financial statements; and
- Any additional quantitative and narrative disclosure about gross profit, selling and marketing expenses, and operating expenses necessary to inform readers about the effect of unusual charges or adjustments in the omitted or double counted period. [SX 3A-02]
F. PARTNERSHIPS [SAB 4F]
1. Consolidation and Equity Method Accounting
Partnerships controlled by the registrant should be consolidated. [SOP 78-9, EITF Topic D-46 and TPA 1400.13 & 1400.19] Limited Partnership interests owned by the registrant generally should be accounted for under the equity method, unless the investor’s interest is so minor that the limited partner may have virtually no influence over the partnership’s operating and financial policy. Investments of more than 3%-5% generally are considered to be more than minor.
2. Financial Statement Presentation
Equity Section of the Balance Sheet |
Statement of Changes in Equity |
Statements of Income & Comprehensive Income |
Distinguish between amounts ascribed to each ownership class (i.e., GP vs. LP’s) with authorized and outstanding units disclosed for each class. |
Present for each class. |
Show net income allocable to each class, with results of operations and comprehensive income reported on a per unit basis. |
3. Taxable incomeshould be disclosed in a reconciliation from GAAP net income. [SP]
G. QUASI REORGANIZATIONS [TPA 4220, SAB 5S, FRC 210]
1. Fair market valuation of assets and liabilities should not result in a net asset value exceeding that reported prior to the quasi-reorganization. Any reorganization value in excess of previously reported net assets should be treated as a reduction of goodwill, then other intangibles, then other non-current assets.
2. Registrants are required to recognize liabilities under FAS 87 and FAS 106 in a quasi-reorganization, as well as other liabilities that would be recognized in allocation of purchase price in a business combination.
3. For a period of at least ten years subsequent to the effective date of a quasi-reorganization, any description of retained earnings should indicate the point in time from which the new retained earnings dates. Indicate the total number of deficit eliminated on the face of the balance sheet for a period of time of at least three years. [SX 5-02.31b]
H. MISCELLANEOUS CONSIDERATIONS
1. Fiscal Year-end. Presumed to be calendar year-end if no closing date has been adopted. [SX 1-02(k)]
2. Ordering of Fiscal Year Data. Consistent chronological order generally should be followed in presentation of financial data throughout the filing to avoid confusion. [SAB 11E]
3. Substance Over Form-Financial. Accounting should emphasize the economic substance over legal form. [AU 9411.11] However, legal form may be decisive with respect to matters involving control, liability, ownership and other factors that are central to the substance of a transaction. In addition, accounting literature specifically prescribes certain treatments on the basis of the form of the transaction (for example, pooling-of-interest method).
4. Staff Accounting Bulletins. Should be applied to analogous circumstances.
5. GAAP Hierarchy. Registrants should apply the hierarchy of GAAP literature as defined at AU 411.10.
I. MATERIALITY
1. Defined as a matter about which an average prudent investor ought reasonably to be informed. [SX 1-02(o)] A matter is material if there is a substantial likelihood that a reasonable person would consider it important.
2. If an item otherwise required by SX is not material, it need not be presented separately. Inapplicable items of SX need not be followed, but the reasons for omission should be clearly stated. [SX 4-02 & 03]
3. SX Article 5 applies a materiality level of 5% if current assets and liabilities and 5% of total assets and liabilities for caption display.
4. For purposes of assessing a financial statement misstatement, the use of a numerical threshold, such as 5%, may provide the basis for a preliminary assumption that — without considering all relevant circumstances — a deviation of less than the specified percentage with respect to a particular item on the registrant’s financial statements is unlikely to be material. The staff has no objection to such a "rule of thumb" as an initial step in assessing materiality. But quantifying, in percentage terms, the magnitude of a misstatement is only the beginning of an analysis of materiality, it cannot appropriately be used as a substitute for a full analysis of all relevant considerations. [SAB 1M]
5. Materiality must not be considered just in terms of a numerical or percentage misstatement. The "total mix" of information should also be considered. The total mix includes not only numerical or percentage terms of misstatement, it also includes the factual context in which the user of financial statements would view the financial statement item. Factors that may affect the materiality of a quantitatively small misstatement include, but are not limited to, the following:
- degree of precision inherent in an estimate
- a change in earnings or other trends
- failure to meet analysts’ consensus expectations for the enterprise
- change from a loss to income or vice versa
- effect on a segment identified as playing a significant role in the registrant’s operations of profitability
- compliance with regulatory requirements
- compliance with loan covenants or other contractual requirements
- effect on management’s compensation
- concealment of an unlawful act [SAB 1M]
6. When changes in accounting occur or accounting errors are identified, their materiality should be considered in relation to both the effects of each change separately and the combined effect of all changes. If a change or correction has a material effect on results of the current period, the guidance of APB 20 should be followed. A change, which does not have a material effect in the period of change but is reasonably certain to have a material effect in later periods, should be disclosed whenever the financial statements of the period of change are presented. [APB 20]
7. Assessments of materiality of liabilities should not be made on a "net" basis after consideration of related receivables and other claims unless a right of setoff exists. Assets and liabilities may not be offset unless a right of setoff exists. The conditions for right of setoff are found in FIN 39 and discussed in SAB Topic 5Y.
Topic Two: Other Financial Statements Required
This topic identifies circumstances in which financial statements of entities other than the registrant are required to be included in filings. The guidance applicable to financial statements of the registrant (in Topic One) applies also to financial statements of the other entities, unless specified otherwise in this section.
I. Businesses Acquired or To Be Acquired [SX 3-05, SB 310, Form S-4]
A. FINANCIAL STATEMENT REQUIREMENTS
1. Financial statements of acquired businesses are required as follows:
Form |
Financial Statement Requirements |
Registration Statements and Proxies |
a) If less than 50% significant, financial statements of a business acquired or likely to be acquired need not be included unless the registration statement is declared effective (or proxy is mailed) 75 days or more after the acquisition is consummated. Refer to I.D. and I.E. for tests of significance. This rules does not apply to "blank check" issuers.
b) If 50% or greater significant, financial statements of a recent or probable acquisition are required.
c) Certain types of offerings may proceed even if the acquisition exceeds the 50% level (conversions, warrants or rights, drips, benefit plans, secondary offerings, sales pursuant to Rule 144). [Instruction 1 to Item 7 of Form 8-K] |
Form 8-K |
a) Form 8-K reporting the transaction is required within 15 days of the consummation of any business acquisition meeting the 20% significance level or for any asset purchase exceeding 10% significance that does not meet the definition of a business.
b) If the required financial statements of the business acquired are not provided with the initial report, they must be filed by amendment within 75 days after consummation of the acquisition.
NOTE: While a Form 8-K is not required for business acquisitions until the 20% significance level, registrants may elect to report business acquisitions below 20% pursuant to Item 5 of Form 8-K even if financial information is not provided. |
2. The requirements of SX 3-05 and SB 310(c) apply only to acquisitions made by the registrant or its predecessor(s). Those rules call for financial statements of the acquiree and its predecessor(s), if applicable. Financial statements of businesses recently acquired by the acquiree need not be furnished unless their omission would render the acquiree’s financial statements misleading or substantially incomplete. [SP]
NOTE: A flow chart to assist you in determining the need for financial statements of an acquired business in a registration statement is located at the end of this Topic.
3. Definition and Requirements
- Financial statements of the acquired business are generally the same as those as if the acquired company were a registrant as described in Topic One, except that the number of years of audited statements of operations is determined by the level of significance (Section D below). Refer to Section F regarding age of financial statements.
Exceptions: Segment information under FAS 131 and employers' disclosures about pensions and other postretirement benefits are not required for nonpublic acquired businesses. [FAS 131, par. 9, FAS 132, par. 8] Earnings per share under FAS 128 is not required for acquired businesses that do not have publicly held common stock or potential common stock. [FAS 128, par. 1]
- Acquisition of selected parts of an entity may result in less than full financial statements.
- In some circumstances, a registrant does not acquire or succeed to all of the assets and liabilities of another entity. If the registrant acquires or succeeds to substantially all of the entity’s key operating assets, complete audited financial statements of the other entity usually will be required. Elimination of specified assets and liabilities not acquired or assumed by the registrant is depicted in pro forma financial statements presenting the effects of the acquisition. Full audited financial statements of the entity are presumed to be necessary in order to provide investors with the complete and comprehensive financial history of the acquired business.
- In other circumstances, the selling entity will retain significant operating assets, or significant operating assets that comprised the seller will continue to be operated by an entity other than the registrant. Financial statements of the larger entity of which the acquired business was a part may be misleading or uninformative. In that case, audited financial statements usually should be presented for the acquired component business, excluding the continuing operations retained by the larger entity.
- The staff may accept audited statements of assets acquired and liabilities assumed and statements of revenues and direct expenses if it is impracticable to prepare the full financial statements required by Regulation S-X, and explanation of that impracticability is included in the filing.
(a) The staff would expect the statement of revenues and direct expenses to exclude only those costs not directly involved in the revenue producing activity, such as corporate overhead, interest and taxes. Selling, general and administrative costs directly associated with producing revenues reflected in the statement must be included.
NOTE: If the registrant cannot identify or associate all costs necessary for the production, marketing and distribution of products with an acquired product line, it may indicate that the acquisition is not a business as defined in Article 11. Refer to I.C for the definition of a business.
(b) The statement should include a reasonable allocation of expenses incurred by the seller on behalf of the business sold. The reasons for omitting any historical corporate overhead, interest, or tax expense should be explained in a note to the statements. If the type and historical amounts of these omitted expenses are known or reasonably available on an unaudited basis, they should be disclosed in an unaudited footnote. [SP]
- When "carve-out" financial statements or statements of revenues and direct expenses are presented instead of full financial statements, full statements of cash flows are generally not required. However, registrants are required to provide information about the business’ operating, investing and financing cash flows, to the extent practicable, in the notes to the financial statements or in unaudited supplemental disclosures. [SP]
- Accompanying pro forma financial statements should include adjustments, if factually supportable, for excluded items as if the business had been acquired at the beginning of the periods presented. Refer to pro forma requirements and forward looking disclosures in Topic Three.
- Requests for substitution of abbreviated financial information in lieu of full financial statements should be directed to DCAO prior to filing.
- Supplemental schedules (SX Article 12) are not required to be furnished. However, it may be necessary to include in footnotes to the financial statements, or elsewhere in a filing, certain information that ordinarily is furnished in the schedules and that is material to an understanding of the financial statements.
- "Purchase" includes acquisition of an interest in a business that is accounted for under the equity method. Refer to Section C regarding definition of a "business".
- Assessment of "probability" requires consideration of all available facts. Acquisition is probable where registrant’s financial statements alone would not provide adequate financial information to make an investment decision. [FRC 506.02(c)(ii)]
4. Exceptions to SX 3-05 financial statement requirements:
a) Pooling |
Financial statements are not required in a registration statement if the acquisition was accounted for as a pooling-of-interests and is presently reflected in the registrant's restated audited financial statements. However, a reporting company with a significant pooling late in its fiscal year must still file the acquired company’s financial statements on Form 8-K even if the registrant’s Form 10-K is filed prior to the due date of the Form 8-K and includes financial statements restated for the pooling. |
b) Audited annual balance sheet of registrant is of a date after consummation of the acquisition |
Balance sheet of the acquired company is not required. |
c) Acquiree financial statements have been previously filed |
If the acquired operations are included in at least nine months of audited results, financial statements are not required unless the acquisition is of major significance. Although the acquisition may be of major significance at lower thresholds due to factors specific to the registrant, the staff presumes that the acquisition is of such major significance that investors need previously furnished financial statements of the acquired company in the registration statements if:
(1) the acquired business is included in audited results of the registrant for less than 9 months and was significant at the 50% or greater level; or
(2) it is included in audited results of the registrant for less than 21 months and was significant at the 70% or greater level. [SP] |
d) Hostile tenders |
Modified registrant statement requirements may apply to some registration statements covering hostile tender offers to shareholders of a company that will not provide its financial statements. However, if the target of the tender offer is a public company, financial statements of the target that are in the public domain (filed with the Commission) may be incorporated by reference. A consent of the auditor may be required. The staff should consult with OMA and DCAO on these matters. [SAB 1A] See Section VI.A.4 of Topic Four for additional guidance regarding audit report and consent requirements in this situation. |
e) Troubled financial institutions |
If a financial institution is acquired in a federally assisted transaction and constitutes a business having material continuity of operations, the staff will not object to the omission of audited financial statements required by SX 3-05 if the statements are not reasonably available and total assets of the acquired entity do not exceed 20% of the registrant’s precombination total assets. Requests for waivers should be directed to DCAO. Additional disclosures are required when waivers are granted. [SAB 1K] |
f) Foreign target |
If the target is a foreign business, the financial statements need only comply with Item 17 of Form 20-F and are subject to the updating requirements under Item 8 of revised Form 20-F. If the foreign target is a non-reporting company and its financial statements are prepared on the basis of a comprehensive body of accounting principles other than U.S. GAAP, a reconciliation to U.S. GAAP in accordance with Item 17 of Form 20-F is required unless a reconciliation is unavailable or not obtainable without unreasonable cost or expense. If a reconciliation is not available, the filing should contain, at a minimum, a narrative description of all material variations in accounting principles, practices and methods used in preparing the non-U.S. GAAP financial statements from those accepted in the U.S. This guidance also applies to SB filers. The staff should consult with DCAO in instances where the U.S. GAAP reconciliation has been omitted on the basis of unavailability or unreasonable cost. Reconciliation requirements are described at Topic Six. |
5. If a registrant is unable to provide the required financial statements of the acquired business, a request for a no action position by the Division’s staff may be directed to DCAO (see below).
The staff generally will not waive the requirements of Form 8-K. However, in cases involving undue cost or difficulty, the staff usually will not recommend any action against the registrant which is based solely on failure to file the audited historical financial statements and pro forma financial information required by the form. If the financial statements and pro forma financial information required by Form 8-K are not filed within the extended time period provided by the form, the filing will be considered substantially deficient and, therefore, not filed in a timely manner for purposes of Forms S-2 and S-3 eligibility.
Further, until the registrant has filed audited financial statements reporting on the operations of the acquired business for a time span equal to the periods for which audited financial statements are required by SX 3-05 and the pro forma financial information required by SX Article 11, registration statements under the Securities Act of 1933 and post-effective amendments to registration statements may not be declared effective. In addition, registrants should not make offerings pursuant to effective registration statements, or pursuant to Rules 505 and 506 of Regulation D, where any purchasers are not accredited investors under Rule 501(a) of that Regulation, until the required audited financial statements are filed.
The foregoing ’33 Act restrictions usually do not apply to (a) offerings or sales of securities upon the conversion of outstanding convertible securities or upon the exercise of outstanding warrants, or rights; (b) dividend or interest reinvestment plans; (c) employee benefit plans; (d) transactions involving secondary offerings by parties unrelated to the acquired business for which financial statements are not provided; or (e) sales of securities pursuant to Rule 144.
Once the registrant has filed audited financial statements that include the post-acquisition results of operations of the acquired entity for at least one year, the Division, at the request of the registrant, will consider a request to accept audited financial statements for a period of time less than that required by SX 3-05. At a minimum, the staff would expect audited pre- and post-acquisition financial statements for the acquired entity to equal the periods required under SX 3-05.
B. FINANCIAL STATEMENTS OF TARGET COMPANIES IN FORM S-4
1. Required financial statements: Form S-4 registers securities being offered to security holders of a business to be acquired. The requirement to include the financial statements of the target varies based on a number of facts and circumstances, as summarized below:
2. If the target is a reporting company (whether or not the issuer’s shareholders are voting), or the target is a non-reporting company and the issuer’s shareholders are voting, the registration statement must include:
- balance sheets as of the two most recent fiscal years (or, for a target registrant reporting under S-B rules or a non-reporting target who would be S-B eligible, the latest fiscal year),
- statements of income and cash flows for each of the three most recent fiscal years (two most recent fiscal years for a target registrant reporting under S-B rules or a non-reporting target who would be S-B eligible), and
- interim information as recent as would have been filed on Form 10-Q had the target company been subject to the Exchange Act, except that interim information need include only cumulative year-to-date interim information of the target for the latest and comparable interim period. See Section I.F for target updating requirements.
NOTE: Targets of non-S-B registrants who are S-B eligible but are not current S-B reporting companies may apply S-B reporting requirements in the Form S-4 but must comply with S-X reporting requirements in a subsequent Form 8-K reporting the business combination.
3. If the target is a non-reporting companyand the issuer’s shareholders are not voting:
Significance of target under SX 3-05 or SB 310(c) does not exceed 20% |
No target financial statements required in the registration statement, subject to the following: Registrants continue to have the obligation under SX 3-05 to evaluate the individually insignificant acquisitions in the aggregate, including the insignificant target. If, in the aggregate, the 50% significance level is reached, the registrant must present audited GAAP financial statements for a mathematical majority of those acquisitions for the most recently completed fiscal year and interim period |
Significance of target under SX 3-05 or SB 310(c) exceeds 20% level |
GAAP financial statements for the most recently completed fiscal year and interim period are required in the registration statement. Prior years’ financial statements are also required if its financial statements prepared under GAAP were previously furnished to its security holders. |
4. Pro forma financial information depicting the acquisition is only required if the acquisition is significant under SX 3-05 or SB 310 individually or in the aggregate.
5. Audit requirement: The requirement to audit depends on whether or not the Form S-4 is to be used for resales by persons considered underwriters under Rule 415.
S-4 to be used for resales |
S-4 not to be used for resales |
Audit is required for the periods required to be audited pursuant to SX 3-05. If audited financial statements for the periods required by SX 3-05 are not provided, the staff should obtain representation from registrant’s counsel that the Form S-4 will not be used for resales by underwriters. |
Only the latest year must be audited if:
(a) the target is not subject to Section 13 of 15(d) of Exchange Act, or is a bank with a 12(i) exemption
(b) the two years preceding the latest full fiscal year previously have not been audited.
No audit will be required if impracticable.
To determine whether an audit is practicable, weigh the feasibility and expense of the audit against the usefulness of the audit to the target company’s security holders. If the target is not closely held by insiders, the staff ordinarily will require audit of the most recent year’s financial statements because shareholders may more confidently base their decisions on financial data that has been attested to by independent auditors.* |
* Although relief from obtaining audit of financial statements be available as described above, the registrant would still be required to furnish all financial statements specified by Item 17 of Form S-4 on an unaudited basis.
NOTE: Relief from the audit requirement for financial statements of an acquired entity applies only to merger proxies and transactions registered on Form S-4 and is not applicable to other forms. If the acquisition is significant, audited financial statements will ordinarily be required in a Form 8-K after consummation.
C. DETERMINATION OF A BUSINESS
What is a business?
1. A separate entity, subsidiary, division or possibly a separate product line
- A "business" for purposes of Rule 3-05 is identified by evaluating whether there is sufficient continuity of operations so that disclosure of prior financial information is material to an understanding of future operations. There is a presumption that a separate entity, subsidiary or division is a business.
- A lesser component, such as a product line, also may be considered a business. In evaluating whether a lesser component is a business, you should consider the following:
- Will the nature of the revenue producing activity generally remain the same?
- Will the facilities, employee base, distribution system, sales force, customer base, operating rights, production techniques, or trade names remain after the acquisition? [SX 11-01(d)]
NOTE: The staff’s analysis of whether an acquisition constitutes the acquisition of a business, rather than of assets, focuses primarily on whether the nature of the revenue producing activity previously associated with the acquired assets will remain generally the same after the acquisition. New carrying values of assets, or changes in financing, management, operating procedures, or other aspects of the business are not unusual following a business acquisition. Such changes typically do not eliminate the relevance of historical financial statements. Registrants that have succeeded to a revenue producing activity by merger or acquisition, with at least one of the other factors listed above remaining after the acquisition, should be encouraged to obtain concurrence from the staff in advance of a filing if they intend to omit financial statements related to the assets and activity. Registrants may direct requests for interpretative letters related to appropriate financial statements of an acquired entity or group of assets to DCAO.
2. An investment accounted for under the equity method
3. A working interest in an oil and gas property
Audited statements of revenues and direct expenses are required, along with footnote disclosures of reserve quantities and the standardized measure pursuant to FAS 69. If the required FAS 69 information is not provided in filings on Form 8-K or other ’34 Act filings within 75 days of the acquisition, that Form 8-K will not be considered to be filed timely and in certain circumstances may limit the registrant’s ability to use Forms S-2 and S-3. [SP and SAB 2D]
4. Bank branch and insurance policy acquisitions
- The assumption of customer deposits at bank branches may constitute the acquisition of a business if historical revenue producing activity is reasonably traceable to the management or customer and deposit base of the acquired branches, and that activity will remain generally the same following the acquisition.
- Acquisitions of blocks of insurance policies by an insurance company or the assumption of policy liabilities in reinsurance transactions may also be deemed the acquisition of a business because the right to receive future premiums generally indicates continuity of historical revenues. The degree of continuity between historical investment income streams and the assets acquired to fund the acquired policy liabilities should also be considered.
D. MEASURING SIGNIFICANCE
1. How do I measure significance?
- The basic tests of significance are:
Asset |
Compare registrant’s share of acquired entity’s total assets to the registrant’s consolidated assets |
Investment |
If purchase accounting, compare total GAAP purchase price of acquired entity to registrant’s consolidated assets
· "Investment" means total consideration, including any assumed debt for which the registrant is the legal obligor, and costs of acquisition that will be allocated to assets and liabilities acquired.
· Include contingent consideration as part of the total investment in the acquiree unless the likelihood of its payment is remote. [SP]
If pooling or reorganization:
· Compare the net book value of the acquired entity’s assets to the registrant’s consolidated assets, and
· Compare the number of shares exchanged to registrant’s outstanding shares at the date the combination is initiated. |
Income |
Compare registrant’s equity in the acquired entity’s income from continuing operations before taxes, extraordinary items and cumulative effect of a change in accounting principle to that of the registrant.
· If registrant’s income for the most recent fiscal year is 10% or more lower than the average of the last five fiscal years, average income of the registrant may be used for this computation. Loss years should be assigned a value of zero in computing the numerator for this average, but the denominator should be "5".
· This rule is not applicable is the registrant reported a loss, rather than income, in the latest fiscal year.
· The acquiree’s income may not be averaged pursuant to this rule. |
- The acquired business is not considered part of the registrant’s base in determining significance. [S-X 1-02(w)]
- In the case of a single acquisition, if either the registrant or the acquired business reported a pretax loss and the other entity reported pretax income, use the absolute values.
- Acquisition of "related businesses" must be treated as a single business acquisition. Businesses are related under Rule 3-05 if:
- they are under common control or management, or
- their acquisitions are dependent on each other or a single common event or condition.
- Other guidance
- Step acquisitions
- If a registrant increases its investment in a business relative to the prior year, base the tests of significance on the increase in the registrant’s proportionate interest in assets and net income during the year, rather than the cumulative interest to date. However, step acquisitions which are part of a single plan to be completed within a twelve month period should be aggregated.
- When a registrant increases its investment in a company that is already consolidated, financial statements of the acquired investment are ordinarily not required. However, pro forma information may be required.
- Evaluate significance using amounts determined on the basis of U.S. GAAP, rather than the foreign GAAP of the acquirer or acquiree.
- Ordinary receivables and other working capital amounts not acquired should nevertheless be included as part of the assets of the acquired enterprise in tests of significance relative to the registrant’s assets because that working capital is expected to be required and funded after the acquisition.
- Registrant’s assets may not be increased for purposes of the significance tests by including the pro forma effect of public offering proceeds received after the balance sheet date.
2. Periods Required
If the Greatest of the Three Calculations in D.1.a above |
Regulation S-X |
Regulation S-B |
Does not exceed 20% |
No financial statements required. |
No financial statements required. |
Exceeds 20% but not 40% |
Financial statements for the most recent fiscal year and the latest interim period preceding the acquisition, and the corresponding interim period of the preceding year |
Financial statements for the most recent fiscal year and the latest interim period preceding acquisition, and the corresponding interim period of the preceding year |
Exceeds 40% but not 50% |
Financial statements for the two most recent fiscal years and the latest interim period preceding acquisition, and the corresponding interim period of the preceding year |
Financial statements for the two most recent fiscal years and the latest interim period preceding acquisition, and the corresponding interim period of the preceding year |
Exceeds 50% |
Financial statements for full three years and the latest interim period preceding acquisition, and the corresponding interim period of the preceding year
* Financial Statements for the earliest of the three fiscal years may be omitted if net revenues of the acquired business in its most recent fiscal year are less than $25 million |
Financial statements for the two most recent fiscal years and the latest interim period preceding acquisition, and the corresponding interim period of the preceding year |
3. Use the following financial statements to measure significance under SX 3-05:
- General RuleCompare the most recent pre-acquisition audited annual statements of the acquired business to registrant’s pre-acquisition consolidated statements as of the end of the most recently completed audited fiscal year filed with the Commission.
- If the acquisition is made after registrant’s most recent fiscal year end and Form 10-K is filed before due date of Form 8-K (i.e., within 75 days of acquisition):
- may evaluate significance using registrant’s financial statements for most recent fiscal year reported in Form 10-K
- If the acquisition is made after reporting a previous significant acquisition or disposition on Form 8-K or non-IPO registration statement that includes all information required by Form 8-K (see Section D.4 below for discussion of acquisitions pre- and post-IPO):
- may evaluate significance using registrant pro forma financial information rather than historical pre-acquisition financial statements
For purposes of evaluating significance in this situation:
- Compare income from continuing operation before income taxes, extraordinary items and cumulative effect of a change in accounting principle for the acquired entity’s latest fiscal year to the pro forma income statement for the latest audited annual period provided in the Form 8-K or registration statement.
- For the investment and asset tests, compare the registrant’s investment in the acquired entity and the assets of the acquired entity for the latest fiscal year to the pro forma balance sheet comprising the latest audited balance sheet of the registrant. That pro forma balance sheet may or may not have been included in the Form 8-K or registration statement, depending on when the Form 8-K or registration statement was filed.
For example: If a calendar year end registrant filed a registration statement containing a pro forma balance sheet as of June 30, 1999 giving effect to an acquisition consummated on September 15, 1999 and then made an acquisition on November 30, 1999, the asset and investment test would be based on a pro forma balance sheet as of December 31, 1998 (the last audited balance sheet on file with the Commission).
NOTE: Do not use the pro forma interim period balance sheet to determine significance unless the interim periods of the registrant are audited. To compute significance using pro forma information, only include those pro forma adjustments directly attributable to the transaction (e.g., purchase price allocation, depreciation and amortization) in the pro forma income statement and balance sheet. If the registrant chooses to compute significance using pro forma information, it must do so for all three significance tests.
- If a registrant or the acquiree has been in existence for less than one year:
- do not annualize historical financial statements
- If an acquisition is made after a transaction accounted for as a reverse acquisition of the registrant but before the audited financial statements for the fiscal year in which the reverse acquisition occurred are filed and the audited financial statements for the accounting acquirer have been filed with the SEC:
- measure significance against the accounting acquirer’s financial statements
- If an acquisition is made subsequent to the purchase by a shell registrant (or registrant with minimal operating activity) of an entity deemed the registrant’s predecessor (but not accounted for as a reverse acquisition or recapitalization):
- measure significance against the historical financial statements of the registrant
- If an exchange transaction in which the registrant and another party each contribute businesses to a joint venture (or the "Newco") in exchange for an equity interest in the Newco:
- measure the significance of the disposition (registrant’s contributed business) and the acquisition (other party’s contributed business) separately to determine whether pro forma information about the disposition and receipt of an equity investment is required, and whether audited financial statements of the business contributed by the other party are required.
Significance of the acquisition should be based on the acquired percentage of the other party’s business compared to the registrant’s historical financial statements (without adjustment for the related disposition of the business contributed by the registrant to the joint venture). Whether or not the transaction is accounted for at fair value, the investment test should be based on the fair value of the consideration given up or the consideration received, whichever is more reliably determinable.
If reporting of both the disposition and the acquisition are required by Form 8-K, a registrant may be unable to present a pro forma income statement depicting the joint venture formation because financial statements of the business contributed by the other party are not available. Those financial statements and related pro forma financial statements need not be filed until 75 days after the transaction is consummated. Pro forma financial statements depicting a significant disposition are required to be filed within 15 business days of the disposition. In these circumstances, the initial Form 8-K reporting the transaction should include a narrative description of the effects of the disposition, quantified to the extent practicable, with complete pro forma information depicting the effects of the exchange of interests furnished at the time that the audited financial statements of the acquired business are filed.
4. Special Significance Tests for Initial Public Offerings (IPOs)
- Staff Accounting Bulletin 80 (SAB 80 or Topic 1J)SX 3-05 and SB 310 identify the financial statements of businesses recently acquired or likely to be acquired that must be included in a registration statement. In some cases involving IPOs, strict application of the rule is problematic or results in provision of financial statements that are clearly not material.Registrants preparing an IPO may consider applying SAB 80. SAB 80 is an interpretation of SX 3-05 for application in the case of IPO's involving businesses that have been built by the aggregation of discrete businesses that remain substantially intact after acquisition. The guidance is intended to ensure that the registration statement includes:
- at least three years of audited financial statements of at least 60% of the constituent businesses that will comprise the registrant on an ongoing basis, and
- at least two years of audited financial statements of at least 80% of the constituent businesses that will comprise the registrant on an ongoing basis, and
- at least one year of audited financial statements of at least 90% of the constituent businesses that will comprise the registrant on an ongoing basis.
NOTE: These percentages have not changed even after adoption of SX 3-05 significance revisions and SB reporting rules.
The SAB permits initial registrants to consider the significance of recently acquired and to be acquired companies based on pro forma financial statements for the registrant’s most recently completed fiscal year. The pro forma data assume all businesses to have been acquired at the beginning of that fiscal year (for income tests) and at the end of the fiscal year (for asset and investment tests).
To measure significance apply the asset and investment tests to a pro forma balance sheet as of the latest audited balance sheet included in the registration statement. Apply the earnings test to the registrant's most recent audited fiscal year included in the registration statement.
For:
Businesses not included for at least 9 months in the registrant’s financial statements: |
May exclude pre-acquisition financial statements to the extent that the sum of their highest significance levels is less than 10% |
Businesses not included for at least 21 months in the registrant’s financial statements: |
May exclude pre-acquisition financial statements to the extent that the sum of their highest significance levels is less than 20% |
Businesses not included for at least 33 months in the registrant’s financial statements: |
May exclude pre-acquisition financial statements to the extent that the sum of their highest significance levels is less than 40% |
Audited financial statements required to be furnished to satisfy the requirements of the SAB should be for continuous periods, with no gap or overlap between pre-acquisition and post-acquisition periods.
- Tests of significance after an IPO in which SAB 80 was applied.
- If the provisions of SAB 80 were used in an IPO to obtain relief from the reporting requirements of SX 3-05, the staff would allow that registrant to evaluate the significance of post-IPO acquisitions using the pro forma financial statements presented in the IPO. However, those pro forma financial statements should be adjusted to eliminate:
- pro forma effects of acquisitions for which no audited financial statements are presented in the IPO,
- the pro forma effects of acquisitions that were probable at the time the IPO was declared effective but which have yet to be consummated, and
- pro forma adjustments not directly attributable to the acquisitions.
Once the registrant files audited annual financial statements (either in a Securities Act or Exchange Act filing) for the fiscal year following the audited fiscal year presented in the IPO registration statement on which pro forma financial statements were based, the registrant should measure significance of acquisitions using the audited financial statements of the registrant as required by SX 3-05. Upon written request, the staff will consider whether relief from the literal application of SX 3-05 is appropriate.
- Financial statements of a business acquired subsequent to an IPO may also be required in a registration statement if the significance of that acquisition, plus other acquisition entities for which no audited financial statements were provided in the IPO prospectus, aggregate 50% or more of adjusted pro forma IPO financial statements. See Section E below.
- SAB 97 "put-together" transactionsIn transactions in which more than two entities combine concurrent with an IPO, measure significance against the accounting acquirer (regardless of whether or not the accounting acquirer is a Newco). All of the acquired businesses are considered related under SX 3-05(a)(3) and SB 310 (c)(ii) and, therefore, must be grouped and assessed for significance against the accounting acquirer as a single transaction (see Section I.D.1.d). SAB 80 may not be applied to individual entities within the group. SAB 80 may only be applied to acquisitions that are not considered related, such as previous acquisitions made by the accounting acquirer if that entity was built through a series of unrelated acquisitions. Upon written request, the staff will consider whether relief from the literal application of SX 3-05 is appropriate.
- Tests of significance after a put-together IPO
- If a new acquisition takes place after an IPO but before the filing of the registrant’s first Form 10-K, measure significance against the audited financial statements of the accounting acquirer for the most recent fiscal year (that was included in the IPO registration statement).
- If a new acquisition takes place after the filing of the registrant’s first Form 10-K, measure significance against the audited financial statements of the registrant for the most recent fiscal year in the Form 10-K. In some cases, such as when the IPO occurs close to the registrant’s year end, the registrant’s financial statements presented in Form 10-K may only include operations for a very short period of time. Upon written request, and depending on the proximity of the SAB 97 transaction to the balance sheet date, the staff will consider whether relief form the literal application of SX 3-05 is appropriate.
- Registrants may request DCAO interpretation in unusual situations or relief where strict application of the rules and guidelines results in a requirement that is unreasonable under the circumstances.
E. INDIVIDUALLY INSIGNIFICANT ACQUIREES
The requirement under SX 3-05 to furnish financial statements of individually insignificant businesses under certain circumstances is applicable only to registration statements and proxies. Form 8-K does not require audited financial statements of insignificant acquirees unless they are "related businesses" (see Section I.D.1.d above).
1. If the aggregate of all insignificant businesses (consummated since the latest audited year-end balance sheet filed and probable, including significant businesses for which financial statements are not yet required because of the 75-day rule) exceed 50% in any condition in ID.1 above, financial statements for the mathematical majority (combined if appropriate) should be furnished for the most recent fiscal year and the latest interim period preceding the acquisition. For purposes of determining the mathematical majority, audited financial statements should be provided for those acquired entities that constitute more than 50% of the asset, income, or investment test determined to be the most significant.
For example: A registrant with a calendar year end files a registration statement October 1, 1999. The following individually insignificant business acquisitions, for which no audited financial statements were filed on Form 8-K, have occurred since the registrant’s audited financial statements were filed in its 1998 Form 10-K:
Date Acquired |
Investment Test % |
Asset Test % |
Income test % |
Highest Significant % | |
Business A |
1/21/99 |
10 |
19 |
8 |
N/A |
Business B |
2/24/99 |
10 |
7 |
6 |
N/A |
Business C |
4/11/99 |
11 |
6 |
6 |
N/A |
Business D |
7/6/99 |
13 |
11 |
5 |
N/A |
Business E |
8/20/99 |
17 |
10 |
20 |
N/A |
Business F |
N/A |
9 |
6 |
4 |
N/A |
Aggregate |
70 |
58 |
49 |
70 |
Since the investment test yields the greatest significance on an aggregate basis (70%), financial statements of the "businesses" adding up to at least 35% under the investment test column must be provided. In this case, financial statements for any combination of three "businesses" that includes Business E of any combination of four "businesses" would meet the requirement. No combination of tree that excludes Business E would meet the requirement.
NOTE: As shown above, even though the registrant is not required to file a Form 8-K with audited financial statements of Business E until 11/2/99, those financial statements may need to be included in the registration statement.
2. Losses of businesses reporting losses should not be offset against income of businesses reporting income for purpose of the income test, the two groups should be evaluated separately. The absolute values of the results of operations of the two groups would not be aggregated for purposes of applying the significance tests. However, the absolute values of the results of operations of the two groups would be aggregated for purposes of selecting the mathematical majority.
3. In a registration statement or proxy which is made effective or mailed after fiscal year end but prior to the date audited year-end statements are required, individually insignificant acquisitions acquired since the previous year-end through the date of effectiveness should be aggregated for purposes of this test.
4. SX 3-05 permits a registrant to evaluate significance of acquirees using the pro forma financial information filed on Form 8-K in connection with a previous significantacquisition. However, a registrant may not circumvent the requirement to furnish audited data of a majority of individually insignificant acquirees by filing a Form 8-K containing financial statements of one or more insignificant acquirees and testing significance of the remaining unaudited acquirees, against either the historical or resulting pro forma financial statements. If a registrant has filed a Form 8-K for a previous significant acquisition, the 50% aggregation test may be applied against the pro forma financial statements included in that Form 8-K.
For example: A registrant files a registration statement on July 15, 1999 that includes audited financial statements for the year ended December 31, 1998 and interim period statements for the three months ended March 31, 1998. The registrant had total assets of $1,000 at December 31, 1998 and reported income from continuing operations before taxes of $100 for the year then ended. The registrant had, or expects to have, the following acquisitions since December 31, 1998.
Date Acquired |
Investment |
Assets |
Income |
Highest Significance | ||||
$ |
% |
$ |
% |
$ |
% | |||
Significant acquisitions: Business A* |
4/8/99 |
210 |
21 |
100 |
10 |
30 |
30 |
30% |
Insignificant Acquisitions: | ||||||||
Business B |
2/3/99 |
40 |
3 |
20 |
2 |
9 |
7 |
N/A |
Business C |
3/16/99 |
60 |
5 |
40 |
3 |
13 |
10 |
N/A |
Business D |
6/14/99 |
160 |
13 |
80 |
7 |
16 |
12 |
N/A |
Business E |
7/1/99 |
50 |
4 |
20 |
2 |
11 |
9 |
N/A |
Probable F |
N/A |
20 |
17 |
100 |
8 |
18 |
14 |
N/A |
Aggregate |
510 |
42 |
260 |
22 |
67 |
52 |
52% |
* In this example, audited financial statements and pro forma financial information were filed on Form 8-K for Target A on 6/15/99. The pro forma financial information reflects purchase accounting as follows:
Assets |
Income | |
Registrant historical |
$1,000 |
$100 |
Adjustments |
210 |
25 |
Pro Forma |
$1,210 |
$125 |
Aggregate significance may be calculated using pro form asset and income information for the year ended December 31, 1998 depicting the acquisition of Target A. In this case, the income test yields the highest aggregate significance test (52%). The registration statement must include financial statements for acquired businesses that total to at least $34 ($67 x 51%) to meet the SX 3-05 requirement. Had the aggregate significance under each test been less than 50% using pro forma information, no financial statements for any of the individual entities would be required in the registration statement. Note that, since the pro forma amounts were used to calculate significance, no financial statements for Probable F will be required on Form 8-K when that acquisition is consummated.
F. AGE OF FINANCIAL STATEMENTS OF COMPANIES ACQUIRED OR TO BE ACQUIRED
1. For year end financial statements in a ’33 Act registration statement:
Effective Date of Filing |
Acquiree Financial Statements |
Filing is made effective after 89thday after acquiree’s fiscal year end |
Acquiree’s most recent fiscal year must be audited |
Registrant’s filing is made effective after 45 days but within 90 days of the acquiree’s fiscal year end |
Updating requirement dependent on the registrant’s (notthe acquiree’s eligibility for relief under SX 3-01(c) |
- After a reverse acquisition, consider the accounting acquirer’s ability to meet the requirements of Rule 3-01(c) of Regulation S-X in determining the need to update.
- In limited circumstances involving a registrant that would be required to update after the 45thday, applying this rule results in a requirement to furnish audited financial statements of the acquiree as of a date more recent than is required for the registrant. If the registrant believes providing updated audited financial statements would impose an unreasonable burden under the circumstances, the registrant may request DCAO to consider granting relief if the acquiree’s financial statements are updated on an unauditedbasis through either the registrant’s latest balance sheet date or the acquiree’s year end. Requests for relief should be made in writing prior to filing.
For example: A registrant with a December 31, 1999 year end is required under SX 3-01(c) to update its audited financial statements after February 14, 2000 in a registration statement. The registrant is acquiring a business with a November 30, 1999 year end. If the registration statement is declared effective February 1, 2000, the registration statement would require audited financial statements of the registrant for the year ended December 31, 1998, and unaudited financial statements for the nine months ended September 30, 1999. Unless relief is obtained, the target’s audited financial statements would be required for the year ended November 30, 1999 since February 1 is beyond 45 days after target’s year end and the registrant is not eligible for relief under SX 3-01(c).
2. Forinterim period financial statements in a ’33 Act registration statement,age requirements are the same as if the acquiree were the registrant (See Topic One, Section II).
- Generally, financial statements of an acquired business need not be updated if the omitted period is less than a complete quarter.
For example: If an acquisition was consummated on September 29, the staff generally would not require that the financial statements of an acquired entity be updated past June 30. However, disclosure of significant events occurring during the omitted interim period may be necessary.
- Financial statements audited through the date of acquisition should be furnished for any business deemed a predecessor or whose significance was determined pursuant to SAB 80 if the registrant’s financial statements for the year of the acquisition are required to be audited. The updating requirements of SX 3-05 should be followed in subsequent registration statements. No updating is required for ’34 Act periodic reporting.
For example: A registrant with a December 31, 1998 year end has an IPO Form S-1 registration statement declared effective February 3, 1999. The registrant acquired several businesses during 1997 and 1998 and applied SAB 80 in determining the required financial statements for those businesses. Among those financial statements are the following for the most recent fiscal year and interim period:
Entity |
Fiscal Year End |
Date Acquired |
Audited Annual Financial Statements |
Unaudited Interim Financial Statements |
Audited Interim Financial Statements |
Registrant |
12/31 |
N/A |
12/31/97 |
1/1/98 – 9/30/98 |
N/A |
Target A |
6/30 |
12/15/97 |
6/30/97 |
N/A |
7/1/97 – 12/14/97 |
Target B |
12/31 |
3/1/98 |
12/31/97 |
N/A |
N/A |
Target C |
6/30 |
1/1/99 |
6/30/98 |
7/1/98 – 9/10/98 |
N/A |
Target D |
12/31 |
2/10/99 |
12/31/97 |
1/1/98 – 9/30/98 |
N/A |
In a subsequent registration statement declared effective June 15, 1999, the following financial statements related to the same entities would be required for the most recent fiscal year and interim period:
Fiscal Year End |
Date Acquired |
Audited Annual Financial Statements |
Unaudited Interim Financial Statements |
Audited Interim Financial Statements | |
Registrant |
12/31 |
N/A |
12/31/98 |
1/1/99 – 3/31/99 |
N/A |
Target A |
6/30 |
12/15/97 |
6/30/97 |
N/A |
7/1/97 – 12/14/97 |
Target B |
12/31 |
3/1/98 |
12/31/97 |
N/A |
N/A |
Target C |
6/30 |
1/1/99 |
6/30/98 |
7/1/98 – 12/31/98 |
N/A |
Target D |
12/31 |
2/10/99 |
12/31/98 |
N/A |
N/A |
3. In a ’34 Act environment:
- For purposes of proxy materials, the staff interprets the updating requirements in the same manner as under the ’33 Act.
- Form 8-K
- General. The staff believes that the age of financial statements in a Form 8-K should be determined by reference to the filing date of the Form 8-K initially reporting consummation of the acquisition. If no filing is made timely within 15 days of the acquisition, the age of financial statements required to be filed should be determined by reference to the 15thday after the consummation of the acquisition.
- Year end. For purposes of Form 8-K, the staff would not require audited statements of the acquiree’s most recently completed year unless the Form 8-K reporting the acquisition was filed 90 days or more after the acquired company’s fiscal year-end.
- Interim Information. In some cases, the financial statements provided in Form 8-K may need to be updated in a registration statement to comply with the 135-day rule (see Topic One, II.B).
For example: A registrant files a Form 8-K reporting an acquisition which occurred on July 10. The registrant and the acquiree have calendar fiscal year ends. The Form 8-K includes the acquiree’s interim financial statements as of March 31. A registration statement filed in December of the same year will not be declared effective unless the acquiree’s financial statements are updated through at least June 30.
- Previously furnished financial statements
- Financial statements of an acquiree are not required in Form 8-K if they were previously filed. [Form 8-K; General Instruction B.3] Financial statements of a significant acquired business previously furnished in a registration statement will be deemed "substantially the same" pursuant to this instruction unless they would not satisfy the required age of financial statements in the Form 8-K because operating results for two or more interim quarters are omitted.
For example: Form S-4 included unaudited financial statements for the three months ended March 31 for a business to be acquired. The business combination was consummated on October 1, and a Form 8-K reporting the acquisition was timely filed. No financial statements are required in the Form 8-K, unless there were significant subsequent events that would materially affect an investor’s understanding of the target company. However, if the business combination had been consummated on November 20, the financial statements would have had to be updated through September 30.
NOTE: If a registrant included financial statements of a previously nonpublic SB eligible target in a Form S-4 and those financial statements complied with SB reporting requirements instead of SX reporting requirements (see Section I.B), those financial statements would not be deemed "substantially the same" pursuant to Form 8-K; General Instruction B.3. Financial statements that comply with SX would need to be filed in a Form 8-K if the SX 3-05 significance threshold is met.
- If updating pursuant to rules usually applicable to the Form 8-K would require audited financial statements to be filed, the staff generally would conclude that the audited annual financial statements are not substantially the same as the previously filed unaudited interim financial statements. In those circumstances, updated audited financial statements should be furnished in the Form 8-K.
For example: Form S-4 contained unaudited financial statements of the entity to be acquired for the nine months ended September 30. Updated audited financial statements of the acquired entity are required in a Form 8-K if the business combination is consummated, and the Form 8-K is filed after the 89th day subsequent to December 31. Note that in a registration statement, updated audited financial statements of the acquired entity may be required for the 90th day, depending on the registrant’s eligibility under Rule 3-01(c) of Regulation S-X. Refer to I.F.1 above regarding the requirements to provide audited financial statements of an acquired entity.
4. Issues arising from ’33 and ’34 Act Integration
- Acquiree financial statements and certain offeringsDuring the 75 day period for providing financial statements of acquirees in Form 8-K, registration statements will be declared effective even if financial statements of >50% significant acquirees are not provided only in the case of secondary offerings, securities underlying outstanding convertible securities or warrants or rights, and reinvestment and employee benefit plans. Prior to declaring these registration statements effective, however, the staff should consider the need to obtain assurance from the issuer that the required financial statements will be timely filed.
- Forms S-2, S-3 and S-4
- At effectiveness: The registrant should comply with age-of-financial-statement rules with respect to itself and all completed and probable acquirees at the time of effectiveness. Any updated financial statements required to be included or incorporated by reference in the registration statement but which were not required to be furnished previously in a specific Exchange Act report may be furnished under cover of Form 8-K pursuant to Item 5.
For example: A registrant files a Form 8-K on August 13 reporting the acquisition of a business on July 31. That Form 8-K included unaudited financial statements for the 3 months ended March 31. If a registration statement is filed after August 13, the financial statements of the acquired entity must be updated through June 30 so that the acquired entity’s financial statements meet the age of financial statement requirements of Regulation S-X. If the acquisition was consummated prior to June 30, updated financial statements would not be required.
If a Form 8-K reporting an acquisition was timely filed and the financial statements of the acquiree required by the Form were timely furnished, the staff will consider a request to waive updatingof the acquiree’s financial statements at effectiveness of a registration statement. For a waiver:
- The registrant must demonstrate that an update would involve unreasonable expense and effort, and
- The registration statement must include at least one complete quarter of post-acquisition operating results of the registrant.
The staff is unlikely to waive the requirements of the rule if audited financial statements would be required of an acquiree whose significance exceeds 40%.
- Delayed and continuous offerings: After effectiveness, the registrant has no specific obligation to update the prospectus except as stipulated by 33 Act Rule 10(a)(3) and with respect to any fundamental change. If an acquisition would be significant under Rule 3-05, the staff recommends that management consider whether the probability of consummation of the transaction would represent a fundamental change.
What is a "fundamental change?"
- It is the responsibility of management to determine what constitutes a fundamental change and it is based generally on whether additional information is necessary for an investor to make an informed investment decision. (Refer to Item 512(a) of Regulation S-K.)
The registrant should also consider whether individually insignificant acquisitions occurring subsequent to effectiveness, when combined with individually insignificant acquisitions that occurred after the most recent audited balance sheet in the registration statement but prior to effectiveness, may be of such significance in the aggregate that an amendment is necessary.
II. Real Estate Acquisitions and Properties Securing Mortgages
A. REAL ESTATE OPERATIONS [SX 3-14]
1. Financial statement requirements for registration statements and proxies
- Financial statements of each operating real estate property (or group of related properties) acquired or probable of acquisition that is significant individually or in the aggregate at the 10% level or higher is required to be filed in all transactional filings (registration statements and proxies).
NOTE: The purchase of real estate by companies engaged in real estate activities is not considered to be an acquisition in the ordinary course of business. Item 2 Form 8-Ks are required to report these transactions.
- SX 3-05 allows a repeat filer to omit from a registration statement financial statements for a business acquisition less than 50% significant if the registration statement is declared effective no more than 74 days after the date the acquisition is consummated. That provision does not apply to SX 3-14 financial statements.
- Individually Insignificant Acquirees
- To compute significance, combine individually insignificant properties into two groups: (a) properties acquired during the most recently completed fiscal year, and (b) properties acquired during the interim period and probable acquisitions. Compute significance for each group separately based on the registrant’s total assets as of the latest audited fiscal year balance sheet date preceding the acquisition.
- If the aggregate of all insignificant real estate properties in either group exceeds 10% of the registrant’s total assets, financial statements are required of operating real estate properties in the group(s) that exceed(s) the 10% level.
Generally, the staff will not object to the omission of audited financial statements of an individually insignificant property that is significant below the 5% level if:
(a) the property is acquired from an unrelated party ,and
(b) audited financial statements of the majority (>50%) of all individually insignificant properties in the group are provided.
2. For ’34 Act reporting purposes, financial statements of each operating real estate property (or group of related properties) acquiredthat is individually significant at the 10% level or higher is required to be filed in a Form 8-K.
3. Significance is computed by comparing the registrant’s investment in the property to the registrant’s total assets at the latest audited fiscal year end filed with the SEC (except as noted in (1) above). If the acquired property is encumbered with mortgage debt that will continue after the acquisition, include that debt as part of the investment in determining significance.
- If the company has not completed its first fiscal year, use the most recent audited balance sheet filed with the Commission.
- If the acquisition was made after the most recent fiscal year and the registrant files its Form 10-K for that year before the due date of the Form 8-K (including the 60 day extension), the staff has not objected if significance is evaluated relative to the most recently completed fiscal year.
- While SX 3-05 permits the determination of significance to be made using pro forma financial information included in a Form 8-K reporting a significant acquisition, this determination of significance is not applicable to SX 3-14.
4. Additional Requirements for "Blind Pool" Offerings
Registration statements for "blind pool" offerings by real estate companies include undertakings to:
- file a sticker supplement during the distribution period describing each property that has not been identified in the prospectus whenever a reasonable probability exists that a property will be acquired, and
- consolidate all stickers in a post-effective amendment filed at least once every 3 months. The post effective amendment must include audited financial statements in the format described in SX 3-14 for all properties which have been acquired. Pro forma information is also required.In addition to sticker supplements, companies are required to file a current report on Form 8-K that includes financial statements and the related pro forma information for each property acquired during the distribution period that exceeds 10% of the company’s total assets at the date the agreement is signed. These financial statements are not required if they are substantially the same as those previously filed. Refer to I.F.3.c.The distribution period is the period during which partnership units are sold. While companies do not undertake to file sticker supplements after this period is completed, they undertake to file on Form 8-K audited financial statements of properties, in the format described in SX 3-14, after this period is completed. Specifically, companies undertake to file audited financial statements for every property it commits to purchase (by signing a binding purchase agreement) once the company commits to the use of 10% or more of the net proceeds of the offering. The staff has not objected to the view that the undertaking to provide audited financial statements is not applicable to individually immaterial properties. SX 3-14 financial statements maybe omitted for individually immaterial properties.An individual property is material if it:
- is acquired from a related party, or
- exceeds the 5% significance level, or
- is one of a group of properties that
- together aggregate more than 5% and are acquired from a single seller, or
- are related
When are properties considered related?Properties are related if their acquisitions are contingent on one another or are otherwise related to one another by virtue of location or other material financial or commercial factor.Reporting companies must comply with the reporting requirements of Form 8-K for financial statements under Rule 3-14. Refer to II.A.2.
5. Required Financial Statements
- Abbreviated income statementsMay exclude items (Such as historical mortgage interest and depreciation) which are not comparable to the proposed future operations of the property. (Where items are excluded, auditors ordinarily will issue a report such as that at AU 621.14 and 623.15.)
- Periods to be presentedAudited three years (two years in the SB Forms), plus unaudited interim period based on the property’s fiscal periods. Only the most recent year and current interim period are required if the property was not acquired from a related party.
- Other required disclosureThe registrant should describe any material factors, which would cause the reported financial information not to be indicative of future operating results.
For example: A change in how the property will be used, an expected material modification to the property, or a material change in property tax assessment.
- Application of SX 3-06SX 3-06 does not apply to financial statements of real estate properties. The staff, however, will not require a registrant to include the financial statements of an individually insignificant operating property acquired from an unrelated party in a transactional filing if the acquired operations have been included in the registrant’s audited operating results for at least nine months.
- Updating requirementsThe same rules for updating 3-05 financial statements apply to 3-14 financial statements. See Section I.F.
6. REIT Formation Transactions
- Test of significance in an IPOA newly-formed REIT having no significant operations may acquire operating properties immediately prior to filing an initial registration statement, or may identify properties to be acquired upon closing the IPO. In addition, the REIT may identify properties that it will probably acquire soon after the IPO. The staff recognizes in these circumstances that the literal application of Rule 3-14 could result in the registrant providing financial statements of properties that are clearly immaterial to investors.
Financial statements of properties that are significant at the 10% level individually or in the aggregate with other individually insignificant properties must be filed in the REIT IPO. In identifying the financial statements required to be included in the initial registration statement, the staff has allowed registrants to compute significance using a base equal to the total cost of the properties acquired immediately prior to filing an initial registration statement, properties to be acquired upon closing the IPO, and properties identified as probable future acquisitions. Even though the staff has allowed registrants to use this base in the initial registration statement, they still need to include financial statements of individually insignificant properties if their aggregate cost exceeds 10% of the base. However, the financial statements of individually insignificant properties below the 5% level may be omitted if the property is acquired from an unrelated party and audited financial statements of the majority (>50%) of all individually insignificant properties acquired and to be acquired are provided.
NOTE: Remember to treat the acquisition of a group of related properties as a single acquisition in measuring significance. Properties are related if they are under common control or management, the acquisition of one property is conditional on the acquisition of each other property, or each acquisition is conditioned on a single common event.
- Tests of significance after an IPOIn computing significance of any future property acquisition until the time the registrant files its initial Form 10-K, the registrant can use the same base as was used in the initial registration statement. However, that base should be reduced for any property not acquired unless audited financial statements were included in the registration statement and acquisition remains probable.
7. Application of SX 3-14 is limited to real estate operations.
The reduced financial statement requirements available to real estate operations are premised on the continuity and predictability of cash flows ordinarily associated with commercial and apartment property leasing, and generally includes shopping centers and malls. Nursing homes, hotels, motels, golf courses, auto dealerships, equipment rental operations, and other businesses that are more susceptible to variations in costs and revenues over shorter periods due to market and managerial factors are not considered to be "real estate operations." Thus, SX 3-05, rather than SX 3-14 and the special undertaking in the industry guide, is applicable to those businesses.
Where a registrant acquires an equity interest in a partnership or corporation owning real estate properties, financial statements of that entity meeting the requirements of SX 3-05 would generally be required. The staff has not objected to presenting SX 3-14 financial statements of the real estate properties in lieu of SX 3-05 financial statements where the entities have no operations other than holding real estate and related debt.
B. PROPERTIES SUBJECT TO NET LEASE
If a real estate property will be leased to a single tenant on a long-term basis immediately after its acquisition under a net lease that transfers substantially all of the property’s nonfinancial operating and holding costs to the tenant, financial data and other information about the tenant (or other party that guarantees the lease payments) may be more relevant to investors than financial statements of the property acquired. In that case, the financial statements of the property may be omitted from the filing, but pertinent financial data and other information about the lessee or guarantor should be furnished. That information should include audited financial statements of the lessee or guarantor if the purchase price of the property exceeds 20% of the greater of total assets at the latest audited year end balance sheet date or the amount expected in good faith to be raised within the next twelve months pursuant to an effective registration statement. That view is consistent with the guidance furnished in SAB 71 concerning significant credit concentrations. If the lessee or lease guarantor is a public company currently filing reports with the Commission, only summary data need be provided. The disclosure pertaining to a material lessee, including its audited financial statements if the investment exceeds 20% of total assets, should be provided in filings made under both the Securities Act and the Exchange Act. The periods presented for lessee or guarantor financial statements should comply with SX 3-01 and 3-02.
C. PROPERTIES SECURING ACQUISITION DEVELOPMENT AND CONSTRUCTION ("ADC") ARRANGEMENTS [SAB 11]
What is an "ADC arrangement?"
"ADC arrangement" is defined in 2/10/86 Notice to Practitioners in CPA Letter. In an ADC arrangement, a lender participates in expected residual profit and shares in the risk and rewards of the owner.
1. Financial Statement Requirements in ’33 Act filings
- Financial statements of operating properties securing ADC loans are required for any single property for which 10% of offering proceeds (or total assets at the latest audited year end balance sheet date, if greater) has been or will be loaned. The information required by Items 14 & 15 of Form S-11 also are required.
- Where no single loan exceeds 10%, but the aggregate of ADC loans exceed 20%, a narrative description of the properties and arrangements is required in a note.
2. Financial Statement Requirements in ’34 Act Filings
- If over 20% of total assets are invested in a single ADC loan, financial statements of the underlying operating property are required (except in Annual Reports to shareholders where only summary data is required).
- If over 10%, but less than 20%, is invested in a single ADC arrangement, summarized financial information of the operating property is required.
- Where individual loans are not significant but the aggregate exceeds 20%, narrative description of the properties and arrangements is required in a note.
D. PROPERTIES SECURING ORDINARY LOANS
If over 20% of offering proceeds (or total assets at the latest audited year end balance sheet date, if greater) have been or will be invested in a single loan (or in several loans on related properties to the same or affiliated borrowers), financial statements of the property securing the loan are required in both ’33 and ’34 Act filings. Properties are related, for example, if they are subject to cross default or collateralization agreements.
III. Financial Statements of Equity Investments Not Consolidated [SX-3-09]
A. REQUIRED SEPARATE FINANCIAL STATEMENTS
1. Separate financial statements of non-consolidated subsidiaries. If any of the conditions set forth in SX 1-02(w) are significant at the 20 percent level or greater, separate financial statements for each subsidiary not consolidated should be provided. (Of course, consolidation is presumed to be necessary for all subsidiaries.)
2. Separate financial statements of equity investments accounted for under the equity method of accounting. If either the income or investment conditions set forth in SX 1-02(w) are significant at the 20 percent level or greater, separate financial statements for each significant 50% or less owned equity investment not consolidated should be filed. The asset test does not apply.
3. The financial statements required should be for the same annual audited periods as required by SX 3-01 and 3-02. Separate audited financial statements for equity method investments are required for those periods where the income or the investment test in SX 1-02(w) equal or exceed 20 percent. Other periods presented may be unaudited. For example, if an equity method investment was 30% significant in 1998 and 19% significant in 1999, audited financial statements of the investee are required for 1998 and unaudited financial statements are permitted for 1999.
4. Audited or unaudited SX 3-09 financial statements are not required for periods prior to the registrant’s ownership of the investment but they may be required under SX 3-05 in the year of acquisition.
5. If a registrant’s financial statements are retroactively restated in accordance with APB 18.19 to reflect equity method accounting for an investment previously accounted for under the cost method, 3-09 financial statements, and summarized financial information required by SX 4-08(g) may be required for periods in which the cost method was previously used if the significance tests are met.
6. Lower tier 3-09 financial statements. To determine whether separate financial statements of an investee accounted for by the equity method by an investee of a registrant are required, the significance test should be computed based on the materiality of the lower tier investee to the registrant consolidated. [SAB 6K.4]
7. If the fiscal year of the non-consolidated entity ends within 90 days before the filing of the registrant’s Form 10-K, or ends after the date of the filing the registrant’s Form 10-K, the financial statements required by SX 3-09 may be filed in an amendment to the Form 10-K within 90 days (for domestic issuers) or six months (for foreign private issuers) after the subsidiary’s fiscal year end. [3-09(b)]
B. MEASURING SIGNIFICANCE
1. If the tested equity investee incurred a loss and if income averaging is used by the registrant (because income in the most recent fiscal year is at least 10 percent lower than the average of the income for the last five fiscal years), the equity in the income or loss of the investee should be excluded by the registrant from each year averaged.
2. For purposes of computing the income significance test under SX 3-09, use GAAP changes in the equity investment as presented in the income statement, which usually includes amortization of goodwill resulting from the registrant’s equity investment and any write-down of the investment for impairment that is not otherwise reflected in the investee’s financial statement.
C. COMBINED / CONSOLIDATED FINANCIAL STATEMENTS OF UNCONSOLIDATED SUBSIDIARIES
SX 3-09 allows for the presentation of combined or consolidated financial statements (where appropriate) if financial statements are required for two or more subsidiaries. Combined financial statements generally are appropriate only for entities under common control or common management, and then only for periods in which that condition existed.
D. SUMMARIZED FINANCIAL DATA
Required if the investee falls in the 10% to 20% significance level (current and non-current assets and liabilities; redeemable stock and minority interests; revenues; gross profit; income from continuing operations; and net income). Summarized annual financial data should not be labeled "unaudited". [SX 4-08(g)] SB issuers are required to provide summarized financial data if the investee is at least 20% significant. [SB 310(b)(2)(iii)]
E. FOREIGN INVESTEES
Financial statements required by SX 3-09 for an investee that meets the definition of a foreign business need only comply with the reporting requirements of Item 17 of Form 20-F and are subject to the updating requirements of SX 3-19. Reconciliation requirements are described at Topic Six.
F. RELIEF
Registrants may request DCAO interpretation in unusual situations for relief where strict application of the rules and guidelines results in a requirement that is unreasonable under the circumstances.
IV. Other Financial Statements Required
A. GUARANTORS OF SECURITIES
[Note: Refer to Division of Corporation Finance: Frequently Requested Accounting and Financial Reporting Interpretations and Guidance located under Current SEC Rulemaking — Other Commission Notices and Information on our website for guidance in this area. The Commission is expected to issue new rules applicable to guarantors of securities soon.]
B. COLLATERALIZATIONS
1. SX 3-10 requires registrants to file financial statements of each affiliate whose securities constitutes a substantial portion of the collateral for any class of security (collateral entities). SX 3-10 views guarantees and collateralizations as two separate disclosure matters. SAB 53 and our interpretations apply only to guarantors and does not apply to collateral situations, as the concepts of full, unconditional, and joint and several do not apply to collateralizations. Therefore, full audited financial statements of each affiliate whose securities constitute a substantial portion of the collateral of a security are required by SX 3-10.
2. Securities constitute a substantial portion of collateral if the greatest of the aggregate principal amount, par value, book value or market value of the securities equals 20% or more of the principal amount of the secured class of securities.
3. Financial statements of collateral entities are required in registration statements, Forms 10-SB and Forms 10-K/10-KSB but not in Forms 10-Q/10-QSB.
C. THIRD PARTY CREDIT ENHANCEMENTS
Third party credit enhancements differ from guarantees. A guarantee running directly to the security holder is a security within Section 2(1) of the Securities Act and must be covered by a Securities Act registration statement filed by the guarantor, as issuer. A third party credit enhancement is an agreement between a third party and the issuer or a trustee that does not run directly to the security holders. A party providing credit enhancement generally is not a co-issuer. However, if an investor’s return is materially dependent upon the third party credit enhancement, the staff requires additional disclosure about the credit provider. The disclosure must provide sufficient information on the third party to permit an investor to determine the ability of the third party to fund the credit enhancement. In most cases, the disclosure of the third party’s audited financial statements presented in accordance with generally accepted accounting principles would be required. However, if such financial statements are not available, statements prepared under statutory standards may be acceptable (e.g., statutory financial statements of insurance companies serving as credit enhancers).
The staff considers the following factors in assessing the sufficiency of the disclosure in this area:
- the amount of the credit enhancement in relation to the issuer’s income and cash flows;
- the duration of the credit enhancement;
- conditions precedent to the application of the credit enhancement; and
- other factors that indicate a material relationship between the credit enhancer and the purchaser’s anticipated return.
Financial information of a third party credit enhancement may also be required if an investor is reasonably likely to rely on a material credit enhancement in place for other debt (including nonpublic debt), even though the credit enhancement does not run directly to the debt being registered.
D. GENERAL PARTNER, WHERE REGISTRANT IS LIMITED PARTNERSHIP [SP]
1. Financial Statements Required in Transactional Filings
If the General Partner is |
Financial Statements Required |
Corporation |
Audited balance sheet as of end of most recent fiscal year. |
Partnership |
Audited balance sheet as of end of most recent fiscal year, and
Financial statements of the partners if there is a commitment, intent or reasonable possibility that the general partner will fund cash flow deficits or furnish other direct or indirect financial assistance. [SP] |
Individual |
Unaudited balance sheet as of a recent date prepared in accordance with AICPA guidelines (SOP 82-1) furnished supplementally.
The prospectus should disclose net worth. Also make appropriate disclosure if:
· net worth is derived from material amounts of assets that are not readily marketable, or
· guarantees and contingencies are material. |
- Age of financial statementsThe balance sheet should be updated on an unaudited basis if there has been a fundamental change in the financial condition of the general partner subsequent to the date of the audited balance sheet. Also updating on the same basis as the registrant is appropriate if the filing indicates a commitment, intent or reasonable possibility that the general partner will fund cash flow deficits or furnish other direct or indirect financial assistance. A general partner that is a public company must comply with the updating requirements of SX 3-12. The financial statements of a non-public general partners should be no more than 6 months old. [SP]
- Where the general partner has significant oil and gas reserves, disclosures should include estimated year-end quantities, and estimated future net revenues and present values. [SAB 12A(3)(d)]
- Where the general partner reports a substantial receivable from or investment in parent or affiliated company, or where the parent or affiliate commits to increase or maintain the general partner’s capital (beyond IRS requirements), the audited balance sheet of the parent or affiliate should be provided. [SP]
2. Periodic Reports
Generally, inclusion of general partner’s balance sheet is not mandatory in periodic reports. However, where investors are likely to be influenced by the financial condition of the general partner because of a general partner’s commitment, intent or implication to fund cash flow deficits or furnish other direct or indirect financial assistance, the general partner’s balance sheet should be furnished. [SP]
E. PARENT-ONLY FINANCIAL STATEMENTS (CONDENSED) [SX 5-04] [ SX 9-06]
Required as an S-X schedule where the restricted net assets of consolidated subsidiaries exceed 25% of consolidated net assets at the most recent fiscal year-end. Also, GAAP requires this as a supplement to the financial statements where material. [ARB 51.24] The information prescribed by SX 12-04 should be presented in the footnotes of bank holding companies.
What are "restricted net assets?"
Restricted net assets is the amount of the registrant’s share of subsidiaries’ net assets (assets less the sum of liabilities, redeemable preferred stock, and minority interests) that may not be transferred to the parent in the form of loans, dividends, etc., without a third party’s consent. [SAB 6K.2]
F. DISPOSITION OF A BUSINESS
1. If authorization is sought from shareholders for disposition of a significant business, unaudited financial statements of that business should be provided in the proxy materials for the same periods as are required for the registrant (along with pro forma information). See PR Item 14(b)(1)(ii)(D)
2. If disposition of a business is being accomplished through the registrant’s distribution to shareholders of its ownership interests in that business, audited financial statements of the separate legal "spinee" (which may not be the spinee for accounting purposes) for the same periods required for the registrant are required in a Form 10, Form 10-SB or ’33 Act registration statement registering the shares being distributed
G. OTHER FINANCIAL STATEMENTS
The staff may require other financial statementsas necessary for a fair presentation of the financial condition of any entity whose financial statements are required. [SX 3-13]
Are Rule 3-05 Financial Statements Required in a Registration Statement for an Acquisition That Has Occurred or Is Probable?(Excludes S-4 Target Companies)
Topic Three: Pro Forma Financial Information, Forecasts and Forward Looking Information
(Article 11 of Regulation S-X)
This topic describes the circumstances in which pro form financial statements should be furnished in filings, the form of their presentation and guidance to be considered in their preparation. Although the specific rules of SX Article 11 do not apply to Small Business issuers, those registrants can consult SX Article 11 for guidance when preparing pro forma financial statements required by SB 310(d) for business acquisitions. Small Business issuers should present pro forma information for other current or probable transactions if that presentation would be material to investors. This topic also discusses the circumstances under which alternative or supplemental presentations of forecasts and forward looking information may be appropriate, along with guidance for their content.
I. Circumstances Requiring Pro Forma Presentations
A. SIGNIFICANT BUSINESS COMBINATION
1. A significant business combination has occurred in the latest fiscal year or subsequent interim period, or is probable. (See Topic Two for definition of a business and tests of significance.) Not required if the transaction is already reflected in historical statements as a pooling of interests or reorganization.
2. Additional pro forma information may also be appropriate if an acquiree of the registrant consummated a significant business combination of its own during the year if that information would be material to an understanding of the registrant or a vote on a transaction.
3. Pro forma information required by SX Article 11 should be filed at the same time the audited financial statements of the target company are filed. Presentation of the acquiree’s financial statements without accompanying pro forma information can be misleading, and there is an expectation that the information required by Item 7 of Form 8-K will be furnished as promptly as feasible. The pro forma information furnished in connection with a Form 8-K filing reporting consummation of an acquisition is not expected to reflect definitive conclusions regarding allocation of the purchase price or other effects. However, uncertainties affecting the pro forma presentation and the possible consequences when they are resolved should be highlighted if they may be material.
B. DISPOSITION OF A SIGNIFICANT PORTION OF A BUSINESS
1. Disposition either by sale, abandonment or distribution to shareholders has occurred or is probable, and is not fully reflected in the historical financial statements.
2. Pro forma data may be relevant even if disposed operations do not satisfy the APB 30 criteria of a discontinued operation.
3. Since audited financial statements of the disposed entity generally are not required in the Form 8-K reporting the disposition, pro forma information should be filed within 15 days after the disposition. The 60-day extension available for filing financial statements and pro forma information for acquisitions is not available for dispositions.
C. ACQUISITION OF ONE OR MORE REAL ESTATE OPERATIONS
Acquisitions, which are in the aggregate significant, have occurred in the latest fiscal year or subsequent interim period, or are probable. See Topic Two Section II for guidance related to aggregate significance tests for real estate acquisitions.
D. ROLL-UP TRANSACTION [SK Item 914]
In connection with a transaction subject to the roll-up rules of SK 914, pro forma financial information should be presented showing the effect on the successor entity assuming (a) that all combining entities participate and (b) participation is limited to those having the lowest combined net cash provided by operating activities for the last fiscal year of such entities. Consideration should be given to the need to present other variations of participation that are permitted by the terms of the roll-up. The following pro forma information should be furnished:
- Balance sheet as of the later of the end of the most recent fiscal year or latest interim period
- Statements of income with separate line items to reflect income (loss) excluding and including roll-up expenses and payments, earnings per share amounts, and ratio of earnings to fixed charges for the most recent fiscal year and the latest interim period
- Statement of cash flows for the most recent fiscal year and the latest interim period
- Book value per share as of the later of the end of the most recent fiscal year or the latest interim period
- Pro forma oil and gas reserve data, if applicable.
E. REGISTRANT PREVIOUSLY WAS PART OF ANOTHER ENTITY
Pro forma presentation may be necessary to reflect operations and financial position of the registrant as a stand-alone entity.
NOTE: Consider whether forward-looking information should be presented instead of or along with pro forma information, particularly in cases where a full set of audited financial statements of an acquired entity is not provided (e.g., audited statement of revenues and direct expenses). See Section II.K.
F. OTHER
Events or transactions have occurred or are probable for which disclosure of pro forma financial information would be material to investors, such as:
1. If the registrant’s historical financial statements are not indicative of the ongoing entity (e.g., tax or other cost sharing agreements terminated or revised). [SAB 1B-2]
2. Dividends declared by a subsidiary subsequent to the balance sheet. [SAB 1B-3]
3. Changes in capitalization at the effectiveness or the close of an IPO.
4. Receipt or application of offering proceeds under certain circumstances. See Section II.C.4(c)(6) and IV.B for further discussion.
5. Other events and transactions which have had or will have a discrete material impact on a registrant’s financial statements.
II. Preparation Requirements — Form and Content
A. OBJECTIVE
SX Article 11 pro forma financial information is intended to provide investors with information about the continuing impact of a transaction by showing how a specific transaction or group of transactions might have affected historical financial statements, illustrating the scope of the change in the registrant’s financial position and results of operations.
The pro forma financial information should illustrate only the isolated and objectively measurable (based on historically determined amounts) effects of a particular transaction, while excluding effects that rely on highly judgmental estimates of how historical management practices and operating decisions may or may not have changed as a result of that transaction. Information about the possible or expected impact of current actions taken by management in response to the pro forma transaction, as if management’s actions were carried out in previous reporting periods, is considered a projection and not an objective of SX Article 11. Presentation of forward looking and projected information should be confined to supplemental information separately identified as such (information that is not required or contemplated by Article 11) and in MD&A.
B. PRO FORMA CONDENSED BALANCE SHEET
1. Pro forma presentation should be based on the latest balance sheet included in the filing. A pro forma balance sheet is not required if an acquisition is already reflected in a historical balance sheet, however, disclosures related to balance sheet accounts would still be required.
2. Pro forma adjustments should be computed assuming the transaction was consummated on that balance sheet date.
3. Adjustments reflected in the pro forma adjustments column should give effect to events that are directly attributable to each specific transaction and factually supportable. Adjustments should include those items that have a continuing impact and also those that are nonrecurring.
C. PRO FORMA CONDENSED INCOME STATEMENT
1. Pro forma presentation should be based on the latest fiscal year and interim period included in the filing, unless the transaction is already reflected in those historical statements for 12 months. Unless the pro forma information gives effect to one of the two items below, a pro forma income statement should not be presented for more than one complete fiscal year. In addition to the required latest fiscal year and interim period, the staff will not object to a registrant providing a pro forma income statement for the corresponding prior interim period.
2. Pro forma presentation of all periods is required:
- for a business combination to be accounted for as a pooling-of-interests or a reorganization of entities under common control; or
- for discontinued operations (APB 30) that are not yet required to be reflected in historical statements.
NOTE: The staff generally objects to retroactive pro forma presentation of transactions for period other than the latest year and interim periods except in the circumstances described here. In some cases, retroactive presentations of revenues and costs of revenues may be meaningful for discussion of trends in MD&A, but more comprehensive presentations (through operating income, for example) can be misleading because they cannot meaningfully or accurately depict what operating results would have been had the transaction occurred at the earlier date.
3. Pro forma adjustments should be computed assuming the transaction occurred at the beginning of the fiscal year presented, and carried forward through any interim period presented.
4. Adjustments shall give effect to events that are:
- directly attributableto each specific transaction,
- factually supportable, and
- expected to have a continuing impact.
Nature of Item |
Treatment in Pro Forma Financial Information |
(1) Material nonrecurringcharges or credits and related tax effects which result directly from the transaction and which will be included in the income of the registrant within the 12 months following the transaction |
· Do not include in pro forma income statements
· Disclose these items in a note and clearly indicate that they were not included. |
(2) Infrequent of nonrecurring items included in the underlying historical financial statements of the registrant or other combining entities and that are not directly affected by the transaction. |
Do not eliminate in arriving at pro forma results.
For example: Cheap stock charges or gains and losses on asset dispositions or liability settlement. |
(3) Conforming change in accounting principles adopted by registrant |
Pro forma information should consistently apply the newly adopted accounting principles to all periods presented. |
(4) Discontinued operations, extraordinary items, or cumulative effects of accounting changes |
If included in historical financial statements, present only the portion of the income statement through "income from continuing operations". |
(5) Earnings per share |
· Present historical basic and diluted per share data based on continuing operations and pro forma basic and diluted per share data on the face of the pro forma statement of operations.
· Also present the number of sharesused to compute per share data if outstanding shares used in the calculation are affected by the transactions included in the pro forma financial statements. |
(6) Use of proceeds and earnings per share |
· The denominator in computing pro forma EPS should include only those common shares whose proceeds are being reflected in pro forma adjustments in the income statement, such as proceeds used for debt repayment or business acquisitions.
· Common shares whose proceeds will be sued for general corporate purpose, for example, should not be used in computing EPS. A company may present "additional" EPS data reflecting the issuance of all shares if it considers this information meaningful. If this additional EPS is shown on the face of the pro forma income statement, it should be labeled appropriately.
· The footnotes to the pro formas should make the computation(s) of pro forma EPS transparent to investors. |
D. FORM
1. Columnar form, with separate columns presenting historical results, pro forma adjustments, and pro forma results. In limited cases, (where they are only a few easily understood adjustments) a narrative description of the effects of the transaction may suffice.
2. Preceded by introductory paragraph which briefly describes (a) each transaction for which pro forma effects are presented, (b) the entities involved, (c) the periods presented, and (d) an explanation of what the pro forma presentation shows.
3. Pro forma adjustments should be referenced to footnotes, which clearly explain the assumptions involved.
4. Pro forma information may be in condensed form (similar to interim financial statements required in Form 10-Q) which reflects only those numbered captions of Regulation S-X. Any balance sheet caption less than 10% of total assets may be combined with others; any income statement caption less than 15% of average net income of the registrant for the last three years (excluding loss years) may be combined with others.
5. If the transaction is structured in such a manner that significantly different results may occur, additional pro forma presentations should be made which give effect to the range of possible results. The additional results may be of equal prominence or lesser, depending on the facts and circumstances. Additional presentations might include the following:
- Pro forma financial statements depicting minimum required issuances of securities or acceptance of offers along with separate pro forma depiction of maximum issuance or acceptance.
- If the minimum or maximum outcome will only affect the balance sheet, the registrant need only present an additional pro forma balance sheet.
- If the outcome of minimum or maximum participation does not have a pervasive impact on the financial statements, possible outcomes and their impacts may be discussed in a note to the pro forma financial statements.
- If the number of offer acceptances in a proposed business combination may determine the accounting to be applied to the transaction (for example, purchase vs. pooling of interests) and the only factor influencing the appropriate accounting is the number of acceptances, full pro forma financial information should be presented assuming each accounting method. If other factors may influence the accounting, pro forma should be based on the most likely accounting to be applied to the transaction based on due diligence performed by the registrant and its financial advisors.
- Sensitivity analysis for a change in one variable which may produce different outcomes. Also see Section II.H for guidance regarding changes in interest rates.
For example: A registrant files a proxy statement requesting shareholder approval of a purchase business combination. The registrant will issue a certain number of common shares in the acquisition, the number of which will be determined by a formula such that the total dollar amount of the acquisition is subject to change. The registrant may present the pro forma effects of the acquisition using a purchase price calculated as if the acquisition was consummated at the date of filing (by using the most current trading price of the common shares). If the range of possible outcomes may have a material impact on the amount of goodwill to be recorded in the financial statements, the registrant should disclose the impact on the balance sheet and income statement (for amortization) of each dollar increase or decrease in the common share trading price.
6. Pro forma information for a particular acquisition or other transaction usually should be presented separately from pro forma information for unrelated transactions for which pro forma information may be required if:
- the proceeds of an offering will be used to fund that acquisition, or
- shareholders are being asked to vote on that acquisition or other transaction, or
- a Form 8-K is required to be filed for that acquisition.
Other transactions appropriate for inclusion in a pro forma presentation should be accumulated in a separate column. Otherwise, if consummation of more than one transaction has occurred or is probable, pro forma information may be presented on either a combined or separate basis. If combined, footnote explanation should disaggregate the various transactions in a reasonable fashion.
E. ACCOUNTANT'S REPORTS
An accountants’ report on pro forma financial information is not required. However, any auditor report provided on pro forma financial information must comply with AICPA guidelines as set forth in the "Statement on Standards for Attestation Engagements; Reporting on Pro Forma Financial Information." The auditor’s consent should cover the report on the pro forma financial statements. Generally, reports on pro forma data are only appropriate where the auditor has a sufficient basis to express an opinion because it also audited the majority of the underlying historical financial statements and issued a report thereon.
F. TYPICAL PRO FORMA ADJUSTMENTS
Generally, pro forma adjustments should be presented gross on the face of the pro forma statements. Alternatively, components of the adjustments may be broken out in a sufficiently detailed manner in the notes to the pro forma statements. [SP]
G. IN BUSINESS COMBINATIONS
1. Purchase Accounting
- Pro forma statements that give effect to a business combination using the purchase method of accounting generally require only two pro forma adjustments: (1) the allocation of the purchase price, including adjusting assets and liabilities to fair value and recognizing intangibles, with related changes in depreciation and amortization expense and (2) the effects of additional financing necessary to complete the acquisition. However, other related adjustments may be necessary.
- Contractual terms of the combination such as major new compensation contracts with management would require pro forma adjustment if the new contracts are entered into as part of the acquisition agreement. [SAB 2C]
- Actions to be taken by management subsequent to a business combination, as reflected in liabilities recorded in accordance with EITF 95-3, may relate to the planned disposal or termination of revenue producing activities, as well as other business integration activities. It is appropriate to present SX Article 11 pro forma adjustments depicting the recurring effects of exiting revenue producing activities. That type of pro forma adjustment is consistent with the requirement to provide pro forma information depicting material dispositions as discussed at I.B. Only revenues and costs specifically identifiable with that revenue-producing activity may be included in the pro forma adjustments. Allocations of corporate costs should not be adjusted for the disposition.
- Termination of employees and closing facilities are typical actions taken in connection with business combinations to eliminate costs perceived by management as redundant. The timing and effects of these actions are generally too uncertain to meet the SX Article 11 criteria for pro forma adjustments. Management’s estimate of how these actions (and other business integration activities not specifically associated with the disposition of a business) are expected to impact the operations and liquidity of the newly combined companies going forward should be discussed in MD&A and in supplemental information clearly identified as forward looking information.
- A schedule showing the calculation of the purchase price(including the value assigned to non-cash portions) should be provided in a note, if not otherwise reasonably apparent.
- The purchase price should be allocated to specific identifiable tangible and intangible assets (such as customer lists, contracts acquired, trademarks and patents, in-process research and development, etc.) and liabilities. If the allocation is preliminary, significant liabilities and tangible and intangible assets likely to be recognized should be identified and uncertainties regarding the effects of amortization periods assigned to the assets should be highlighted.
- If the registrant is awaiting additional information necessary for the measurement of a contingency of the acquired company during the allocation period specified by FAS 38, the registrant should disclose prominently that the purchase price allocation is preliminary. In this circumstance, the registrant should:
- describe clearly the nature of the contingency,
- discuss the reasons why the allocation is preliminary (i.e., identify the information that the registrant has arranged to obtain),
- indicate when the allocation is expected to be finalized, and
- furnish other available information, which will enable a reader to understand the magnitude of any potential accrual and the range of reasonably possible loss.
In the absence of such disclosure, investors may assume reasonably that the purchase price allocation is final and that all future revisions of estimated fair values of assets and liabilities acquired will be reflected in income. [SAB 2A.7]
- If contingent consideration is issuable (as discussed in paragraph 77 of APB 16), the registrant should disclose the terms of the contingent consideration and the potential impact on future earnings.
- The expected useful lives or amortization periods of significant assets acquired in a purchase business combination, including goodwill and other identified intangibles, should be disclosed in a note to the pro forma financial statements.
- If amortizationof purchase adjustments is not straight-line, the effect on operating results for the five years following the acquisition should be disclosed in a note, if material.
2. Pooling of Interests
- Pro forma financial statements that present a merger accounted for as a pooling of interests merely combine two sets of historical financial statements. It is highly unusual to have pro forma adjustmentsother than elimination of any intercompany transactions and conforming of accounting policies. The resulting pro forma financial statements generally will be the same as those which the investor will see as the registrant’s actual financial statements after the transaction is consummated. If other transactions requiring pro forma presentation have occurred which affect one or both of the combining entities, those pro forma effects should be presented in a separate column following the pro forma pooling results, for the most recent fiscal year and interim period only.
- Compute earnings per share based on the aggregate of the weighted average outstanding shares of the constituent businesses, adjusted to equivalent shares of the surviving business for all periods presented. [FAS 128.59]
3. Any Business Combination
Either the registrant or its target may expect to dispose of certain operations in order for a merger to gain the approval of one or more U.S. regulatory agencies. Pro forma recognition should be given to the impact of those disposals to the extent they are identifiable at the time the pro formas are prepared. If operations to be disposed of are not identifiable with any reasonable certainty at that time, the notes to the pro forma financial information should disclose the contingency and its reasonably possible impact on the financial statements. Pro forma financial information giving effect to the disposals should be filed on Form 8-K when the disposals occur.
H. PRO FORMA PRESENTATIONS REFLECTING DEBT FINANCING
1. Generally should be based on either the current interest rate or the interest rate for which the registrant has a commitment. If actual interest rates in the transaction can vary from those depicted, disclosures of the effect on income of a 1/8 percent variance in interest rates should be disclosed.
2. Although use of current or committed interest rates is appropriate in most cases, careful consideration should be given to the facts and circumstances specific to each presentation to determine whether the interest rate used is reasonable. Certain limited circumstances may warrant the use of an interest rate other than the current or committed rate. In some instances, the staff believes that the registrant should use the interest rates that were prevailing during the period covered by the pro forma information.
For example: If a registrant purchases a business whose assets comprise variable rate interest earning assets financed by variable rate debt, it may be inappropriate to use current interest rates for purposes of computing pro forma interest expense if historical income amounts related to interest earning assets are reflected using interest rates significantly different from current or committed rates.
When a rate other than the current or committed rate is used, prominent disclosure of the basis of presentation and the anticipated effects of the current interest rate environment should appear in the introduction to the pro forma financial statements and wherever pro forma information is provided. [SP]
I. TAX EFFECTS
Normally should be calculated with reference to the statutory rate in effect during the periods for which the pro forma income statements are presented. If taxes are not calculated on that basis, or if unusual effects of loss carryforwards or other aspects of tax accounting are depicted, explanation should be provided in a note to the pro forma financial statements.
J. EFFECTS OF NEW CONTRACTUAL ARRANGEMENTS
Effects of new major distribution, cost sharing, or management agreements, and compensation or benefit plans may only be reflected if amounts can be factually supported, are directly attributable to the transaction, and are expected to have a continuing impact on the statement of operations.
For example: A formal management agreement between a registrant or target subsidiary and its parent that provides for payments intended to cover administrative costs incurred by the parent on behalf of the subsidiary may be terminated or modified. If a new agreement is executed with different terms or the old agreement is terminated and no new agreement is entered into because the subsidiary or its new parent will now perform the activities covered by the previous management agreement, pro forma adjustment for the contractually modified fee may be made. [SP]
K. "CARVED OUT" BUSINESSES
1. A forecast about post-acquisition results of operations may be more meaningful than a pro forma statement of operations prepared in accordance with SX Article 11 when historical financial statements of the acquiree are not indicative of financial condition or results of operations going forward because of the changes in the business and the omission of various operating expenses in the financial statements of businesses carved out of larger entities. Refer to V for guidance regarding forecasts.
2. If a pro forma statement of operations is furnished, management should present within the pro forma information its best estimate of what any allocated or omitted corporate costs would be had the merger taken place as of the beginning of the earliest period presented. [Instruction 4 to SX Article 11] (See Topic Two, 1.A.3.b for guidance about form and content of carve out financial statements.) That information should be clearly identified as forward-looking either in a note to the pro forma adjustments or in a separate pro forma statement column heading. Material assumptions should also be fully explained in a note. The adjustments should be limited to those demonstrating the effects of the changes in operations that may have affected historical revenues or operating expenses had they been implemented at the beginning of the historical period. The limitations of the pro forma information should be explained clearly.
III. Special Problems and Issues
A. COMMON PRO FORMA PREPARATION PROBLEMS
The following adjustments generally are not appropriate on the face of the respective pro forma financial statements, but could be disclosed in the footnotes thereto.
1. Interest income from the use of proceeds from an offering or asset sale
2. Income statement presentation of gains and losses directly attributable to the transaction. However, such amount should be presented as an adjustment to pro forma retained earnings with an appropriate explanation in the notes.
3. Pro forma adjustments that give effect to actions taken by management or expected to occur after a business combination, including termination of employees, closure of facilities, and other restructuring charges. Forecasts or projections may be the most appropriate way to depict the effect of such actions.
4. There generally should be no adjustments in the acquiree’s historical allowance for loan losses, insurance reserves or other contingent liabilities. Ordinarily, such adjustments imply that the historical financial statements of the acquiree require revision to conform with GAAP. However, a pro forma adjustment may be appropriate if the acquiring entity intends on a substantially different method of disposing problem loans (bulk sale). [SAB 2A.5] Refer to SAB 2A.9 for a discussion of liabilities assumed in a purchase business combination.
5. Alternative measures of performance or liquidity and the effect of pro forma adjustments thereon.
B. PROHIBITION ON ASSUMING OFFERING PROCEEDS [33A-170]
1. Pro forma financial statements may not reflect the receipt or application of offering proceeds, except as follows:
- to the extent of a firm commitment from underwriter,
- to the extent of the minimum in a best-efforts minimum/maximum offering;
- in a best-efforts all-or-none offering; and
- certain exceptions for savings and loan conversions.
2. A similar prohibition applies to pro forma capitalization tables, except the staff has accepted the following:
- In a minimum/maximum offering, presentation at both minimum and maximum; and
- In a rights offering or offerings of securities upon the exercise of outstanding warrants, to the extent exercise is likely in view of the current market price.
C. COMBINING ENTITIES WITH DIFFERENT FISCAL YEARS
1. An acquired entity’s income statement should be brought up to within 93 days of the registrant’s fiscal year, if practicable, by adding subsequent interim results to the fiscal year’s data and deducting the comparable preceding year interim results, with appropriate disclosure. [SX 11-02(c)(3)]
2. For business combinations accounted for using the pooling-of-interests method of accounting, the financial statements of the combining companies may differ by more than 93 days. However, financial statements of the fiscal year in which the pooling is consummated must be recast so that the combined periods do not differ by more than 93 days. The resulting adjustment is reflected as an adjustment of stockholders’ equity. An accompanying footnote explaining the basis of combination should include disclosure of sales or revenues, net income before extraordinary items, and net income for any period excluded from or included more than once in the recast financial statements. [SX 3A-02]
3. Additional quantitative and narrative disclosure about gross profit, selling and marketing expenses, and operating income of any period excluded from or included more than once may be necessary to inform readers about the effects of unusual charges or adjustment in the omitted or double counted period. [SP]
D. HISTORICAL RESULTS INCLUDE UNUSUAL EVENTS [SX 11-02(c)(4)]
If unusual events enter into the determination of operating results presented for the most recently completed fiscal year, the effect of such unusual events should be disclosed and the registrant should consider presenting an additional pro forma statement of operations for the most recent 12-month period. The effects of the unusual events ordinarily should not be eliminated from pro forma data. The registrant may wish to consider furnishing a forecast in lieu of pro forma data. See Section V.
IV. Special Applications
A. SUB-CHAPTER S CORPORATION AND PARTNERSHIPS [SP]
1. If the issuer was formerly a Sub-S, partnership or similar tax exempt enterprise, pro forma tax and EPS data should be presented on the face of historical statements for the periods identified below.
- If necessary adjustments include more than adjustments for taxes, limit pro forma presentation to latest year and interim period.
- If necessary adjustments include only taxes, pro forma presentation for all periods presented is encouraged, but not required.
2. In filings for periods subsequent to become taxable, pro forma presentations reflecting tax expense for earlier comparable periods should continue to be presented for periods prior to becoming taxable and for the period of change if the registrant elects to present pro forma information for all periods pursuant to IV.A.1.b above. Such pro forma presentations should continue to calculate the pro forma tax expense based on statutory rates in effect for the earlier period.
3. Undistributed earnings or losses of a Sub-S registrant should be reclassified to paid-in capital in the pro forma statements. [SAB 4B] Similarly, undistributed earnings or losses of partnership should be reclassified to paid-in capital in the pro forma statements. That presentation assumes a constructive distribution to the owners followed by a contribution to the capital of the corporate entity.
4. Sub-S registrants or partnerships that pay distributions to promoter-owners at the close or effectiveness with proceeds of the offering (rather than out of retained earnings) should consider the pro forma presentations specified in Section IV.C.3 below.
B. DISTRIBUTIONS TO PROMOTERS/OWNERS AT OR PRIOR TO CLOSING OF IPO [SAB 1B.3]
1. If a planned distribution to owners (whether declared or not, whether to be paid from proceeds or not) is not reflected in the latest balance sheet but would be significant relative to reported equity, a pro forma balance reflecting the distribution accrual (but not giving effect to the offering proceeds) should be presented along side the historical balance sheet in the filing.
2. If a distribution to owners (whether already reflected in the balance sheet or not, whether declared or not) is to be paid out of proceeds of the offering rather than from the current year’s earnings, pro forma per share data should be presented (for the latest year and interim period only) giving effect to the number of shares whose proceeds would be necessary to pay the dividend (but only the amount that exceeds current year’s earnings) in addition to historical earnings per share. For purposes of this SAB, a dividend declared in the latest year would be deemed to be in contemplation of the offering with the intention of repayment out of offering proceeds to the extent that the dividend exceeded earnings during the previous twelve months.
C. OTHER CHANGES IN CAPITALIZATION AT OR PRIOR TO CLOSING OF IPO [SP]
1. Generally, the historical balance sheet and statement of operations (including EPS) should not be revised to reflect modifications of the terms of outstanding securities that become effective after the latest balance sheet date, although pro forma data may be necessary. If the registrant and its independent accountants elect to present retroactively a conversion of securities as if it had occurred at the date of the latest balance sheet included in the filing (with no adjustment of earlier statements), the staff ordinarily will not object. However, if the original instrument accrues interest or accretes toward redemption value after the balance sheet date until the conversion actually occurs, or if the terms of the conversion do not confirm the carrying value, only pro forma presentation would be deemed appropriate.
2. If terms of outstanding equity securities will change subsequent to the date of the latest balance sheet and the new terms result in a material reductionof permanent equity or, if redemption of a material amount of equity securities will occur in conjunction with the offering, the filing should include a pro forma balance sheet (excluding effects of offering proceeds) presented along side of the historical balance sheet giving effect to the change in capitalization.
3. If the conversion of outstanding securities will occur subsequent to the latest balance sheet date and the conversion will result in a material reduction of earnings applicable to common shareholders (excluding effects of offering), pro forma EPS for the latest year and interim period should be presented giving effect to the conversion (but not the offering).
D. PRO FORMA TO FORMA REQUIREMENTS FOR REAL ESTATE AND LEASING OPERATIONS
1. Statements of estimated taxable operating results and cash to be made available by operations are required. These should be pro forma statements of the registrant, rather than of the property, giving effect to the acquisition.
- If the property is to be operated by the registrant, the presentation should be based on the most recent 12 month period and include only those adjustments which are factually supportable. Annualized results for a period less than twelve months is not appropriate.
- If the property to be acquired is subject to one or more leases, the presentation should be based on the rents to be paid in the first year of those leases. Material changes in the terms that will occur pursuant to the terms of the leases subsequent to the first year should be prominently disclosed.
- Registrants that are partnerships or REITs may present in tabular form for a limited number of years, typically one year, the estimated cash distribution per unit showing the portion thereof reportable as taxable income and the portion thereof that is a return of capital. If taxable net income will be greater than the cash available for distribution per unit, this should be disclosed.
2. To the extent applicable, pro forma information required by SX Article 11 is also required.
3. Pro forma presentations should not include the effects of real estate properties for periods prior to actual construction since that type of adjustment would be a forecast or projection.
4. The provision of SX 3-14 which permits estimated taxable operating results of real estate companies to include annualization of existing lease contracts is not applicable to equipment leasing companies or other businesses that generate income through leases.
V. Projections and Financial Forecasts
A. ALTERNATIVE TO PRO FORMA STATEMENTS
Financial forecasts may be presented in lieu of pro forma statements of operations, or they may be presented for other informational purposes. [SX 11-03]
B. PRESENTATION REQUIREMENTS
1. All projections and forecasts must comply with the guidelines for projections in Item 10 of Regulation S-K and S-B. Item 10 requires that management have a reasonable basis for the assumptions underlying their prospective financial statements. Similarly, sections 210 and 316 of the AICPA Guide for Prospective Financial Statementsrequire these assumptions to be reasonably objective with persuasive support. Support for assumptions include market surveys, industry data, general economic indicators, historical operations, signed contracts, etc. An absence of adequate support may preclude a registrant’s ability to include prospective financial statements in the filing. Additionally, a company with a limited operating history may not have a reasonable basis to present a financial forecast beyond one year.
2. Forecasts presented in lieu of pro forma financial statements must be presented in accordance with AICPA guidelines, and the following:
- Cover a period of at least 12 months from the later of, (a) the latest historical balance sheet in the filing, or (b) the date of the event.
- Same degree of detail as that required in pro forma data; assumptions are clearly set forth.
- Historical information of the registrant and business to be acquired (if applicable) should be presented for a recent 12-month period in parallel columns with the forecast.
VI. Other
A. PRO FORMA DISCLOSURES REQUIRED BY GAAP
Certain "pro forma" disclosures are required by GAAP (e.g., APB 16, 20 and certain EITF consensuses) and should be provided where applicable. Those presentations may differ in style and content from the requirements of SX Article 11.
Topic Four: Independent Accountants' Involvement
(Article 2 of Regulation S-X)
I. Qualifications of Accountants
A. DULY REGISTERED AND IN GOOD STANDING UNDER THE LAWS OF HIS OR HER PLACE OF RESIDENCE OF PRINCIPAL BUSINESS.
1. Licensure status should be confirmed with appropriate personnel in OCA if the accounting firm is unfamiliar to the staff.
2. SX 2-01 requires that an independent accountant be licensed and in good standing under the laws of the place of the accountant’s residence or principal office. The rule is silent as to whether or not the accountant’s state or country of licensure must coincide with the location of the registrant’s corporate offices or place where the registrant conducts its principal operations.
- The staff interprets SX 2-01 to require the audit report on a domestic registrant’s financial statements to be rendered by an auditor licensed in the U.S. However, the staff has made limited exceptions in the circumstance of a domestic shell company registrant where substantially all operations are foreign, and the audit report is rendered from the location of the principal business.
- In any event, an auditor whose report is included in a domestic registrant’s filings should be an expert in U.S. GAAP and U.S. GAAS. In circumstances where the audit report is not rendered in the U.S., the staff should inquire about the steps the auditor has taken to obtain competency in U.S. GAAP and compliance with U.S. GAAS. Notify DCAO of instances where the audit report on a domestic registrant’s financial statements was rendered by a non-U.S. auditor.
B. INDEPENDENT [FR 602]
1. All independence questions should be referred through DCAO to the Commission’s OCA.
2. An accountant is not independent if he or she has any direct, or material indirect, interest in the client. The Commission’s rules are more restrictive than AICPA guidelines regarding the association of the accountant’s family members and retired partners with the client. The Commission also is more restrictive as to the extent of services (particularly recordkeeping) that may be provided to an audit client.
3. Independence rules also apply to Regulation A and Regulation D filings. [FRC 602.02(a)]
C. INDEMNIFICATION
Indemnification of parties subject to liability under the U.S. securities laws is considered contrary to public policy. Indemnification also may impair an auditor’s independence (FRC 602.02.i.i). The staff does not object to a domestic or foreign registrant’s indemnification of predecessor auditors for costs incurred in successful defense of claims. However, the current auditor may not be indemnified under any circumstances. Any auditor indemnification arrangement should be described under "Experts" in a registration statement.
D. PRINCIPAL AUDITOR
1. A principal auditor must take responsibility for the financial statements of the registrant for each year presented, although that auditor may refer to other auditors whose reports and audits are being relied upon by the principal auditor. The principal auditor is expected to have audited or assumed responsibility for reporting on at least 50% of the assets and revenues of the consolidated entity. If it is impracticable for a principal auditor to assume that extent of responsibility for one or more of the periods presented, the staff will evaluate whether to accept the audit reports as sufficient for reliance in filings with the Commission depending on the facts and circumstances. The staff should encourage registrants that are unable to obtain a report from an auditor assuming that degree of responsibility to consult with the staff well in advance of filing.
2. The staff has not objected to a principal auditor’s report solely on the basis that the auditor is taking responsibility for less than 50% of the assets and revenues of the registrant if that report is issued by an auditor required to be designated as the principal auditor because of the laws, regulations, stock exchange rules, or similar circumstances applicable to the registrant.
E. AICPA SEC PRACTICE SECTION
Independent accountants are not required to be members of the AICPA or the AICPA SEC Practice Section to practice before the Commission. However, the AICPA requires a member of the AICPA that issues a report on financial statements of a company after it has become subject to the Commission’s reporting requirements to be a member of the AICPA SEC Practice Section.
II. Accountant’s Report
A. GENERAL
1. Basic requirements: dated; signed; indication of City and State where issued; identify the financial statements covered.
2. The report should refer to any supplemental schedules furnished pursuant to SX Article 12 (or a separate report on those schedules may be included with the schedules).
3. The report must contain clear statements as to scope, opinion and any exceptions taken. It must include representations that the audit is conducted in accordance with GAAS and that financial statements are presented in conformity with GAAP. All audits of financial statements filed with the Commission must be conducted in accordance with U.S. GAAS. All financial statements must be prepared in accordance with U.S. GAAP, except as permitted by Item 17 or 18 of Form 20-F.
4. If an audit report required to be filed includes reference to another accountant’s report, the separate report of the other accountant must also be included in the filing.
5. Auditors’ reports referring to each period for which audited financial statements are required must be included in the filing, except that only audit reports opining on the most recently completed fiscal year are required in an Annual Report to Shareholders. Including only an audit report on the current period precludes the incorporation by reference of those financial statements into the Form 10-K unless the audit reports for previous years are separately included or incorporated by reference from another document. [PR 14a-3]
B. QUALIFIED REPORTS
The audit report that an independent auditor may be required to issue under GAAS may indicate that either the financial statements or the audit procedures applied do not satisfy the requirements of the form or the Commission’s rules. Examples of audit reports that always represent a substantial deficiency in the filinginclude the following:
1. Scope qualifications [SAB 1E.2]
- Any qualification with respect to the scope of the audit results in a finding by the staff that the audit of the financial statements required by Commission rules has not been performed.
- Sometimes an auditor is not present for observation of inventory. In that case, the auditor must be able to satisfy himself or herself through alternative procedures. No language in the report should imply a qualification as to scope or conclusions. [FRC 607.01]
2. Disclaimer of opinion
SX Article 2 requires the clear expression of an opinion on the financial statements. A report that states that the auditor is disclaiming an opinion for any reason does not satisfy the requirements of SX Article 2.
3. Qualifications as to accounting principles or disclosures [SAB 1E]
Financial statements not in conformity with GAAP are presumed to be inaccurate or misleading, notwithstanding explanatory disclosures in footnotes or in the accountant’s report. [FRC 101]
C. OTHER REPORT MODIFICATIONS
1. NNEmphasis of a matter [AU 508.19]
Auditors are permitted, but not required, to include the emphasis of a matter in their reports regarding:
- The entity is a component of a larger entity
- Significant related party transactions
- Subsequent events
- Issues (such as changes in accounting) that affect the comparability of financial statements
- Other matters that are of such a character as to warrant emphasis to investors.
The staff should be alert to language in an audit report that emphasizes an uncertainty. That language may be indicative of a scope limitation, or may be presented in a fashion that can confuse readers as to the conclusions reached by the auditor with respect to amounts presented in the financial statements. Audit reports that emphasize or otherwise refer to uncertainties, other than going concern modifications, should be brought to the attention of DCAO.
2. Going concern modifications [AU 341]
- Going concern modifications are required by GAAS in certain circumstances.
- Filings that include reports having going concern modifications must also include appropriate and prominent disclosure of the financial difficulties giving rise to that uncertainty. Discussion of a viable plan that has the capability of removing the threat to the continuation of the business must be included. The plan may include a "best efforts" offering so long as the amount of minimum proceeds necessary to remove the threat is disclosed. The plan should enable the issuer to remain viable for at least the 12 months following the date of the financial statements being reported on. If management has no viable plan, the use of going concern financial statements should be questioned. [FRC 607.02]
- Going concern opinions that do not use the words "substantial doubt" when referencing a going concern matter do not comply with GAAS.
- Going concern opinions that are phrased as a conditional uncertainty, that is, they indicate that substantial doubt will arise if an event occurs or fails to occur, are not appropriate.
- A disclaimer of opinion resulting from going concern matters is permitted by SAS 59, but does not comply with the requirements of SX Article 2.
3. Changes in accounting principles
- A reference in the audit report is required if there has been a change in accounting principles applied that materially affects the comparability of financial statements presented.
- A registrant filing an initial public offeringis permitted a special exemption to retroactively apply a change pursuant to APB 20.29. However, disclosures of the nature of the change and the justification for a change, including an explanation of why the newly adopted accounting principle is preferable, are required by APB 20.17 and .30.
- Preferability LettersThe presumption that an entity should not, in the absence of the promulgation of a new accounting standard, change an accounting principle may be overcome only if the enterprise justifies the use of an alternative acceptable accounting principle on the basis that it is preferable. [APB 20.16] The registrant is required to file a letter from its independent accountant concurring with its conclusions as to the new method’s preferability. [SAB 6G.2.b] In all cases, the staff should evaluate the reasonableness of the new accounting policy and ensure adequate disclosure of its effects. In the absence of authoritative literature providing another basis for evaluating preferability, the registrant’s determination should be based on its own particular circumstances and reflect management’s business judgment.
- Preferability letters must be included in Form 10-Q or Form 10-K as Exhibit 18 and need only be filed once in the first applicable Exchange Act filing following the change. Preferability letters are not required in Securities Act filings. A preferability letter generally is required in Form 10-K only when a change in accounting occurred in the fourth quarter. Even though the independent accountant referred to the change in its audit report as acquired by GAAS and thus concluded as to the preferability of the change, Regulation S-K requires that a preferability letter be included as an exhibit to the Form 10-K.
- The staff has objected to the change from one acceptable method to another acceptable method if the registrant and its independent accountants cannot demonstrate that the new method is preferable. Conforming to industry practice may not justify a change if industry practice is not the preferable method.
- Preferability letters are generally not required after a purchase business combination where changes in the acquired entity’s accounting are made to conform to those of the acquiring entity.
- For a business combination accounted for as a pooling of interests, a preferability letter is required if the registrant issuer changes its accounting principles. A preferability letter is not required when the other combining company changes accounting principles to conform to the registrant’s accounting.
- A preferability letter is required for a change in estimate effected by a change in accounting principle.
- No preferability letter is required if the change is in response to newly issued category A or category B GAAP, a SAB, or an EITF consensus.
- GAAP hierarchy for evaluating preferability or resolving conflicts in guidance is as follows [AU 411.10]:
Category A |
· FASB Statements of Financial Accounting Standards
· FASB Interpretations
· APB Opinions
· AICPA Accounting Research Bulletins
· Rules and interpretive releases of the Commission have authority similar to Category A GAAP for SEC registrants |
Category B |
· AICPA Industry Audit Guides
· AICPA Statements of Position
· FASB Technical Bulletins |
Category C |
· AcSEC Practice Bulletins
· FASB EITF Consensus Positions |
Category D |
· AICPA Interpretations and Implementation Guides
· Widely recognized and prevalent practices |
NOTE: In addition, the staff would challenge any accounting that differs from an EITF consensus even though it is considered Category C GAAP by the AICPA. The staff believes that EITF consensus issues represent the best thinking on areas for which there are no specific standards.
III. Review and Compilation Reports
A. REVIEW REPORTS ON INTERIM OR PRO FORMA DATA
1. Prior to filing, interim financial statements included in quarterly reports on Forms 10-Q and 10-QSB, must be reviewed by an independent public accountant using professional standards and procedures for conducting such reviews, as established by generally accepted auditing standards, as may be modified or supplemented by the Commission. If, in any filing, the company states that interim financial statements have been reviewed by an independent public accountant, a report of the accountant on the review must be filed with the interim financial statements. Otherwise, the report is not required to be included in Forms 10-Q and 10-QSB.
2. An accountant issuing a review report on interim data is presumed to not have adequate knowledge of the company’s accounting and financial reporting policies unless he has also audited the prior fiscal year. [AU 722.09 & SP] Likewise, an accountant issuing a review report on pro forma data should have conducted an audit of a significant portion of the historical data in the pro forma presentation. See also Topic Three, II.E. [SP]
3. Consent to inclusion of the report, in the form discussed in Section 605 of the Codification of Financial reporting Policies, should be included.
B. SELECTED QUARTERLY FINANCIAL DATA
1. Required for all registrants except foreign private issuers, mutual life insurance companies and small business issuers filing on small business forms. If it is required to be furnished, it must be reviewed by the independent accountant. [SK 302]
2. No reference in the audit report to the quarterly data accompanying the annual financial statements is necessary if the auditor’s review conformed with applicable standards and the auditor is not aware that the interim information is materially affected by a departure from GAAP. Otherwise, the auditor must discuss the departures that exist.
3. If a significant change or credit is reported in a quarter, the staff may question whether the adjustment should have been recognized in whole or in part in an earlier quarter. The staff will also consider the need to confirm that (1) the auditor made reasonable inquiry as required by review standards and (2) the auditor has not referred to the interim data because they have concluded that there is no reason to believe that any departure from GAAP related to the adjustment materially affected interim information.
C. COMPILATION REPORTS
Compilation reports are not appropriate in any filings, including Regulation A fillings, because the association of the accountant provides no basis for reliance. [SP]
IV. Change in Accountants; Disagreements [SK 304]
A. CHANGE IN ACCOUNTANTS
1. If a change in accountants occurred within 24 months prior to or in any period subsequent to the date of the most recent financial statements, the registrant should provide required information:
- in Form 8-K within 5 business days of the change
- in proxies, even though previously discussed in Form 8-K
- in registration statements, unless the change was previously disclosed.
2. Disclose:
- whether the accountant resigned, declined to stand for reelection or was discharged, and the date of resignation or discharge;
- whether the decision was recommended or approved by the Board of Directors or committee thereof; and
- whether the accountant had issued a report in the last two fiscal years containing a disclaimer or adverse or qualified opinion.
- whether in connection with audits of the two most recent years through the date of resignation or discharge there were any disagreements with the former accountants on any matter which, if not resolved to the satisfaction of the accountants, would have caused the accountant to make reference in its report to the matter. This includes disagreements, which were resolved to the satisfaction of the accountant. The filing should describe the subject matter of any such disagreement.
3. If the registrant amends the Item 4 disclosures for any reason, it must also file as Exhibit 16 an updated letter from the auditor addressing the revised disclosures.
B. UNUSUAL ISSUES INVOLVING CHANGES IN ACCOUNTANTS
1. New accountant hired prior to termination of prior accountant
A registrant may engage a new auditor prior to termination of the predecessor accountant who is completing the audit of the current fiscal year. A termination occurs on the date the registrant hires a new accountant. The registrant should file an Item 4 Form 8-K when it formally engages the new auditors. The Item 4 Form 8-K should report the change, identify disagreements or reportable events and include the predecessor auditor’s letter. The registrant should file an amendment on Form 8-K within five days after it files the predecessor auditor’s final audit report on the registrant’s financial statements. The amendment should indicate whether there are any disagreements through that date and include a confirming auditor’s letter.
2. Reverse acquisition
Unless the same accountant reported on the most recent financial statements of both the registrant and the accounting acquirer, a reverse acquisition always results in a change in accountants. A Form 8-K filed in connection with a reverse acquisition should provide the disclosures required by SK Item 304 under Item 4 of Form 8-K for the change in independent accountants, treating the accountant that no longer will be associated with the registrant’s financial statements as the predecessor accountant.
3. The disclosures required by Item 304 with respect to any changes in the accounting acquirer’s auditor which occurred within 24 months prior to, or in any period subsequent to, the date of the acquirer’s financial statements must be provided in the first filing containing the accounting acquirer’s financial statements.
V. "To Be Issued" Accountant’s Reports
A. CONTINGENT UPON FUTURE EVENT OR TRANSACTION
If audited financial statements are required in a filing, the audit report should be signed and unrestricted. Generally, the staff should not commence a review of a filing that does not meet that requirement. However, if the entities comprising the registrant will not be legally transferred to the registrant in a reorganization until immediately before effectiveness, the staff has accepted filing of a "draft" report in the form that it will be expressed at effectiveness. In that case, the draft report should be accompanied by a signed preface of the auditor stating that it expects to be in a position to issue the report in the form presented at effectiveness. No registration statement can be declared effective until the preface is removed and the accountant’s report finalized. If a filing does not include a currently effective audit report for reasons other than as described here, DCAO should be advised promptly.
B. CONTINGENT UPON FUTURE UNDERWRITING AGREEMENT
If a report is restricted solely to avoid issuing a modified report because of doubt about the registrant’s continued existence and the modification would removed upon receipt of proceeds from offering, the accountant’s report should reflect such modification in the registration statement upon effectiveness. [SP]
VI. Other Matters
A. CONSENTS TO THE USE OD AUDIT REPORTS
1. Registrants must file a copy of the auditor’s consent to the use of its report in any filing under the Securities Act as an exhibit. The primary purpose of obtaining consent is to assure that the auditor is aware of the use of its report and the context in which it is used.
2. A new consent is required:
- whenever any change, other than typographical, is made to the financial statements
- for an amendment if there have been intervening events since the prior filing that are material to the company
- with an amendment if an extended period of time passes since the last filing. An extended time is generally any period, which is more than 30 days. Many firms require their clients to obtain a new consent each time an amendment is filed.
3. Exchange Act report
- Filing of a consent to the use of an audit report is not required in Exchange Act reports. Ordinarily, an auditor’s engagement letter with the registrant will require the registrant to inform the auditor prior to each occasion that the report is filed with the Commission. Audit reports included in Exchange Act filings are required to be signed.
- An amendment to a previously filed Exchange Act filing may require the reissuance of the auditor’s report. In other circumstances, it may be sufficient to include a manually signed report or consent that affirms that the originally filed report applies to the financial statement and/or schedules as revised in the amendment.
4. Waivers [SAB 1A and SAB 1L]
- In rare circumstances, such as situations involving hostile takeover attempts, a consent may be waived if the registrant applies for a waiver and provides an affidavit complying with Rule 437 of Regulation C.
- Hostile takeovers
A registrant offering its own securities in a hostile exchange offer for a target’s stock may seek and not be able to obtain the target’s cooperation in providing either its audited financial statements or the target auditor’s consent to the use of its report in the required registration statement. The acquirer/registrant should use its best efforts to obtain the target’s permission and cooperation for the filing or incorporation by reference of the target’s financial statements and the target auditor’s consent to the inclusion of its report on the financial statements. At a minimum, a registrant is expected to write to the target requesting these items and to allow a reasonable amount of time for a response prior to effectiveness of the filing. The target may, however, fail to cooperate with the registrant.
If a registrant uses its best efforts but is unsuccessful in obtaining the target’s permission and cooperation for the filing or incorporation by reference of its financial statements and its auditor’s consent to the inclusion of its report on the financial statements, the registrant may request a waiver of the consent.
The affidavit included in the request should document the specific actions taken by the registrant to obtain the cooperation of the other party for the filing as well as the efforts to obtain the auditor’s consent. Correspondence evidencing the registrant’s request for these items should accompany the affidavit.
The staff will generally agree to waive the requirement to include or incorporate by reference the target auditor’s audit report. In that situation, disclosure should be made that, although an audit report was issued on the target’s financial statements, and is included in the target’s filings, the auditor has not permitted use of its report in the registrant’s registration statement. The auditor should not be named. Any legal or practical implication for shareholders of the registrant and the target resulting from the inability to obtain the cooperation of the target or consent of the target’s auditor should be explained. No disclosure in the registration statement should expressly or implicitly disclaim the registrant’s liability for the target’s financial statements. In the event that circumstances change, the registration statement should be amended to include the audited financial statements and the auditor’s consent required by the form.
5. The consent of the independent accountant is not required for a report on financial statements, which is not a part of a 1933 Act registration statement under Rule 412(c) of Regulation C, like superseded financial statements.
The staff has not objected to a modified consent language indicating that the independent accountant’s report on financial statements previously filed on Form 10-K and incorporated by reference in Form S-3 is no longer appropriate since restated financial statements have been presented giving effect to a business combination accounted for as a pooling-of-interests. This language is only appropriate where the pooling-of-interest combination is consummated and the financial statements have been restated as a result of the publication of post-combination financial statements. That is, this does not apply to supplemental financial statements.
B. WITHDRAW OF AUDIT REPORT [AU 561 and SP]
When an auditor becomes aware of information in interim periods which relates to financial statements previously reported on and that information would require revision of the financial statements and/or the auditor’s report, the auditor must notify the Commission (through OCA) that the report must no longer be relied upon. If a registrant publicly discloses that previously filed audited financial statements require adjustment and the auditor has not withdrawn its report, confusion for investors as to the auditor’s concurrence with the adjustments may result. In this situation, the registrant should clarify in the filing the extent of reliance on the audit report.
C. ACCOUNTANTS' REFUSALS TO RE-ISSUE REPORTS
Some accounting firms have adopted risk management policies that lead them to refuse to reissue their reports on the audits of financial statements that have been included previously in Commission filings. In some cases, accountants whose reports on acquired businesses were included in a registrant’s Form 8-K have declined to permit that report to be included in a registrant’s subsequent registration statement. In other cases, accountants have declined to reissue their reports on the registrant’s financial statements after the registrant engaged a different auditor for subsequent periods. The Commission’s staff is not in a position to evaluate the reasons for an accountant’s refusal to re-issue its report and will not intervene in disputes between registrants and their auditors. Moreover, the staff will not waive the requirements for the audit report or the accountant’s consent to be named as an expert in filings. If a registrant is unable to re-use the previously issued audit report in a current filing, the registrant must engage another accountant to re-audit those financial statements. A registrant that is unable to obtain either re-issuance of an audit report or a new audit by a different firm may be precluded from raising capital in a public offering.
D. ILLEGAL ACTS
Section 10A of the Exchange Act requires that auditors report in a timely manner certain uncorrected illegal acts to a registrant’s board of directors. It further requires the registrant, or the auditor if the registrant fails to do so, to provide information regarding the illegal act to the Chief Accountant of the Commission. Notify DCAO immediately upon any indication from a registrant or its auditor that an illegal act has occurred.
E. SIGNATURES
Wherever a signature is required, typed signatures or duplicated or facsimile versions of the manually signed document may be used. In any of these cases, each signatory must manually sign the document authenticating, acknowledging or otherwise adopting the signature that appears in the filing before or at the time that the filing is made, and the manually signed document must be retained by the filer for five years. A copy of this document must be furnished to the Commission upon request. [ST 302]
F. SELECTED FINANCIAL DATA
1. An auditor may be engaged to report on selected financial data suing the guidance of SAS 42. Identification of some or all columns of selected financial data as "audited" or other references to the auditor can create the impression that the registrant has so engaged the auditor. If no auditor associated with the selected financial data has occurred but an investor could obtain such an impression from the manner of presentation, the staff should recommend revision of that presentation. A statement in a headnote too the data that the amounts presented for the fiscal year are derived from audited financial statements does notcreate the impression that the information was subject to a SAS 42 examination.
2. If an auditor was engaged to report on the selected financial data, the form of report specified by SAS 42 should be included in the filing and the auditor’s consent to the report should make reference to its applicability to the selected financial data.
G. MISCELLANEOUS
1. The financial statements should not appear on the accountant’s letterhead, and should not refer in any way to the accountants’ report. [TPA 9410.06]
2. The terms "audited" and "certified" have the same meaning in the Commission’s regulations. [SAB 1E.1]
3. The accountant’s report should not refer to unaudited interim financial statements even where they are presented along side of audited fiscal year data. [AU 504.14] Such data should be clearly labeled as unaudited.
4. Additional disclosures are required if an auditor report of a bankrupt accounting firm is included in a filing. [SAB 1L]
Topic Five: Small Business Issuers
Regulation S-B
I. Definition and Eligibility
A. MUST MEET ALL OF THE FOLLOWING FIVE CONDITIONS [SB 10]:
1. Annual revenues of less than $25 million, as reported in its most recent fiscal year (12 months) for which audited financial statements are prepared in accordance with U.S. GAAP.
a) |
New reporting companies |
A company that has not previously reported to the Commission must meet the revenues test based on the most recent fiscal year for which audited financial statements are included in the initial registration statement. However, if, consideration of the pro forma effect of (1) businesses acquired during the latest fiscal year, and (2) consummation of business combinations identified as probableat the time of filing the initial registration statement would result in the issuer exceeding the revenue limit, the issuer would not qualify for the use of the S-B form. |
b) |
Previously reporting companies |
A previously reporting company must meet the revenues test based on its annual audited financial statements as originally filed with the Commission (not restated for subsequent pooling-of-interests transactions or discontinued operations) for the two most recent fiscal years. |
c) |
Banks and similar financial institutions |
For purposes of the test, a bank must include all grossrevenues from traditional banking activities. Banking activity revenues include interest on loans and investments, dividends on investments, fees from loan origination, fees from trust and investment services, commissions, brokerage fees, mortgage servicing revenues, and any other fees or income from banking or related services. Revenues do not include gains and losses on dispositions of investment portfolio securities (although it may include gains on trading account activity if that is a regular part of the institution’s activities). |
2. U.S. or Canadian issuer. A small business issuer that ceases to be incorporated in the U.S. or Canada is immediately disqualified from the S-B reporting system.
3. Not an investment company. A small business issuer that becomes an investment company is immediately disqualified from the S-B reporting system.
4. Parent, if any, must qualify. If the issuer is a majority owned subsidiary, the parent entity also must be a small business issuer. An entity that is to be spun off from its parent coincident with or prior to its initial registration may register as a small business issuer if it will otherwise qualify as small business issuer upon consummation of the spin-off.
5. Public float less than $25 million. An entity is not a small business issuer if it has a public float (the aggregate market value of the issuer’s outstanding securities held by non-affiliates) of $25 million or more. Apply the public float test as follows:
Reporting Company |
The public float test of a reporting company is computed using the price at which the stock last sold, or the average bid/ask prices of such stock, on a date within 60 days prior to the end of its most recent fiscal year. |
New Registration — Exchange Act |
The public float of a company filing an initial registration statement under the Exchange Act shall be determined as of a date within 60 days of the date the registration statement is filed. Float shall be computed on the basis of the number of all shares outstanding held by non-affiliates prior to the filing of the registration statement and the estimated public price of the securities. |
New Registration — Securities Act |
In the case of an initial public offering under the Securities Act, public float shall be computed on the basis of the number of shares outstanding held by non-affiliates prior to the offering and the estimated public offering price of the securities. |
B. REGULAR REPORTING COMPANY CHANGING TO S-B REPORTING SYSTEM
A reporting company may enter the S-B system only at the beginning of a fiscal year, and must determine at the time of its first filing in a fiscal year (first quarterly report, Form 8-K, or registration statement) whether it will enter the S-B reporting system. A reporting issuer cannot enter the S-B system during a fiscal year if it has already filed Exchange Act reports for periods included in that fiscal year under Regulation S-X. A reporting company may enter the S-B system if it meets both the revenue and the public float test for each of the last two fiscal years.
C. CONTINUED ELIGIBILITY TO USE THE S-B REPORTING SYSTEM
1. Small business issuers wishing to remain in the S-B system must file all Exchange Act reports including Form 8-K, following the requirements of Regulation S-B beginning with the first Exchange Act report in a given fiscal year, or with the first Exchange Act report following effectiveness of the initial S-B registration statement.
2. A company may continue to use the Small Business Issuer forms until it exceeds the revenue limit for two successive fiscal years orit exceeds the public float limit at the end of two consecutive fiscal years. The revenue test is applied to the annual financial statements originally filed with the Commission, not as restated for subsequent discontinued operations or pooling of interests.
3. S-B issuers are permitted to use Form S-1, or any other form for which they qualify, at any time provided that all the requirements of that form are met (including the financial statement requirements). The use of Form S-1 does not disqualify the registrant from filing subsequent Exchange Act reports pursuant to S-B so long as it continues to meet the S-B eligibility requirements. [SB 10(a)(2)(v)]
4. A company may exit the S-B reporting system voluntarily at any time by filing a required report or registration statement on a non S-B form. After a company has filed using a non-S-B form, it may not re-enter the S-B reporting system until the following fiscal year (with the exception of 3 above), at which time it must satisfy the requirements for a reporting company entering the S-B system.
5. If a S-B issuer becomes a majority-owned subsidiary of a domestic company that is not a small business issuer or a foreign private issuer during the year, the S-B issuer may finish the year reporting under the S-B system. With the start of the next new year, the registrant must report under the S-X/S-K system.
6. For purposes of proxy and information statements, as well as subsequent Form 10-K’s, the small business issuer that has exited the S-B reporting system need not provide the additional disclosures required by Regulation S-X and S-K with respect to fiscal years during which it was an S-B filer. However, registration statements filed by former S-B filers must comply fully with the requirements of the registration form.
II. Other Eligibility Issues
A. Date for determining eligibility |
Eligibility for Forms SB-1 and SB-2 with respect to the revenues and public float tests is determined on the date that the form is filed and at 33A-10(a)(3) update time, with the exception of C below. Therefore, transactions subsequent to the filing date and prior to the date of effectiveness do not affect the use of the form. |
B. 3-05 or 3-09 financial statements of SX filer |
A non-S-B registrant required to furnish financial statements under SX 3-05 or 3-09 may not rely on accommodations in Regulation S-B with respect to the acquired business or investee even though that business would satisfy the tests as a small business or investee. |
C. Finalization of year end financial statements |
If a reporting company believes it has met the test as a small business issuer for each of the past two fiscal years it may file, immediately after the latest year end, a registration statement using an S-B Form. If it is determined after the financial statements for the latest fiscal year has been finalized that the company does not qualify as a small business issuer, then an amendment must be filed before effectiveness converting the filing to a non-S-B form and complying with the requirements of Regulation S-K and Regulation S-X. |
D. Business acquisitions |
An S-B reporting company generally continues to qualify for use of S-B forms after the acquisition of another company that is not S-B reporting or S-B eligible until the revenue or public float limits are exceeded for two successive fiscal years. |
E. Reverse acquisitions |
· The staff considers "reverse acquisitions" with non-operating public shells to be capital transactions in substance, rather than business combinations. Accordingly, the staff looks to the accounting acquirer’s eligibility as a small business issuer.
· If a reverse acquisition occurs in which a non-public operating company is deemed to be the acquirer of an S-B public operating company (registrant), the registrant (the legal acquirer) would continue to be SB eligible. In circumstances where the transaction appears to be an initial public offering of a larger, dominant accounting acquirer, the staff may look to the accounting acquirer’s eligibility as a small business issuer. Refer to Appendix B.
· If the accounting acquirer is a public operating company that reports under Regulations SK and SX, the registrant will no longer be S-B eligible. |
F. Other financial statements may be required |
A primary goal of the S-B reporting system is to reduce the impediments to small business financing in the securities markets without compromising the basic protection of investors. Where consistent with the protection of investors, the staff may require the filing of other financial statements where necessary or appropriate. In situations where a small business issuer acquires a company reporting under the Exchange Act pursuant to Regulations S-K and S-X, the staff may require 3 years of audited financial statements for the acquired entity, since those financial statements are already required to be furnished. Further, the staff may raise additional questions as to the eligibility to use the S-B forms after the acquisition. |
III. Form and Content Disclosures Required by Regulation S-X Are Not Applicable
A. GENERAL
Small business issuers need not comply with the disclosure requirements of Regulation S-X, except as indicated under the "NOTES" to Item 310 of Regulation S-B.
The staff, based on the AICPA Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles in the Independent Auditor’s Report, views Staff Accounting Bulletins (SABs) and Financial Reporting Releases (FRRs) to be interpretations of GAAP, and, in most cases, should be applied.
Small Business Issuers must provide all information required by the Industry Guides, and real estate companies should also refer to Item 13 [Investment Policies of Registrant], Item 14 [Description of Real Estate], and Item 15 [Operating Data] of Form S-11.
B. PRO FORMA INFORMATION
Pro forma financial statements are required in transactional filings whenever a significant business combination has occurred or is probable, and the transaction has not been reflected in at least nine months of historical audited financial statements of the issuer. In addition, pro forma financial information should be furnished whenever consummation of an event or transaction has occurred or is probable for which disclosure of pro forma information would be material to investors. Issuers should consider the guidance in SX Article 11.
NOTE: SB issuers are not required to present pro forma information for periods prior to the periods for which financial statements are required. |
For example: Pro forma information depicting a business combination to be accounted for as a pooling of interests requires two years and interim period, not three years.
C. SIGNIFICANT EQUITY INVESTEES
The disclosure about significant equity investees cited under Item 310(b)(iii) of Regulation S-B is required in both interim and annual financial statements.
D. CANADIAN ISSUERS
Canadian small business issuers that present financial statements in accordance with Canadian GAAP shall include a reconciliation to U.S. GAAP that complies with Item 18 of Form 20-F for registration statements (with certain exceptions). The requirements of Item 17 need only be met for financial statements included in periodic reports and certain registration statements. [Note 2 to SB 310]
Topic Six: Foreign Private Issuers & Foreign Businesses
I. Definitions and Basic Rules
A. DEFINITIONS
Foreign Issuer[RC 405]
|
An issuer which is foreign government, a foreign national or a corporation or other organization that is incorporated or organized under the laws of any foreign country. |
Foreign Private Issuer[RC 405] |
A foreign issuer that is not a foreign government. If U.S. residents own more than 50% of its voting securities, all of the following must also be true:
(a) Majority of its executive officers and directors are not U.S. citizens or residents,
(b) More than 50% of the value of its assets is located outside the U.S., and
(c) Its business is administered principally outside the U.S. |
Foreign Business[SX 1-020(l)] |
A foreign business is not organized under the laws of the U.S. or any state thereof, is majority owned by persons who are not U.S. citizens or residents and:
(a) More than 50% of its assets are located outside the U.S.
or
(b) Majority of its executive officers and directors are not U.S. citizens or residents. |
NOTE: In its determination of the majority ownership of a business, the staff will consider the ultimate parent entity that would consolidate the business under U.S. GAAP and its controlling shareholders.
B. BASIC RULES
1. Foreign private issuers are eligible to use Form 20-F and the other "F forms" which provide certain financial statement and disclosure accommodations.
Can a foreign private issuer elect to use the registration and reporting forms that domestic companies use?
Yes. However, if it elects to do so, it must comply with all of the requirements of the "domestic company" forms.
2. A foreign issuer — other than a foreign government — that does not meet the definition of a foreign private issuer, must use the same registration and reporting forms as a domestic company. A foreign issuer that loses its foreign private issuer status becomes subject to the reporting requirements for a domestic company on that date. While previous Exchange Act filings do not have to be amended upon the loss of foreign private issuer status, all future filings would be required to fully comply with the requirements for a domestic company. The financial statements and selected financial data should be recast into U.S. GAAP and U.S. dollar reporting currency for all periods presented.
3. If a Canadian company is required by law to prepare financial statements in accordance with Canadian GAAP, the staff will not object to it using Canadian GAAP and Canadian dollars in filings with the Commission even if it does not meet the definition of a foreign private issuer. However, it should file on domestic forms and provide a reconciliation to U.S. GAAP under Item 18 of Form 20-F. Companies incorporated in a foreign country other than Canada that do not meet the definition of a foreign private issuer are required to use U.S. GAAP to prepare their financial statements filed with the Commission.
4. Reincorporation of a foreign private issuer as a U.S. entity generally will require a 1933 Act registration statement on a domestic form (S-4). All periods must be restated to U.S. GAAP/U.S. dollars.
II. General Financial Statement Requirements for Foreign Private Issuers
A. PERIODS FOR WHICH FINANCIAL STATEMENTS ARE REQUIRED [ITEM 8 OF REVISED FORM 20-F]
1. Auditedfinancial statements required in a registration statement or annual report:
Balance Sheet |
Income Statement |
Shareholders' Equity |
Cash Flow Statement |
Comprehensive Income |
2 years |
3 years |
3 years |
3 years |
3 years |
2. Unaudited interim financial statements required:
- Registration statement
Financial Statement |
Period Required |
Balance Sheet |
As of interim date |
Income Statement, Cash Flow Statement and Comprehensive Income |
For period from latest fiscal year end to the interim balance sheet date and
Corresponding period in prior year. |
Shareholders’ equity |
Current interim period. |
- Periodic interim reportsForeign private issuers that file annual reports on Form 20-F are required only to furnish promptly, in a Form 6-K, material information:
- Distributed to stockholders or to a national exchange, if made public by that exchange, or
- Required to be made public by its domestic laws. [EAR 15d-13(b) and 13a-13(b)]
B. AGE OF FINANCIAL STATEMENTS IN A REGISTRATION STATEMENT [ITEM 8 OF REVISED FORM 20-F]
NOTE: Item 8 of Revised Form 20-F will supersede SX 3-19 effective for registration statements first filed after September 30, 2000 and annual reports that include financial statements for fiscal years ending on or after September 30, 2000. The guidance contained in this section reflects the Form 20-F revisions. Refer to old SX 3-19 for the age requirements for financial statements contained in filings that precede the effective date.
1. Financial statements of a foreign private issuer must be as of a date within 9 months of the effective date of a registration statement. Audited financial statements for the most recent completed fiscal year must be included in registration statements declared effective 3 months or more after fiscal year-end. Under the rule, foreign private issuers can go effective with audited financial statements as old as 15 months, with the most recent interim statements as old as 9 months. If interim statements are required, they must cover a period of at least 6 months.
NOTE: Foreign private issuers use Form 20-F as both an Exchange Act registration statement and an annual report form. An Exchange Act registration statement on Form 20-F is sometimes referred to as a "20-FR". The age of financial statements requirements under Item 8 of revised Form 20-F apply when Form 20-F is used as a registration statement.
2. The 15 month period for audited statements is extended to 18 months, and the 9 month period for interim statements is extended to 12 months, for the following offerings:
- exercise of outstanding rights granted pro rata to all existing securityholders;
- dividend or interest reinvestment plan; or
- conversion of outstanding convertible securities or exercise of outstanding transferable warrants. [Item 8 of revised Form 20-F]
3. Special Rule for IPOs — Audited financial statements in initial public offerings must be no more than 12 months old at the time of filing. However, this rule applies only where the registrant is not public in any jurisdiction. Further, the staff will waive the 12-month requirement where compliance is not required in any other jurisdiction and it is impracticable or involves undue hardship. [Item 8 of revised Form 20-F]
4. The age requirements in Item 8 of revised Form 20-F also apply to financial statements of:
- foreign businesses acquired by both foreign and domestic registrants under SX 3-05
- foreign target businesses required in Form S-4 or Form F-4
- foreign equity investees of both foreign and domestic registrants under SX 3-09.
5. A foreign private issuer that has been in existence less than a year must include an audited balance sheet that is no more than 9 months old. [SP]
6. If financial information reporting revenues and income for an annual or interim period more current than required by the rule is made available to shareholders, exchanges, or others in any jurisdiction, that information should be included in the registration statement.
- The more current information is not required to be reconciled to U.S. GAAP. However, a narrative explanation of differences in accounting principles should be provided, and material new reconciling items should be quantified. Differences between foreign and U.S. GAAP can be identified by cross reference to U.S. GAAP reconciliation footnotes elsewhere in the filing.
- If a new U.S. accounting standard would be required to be applied in the period for which the updated information is provided, that fact should be disclosed, but no quantification of the effect is necessary if unreasonable cost or delay would be required. [Item 8 of revised Form 20-F]
7. Acquired and to be acquired foreign businesses under SX 3-05
Financial statements of acquired and to be acquired foreign businesses under SX 3-05 must comply with the age of financial statement requirements at the time of effectiveness of the registration statement. Interim financial statements for the period preceding the acquisition date may not be omitted on the basis that the acquisition occurred during the first 9 months of the current year. However, the financial statements generally need not be updated if the omitted period is less than 6 months, and the acquired business does not prepare quarterly financial statements under its home-country reporting requirements.
8. Age of pro formasin cross-border business combinations
Also see Section IV.A.7 for additional guidance on preparation of pro forma financial information.
- The age of the pro forma financial information included in a registration statement is based on the age of financial statements requirement applicable to the registrant. If a foreign private issuer files a Form F-4 and the target company is a U.S. domestic registrant, the age of the pro forma information may be determined by reference to Item 8 of revised Form 20-F. By contrast, if a U.S. domestic registrant files a Form S-4 and the target company is a foreign private issuer, the age of the pro forma information must be determined by reference to SX 3-12.
- Application of the age of financial statement rules may require the foreign target company to include in a Form S-4 a period in the pro forma information that would be more current than its separate historical financial statements. However, SX Article 11 permits the ending date of the periods included for the target company to differ from those of the registrant by up to 93 days. The staff will also consider combinations of periods that involve overlaps or gaps in the information of the target company of up to 93 days, provided that the resulting annual and interim periods are of the same length required for the registrant, and there are no overlaps or gaps in the registrant’s information. However, the staff would not permit a registrant to omit an interim pro form presentation because of different fiscal periods.
9. In certain circumstances, the staff will consider special processing needs for cross-border offerings which involve special problems of coordination among several national jurisdictions. Foreign issuers should direct requests for special processing to the Office of International Corporate Finance in advance of filing.
C. DUE DATE FOR ANNUAL REPORTS OF FORM 20-F
1. General rule
An annual report on Form 20-F is required to be filed within 6 months after the foreign private issuer’s fiscal year-end.
2. Special Report on Form 20-F triggered by an IPO
- When an IPO is made effective within 6 months after a foreign private issuer’s fiscal year-end and the audited financial statements of the just recently completed year are not included, the following reporting requirements apply:
If the registrant is subject only to the Exchange Act reporting requirements of Section 15(d): |
A Special Report* on Form 20-F must be filed by the later of 90 days after effectiveness or 6 months after fiscal year-end. A complete annual report on Form 20-F is not required until the following fiscal year. [EAR 15d-2] |
If the registrant is registered under Sections 12(b) or 12(g): |
An annual report on Form 20-F must be filed within 6 months after the fiscal year end. [EAR 13a-1; Form 20-F] |
* This Special Report should contain the audited financial statements of the just recently completed year. It does not need to include MD&A or other narrative disclosures ordinarily required in a Form 20-F; but, registrants are encouraged to provide that information. To comply with the rules of the exchange on which they are listed (not Commission rules), companies may need to file a complete Form 20-F, rather than a Special Report. Even if omitted from a Special Report, MD&A and other omitted information needs to be included in any subsequent registration statement or proxy.
D. CONTINUOUS AND SHELF OFFERINGS
Foreign private issuers are required to update the financial statements and other information included in a prospectus used more than nine months after effectiveness of a registration statement only when the financial statements would be as of a date later than the date of financial statements required under Item 8 of revised Form 20-F. Issuers filing on Form F-3 may incorporate by reference reports filed or furnished to the Commission that contain the updated financial statements rather than filing a post-effective amendment. [SK 512(a)(4)]
E. CHANGES IN FISCAL YEAR [EAR 15D-10(G) & 13a-10(G)]
1. Transition reports for foreign private issuers are filed on Form 20-F as follows:
Transition period is: |
In a transition report on Form 20-F, include: |
File the transition report within: |
More than 6 months |
· Audited financial statements reconciled to U.S. GAAP.
· All information required to be filed when Form 20-F is used as an annual report. |
Later of 6 months after either the end of the transition period or the date the issuer elected to change its fiscal year-end. |
6 months or less, but more than one month |
· Unaudited financial statements, reconciled to U.S. GAAP.
· Information required by Items 3 9, 15, 16 and 17 or 18 of Form 20-F.
NOTE: The next annual report on Form 20-F must include audited financial statements for this transition period. |
Later of 3 months after either the end of the transition period or the date the issuer elected to change its fiscal year- end. |
One month or less |
No separate filing is required but the one-month transition period must be audited and included in the next annual report on Form 20-F. |
No separate filing is required. |
2. The staff will consider requests for a transition period of more than 12 months if a longer period is accepted in the issuer’s home country. Issuers that receive this accommodation are required to provide complete unaudited financial statements with all of the applicable disclosures for both the 12-month period and the remaining portion of the transition period.
3. Foreign private issuers filing a registration statement after electing to change their fiscal year end may need to provide more current audited financial statements than are required under the Exchange Act transition reporting rules. A foreign private issuer’s most recently audited financial statements cannot exceed the age specified by Item 8 (generally 15 months) at the registration statement’s date of effectiveness.
III. Requirement for Reconciliation to U.S. GAAP
Foreign private issuers are allowed to prepare the primary financial statements filed with the Commission in accordance with a comprehensive body of GAAP other than U.S. GAAP. To assist U.S. investors in understanding the nature of the accounting differences and their effects on financial statements, foreign issuers are required to provide a reconciliation to U.S. GAAP.
A. REQUIREMENT FOR RECONCILIATION BY REGISTRANT
1. General
- A reconciliation is required for each annual and interim period required to be included in a registration statement or annual report.
- Form 20-F provides two levels of reconciliation to U.S. GAAP — Item 17 and Item 18. Item 18 requires the same information as Item 17 plus all of the disclosures required by U.S. GAAP and Regulation S-X. With certain limited exceptions, Item 18 is required for securities offerings. Some of these exceptions include:
- offerings pursuant to reinvestment plans
- offerings upon the conversion of securities
- offerings of investment grade securities
Item 17 is acceptable in these instances and for purposes of the annual report. Many foreign issuers elect to file their annual reports under Item 18 and provide all of the disclosures required by the U.S,GAAP and Regulation S-X. Issuers that file using Item 17 may be required to provide certain additional information in the MD&A to assist the U.S. investor in understanding the financial statements. [SAB 1D]
2. First-time entrants to U.S. reporting system
- If a foreign registrant has not previously filed financial statements with the Commission on a reconciled basis, it is only required to provide reconciliations of the financial statements and selected financial data to U.S. GAAP for the two most recently completed fiscal years and for any interim periods required in the registration statement. In each subsequent year, on a prospective basis, an additional year of the reconciliation is required. This accommodation also applies to financial statements filed pursuant to SX 3-05 and 3-09
NOTE: While reconciliations to U.S. GAAP are initially only required for two years, the registrant’s financial statements still need to be presented in the registration statement for all of the periods required by Item 8 of revised Form 20-F. Similarly, selected financial data still needs to be presented for five years, even though the oldest three years need not be reconciled to U.S. GAAP.
- First time registrants that elect to prepare the financial statements in accordance with U.S. GAAP may provide income statements and statements of cash flows for only their two most recent fiscal years. However, selected financial data still needs to be presented for five years under home-country GAAP if U.S. GAAP financial data is not available for the oldest three years. MD&A need only discuss the two years presented in the financial statements. [R33-7053]
- Predecessor financial statements and selected financial data must be presented in the same comprehensive body of accounting as the registrant. A foreign entity that is a predecessor of a U.S. domestic company must present financial statements in U.S. GAAP and U.S. dollars.
3. Issuers of investment grade debt
Forms F-1, F-2, F-3, and F-4 allow registration of investment grade securities utilizing the simpler reconciliation requirements of Item 17 of Form 20-F.
4. "Backdoor" listing by foreign companies
- Foreign companies sometimes obtain a "backdoor" listing through a reverse acquisition with a U.S. public shell. Even though substantially all of the operations are conducted outside of the U.S., the registrant would not be considered a foreign private issuer.
- To facilitate timely reporting, the staff would not object if the financial statements included in the Form 8-K are prepared using a foreign GAAP, provided a reconciliation to U.S. GAAP that complies with Item 18 of Form 20-F is provided.
- The first Form 10-K and any registration statement should include financial statements prepared using U.S. GAAP for all periods presented, including those prior to the reverse acquisition. Financial statements in a foreign GAAP reconciled to U.S. GAAP would not be acceptable.
5. Financial Statements of Foreign Acquired Businesses or Foreign Equity Investees
- The reporting requirements of Form 8-K do not apply to foreign private issuers. However, foreign private issuers must comply with SX 3-05 in registration statements.
- If financial statements are required to be filed by registrants (domestic or foreign) for foreign acquirees or foreign equity investees, these statements may be prepared on a basis other than U.S. GAAP. Reconciliations to U.S. GAAP must be provided only when the foreign acquiree or foreign equity investee is significant to the registrant at the 30% level or greater. Refer to Topic Two for the tests of significance. [Item 17(c)(2)(v) and (vi) of Form 20-F]
6. If reconciliation is required, the financial statements of foreign acquirees or foreign investees need only comply with the reconciliation requirements of Item 17 of Form 20-F, rather than Item 18. Even though the significance level of an acquisition may require the presentation of three years of audited financial statements in a registration statement or other transactional filing, the reconciliation only needs to be reconciled for the most recent two years and any required interim period.
7. If three years of audited financial statements of an acquired foreign business would be required based on the level of significance, a registrant may elect to present the acquired business’ statements for only two years if they are prepared using U.S. GAAP, rather than foreign GAAP with a reconciliation. In applying this accommodation, the registrant’s primary financial statements must also be prepared in accordance with U.S. GAAP if post-acquisition periods are considered in determining the years presented.
8. A foreign or domestic registrant may apply SAB 80 in determining the periods for which audited financial statements of acquired foreign businesses are required in an IPO. Assuming that the businesses acquired are reporting in the U.S. for the first time, financial statements of foreign businesses required to be presented under the SAB for three years need only be reconciled to U.S. GAAP for the two most recent fiscal years. Financial statements required to be presented under the SAB for two years must be reconciled to U.S. GAAP for both years. Most recent interim period and corresponding prior year financial statements also would be reconciled to U.S. GAAP.
B. SELECTED FINANCIAL DATA [ITE 3A OF REVISED FORM 20-F]
1. Selected financial data should include amounts under U.S. GAAP, if different. The selected data should be provided for 5 years.
2. Selected data for the earliest two years of the five year period may be omitted if the registrant represents that the information cannot be provided without unreasonable effort or expense, and states the reasons for the omission in the filing.
IV. Content of Reconciliation to U.S. GAAP
Form 20-F provides two levels of reconciliation to U.S. GAAP — Item 17 and Item 18. Item 17 permits the registrant to use its financial statements that are prepared on a comprehensive basis other than U.S. GAAP but requires quantification of the material differences in the principles, practices and methods of accounting. An issuer complying with Item 18 must satisfy the requirements of Item 17 and also must provide all other information required by U.S. GAAP and Regulation S-X. The distinction between Items 17 and 18 is premised on a classification of the requirements of U.S. GAAP and Regulation S-X into those that specify the methods of measuring the amounts shown on the face of the financial statements and those prescribing disclosures that explain, modify or supplement the accounting measurements. [SAB 1D]
A. ITEM 17 REQUIREMENTS
1. A discussion of material variations in accounting principles, practices and methods used in preparing the financial statements between foreign GAAP and U.S. GAAP.
2. A quantified description of balance sheet differences under foreign GAAP in comparison to U.S. GAAP. Most companies elect to present this information in the form of a reconciliation of shareholders’ equity, but they may also provide restated balances of individual balance sheet line items, or describe, in numerical terms, how balance sheet line items would specifically change under U.S. GAAP.
NOTE: The reconciliation of shareholders’ equity should be in sufficient detail to allow an investor to determine the differences between a balance sheet prepared using foreign GAAP and one prepared using U.S. GAAP.
Common deficiencies include:
a) Recording reconciling item net of taxes. |
All reconciling items should be presented gross with a separate adjustment for taxes. |
b) Presenting adjustments that impact several balance sheet captions as one reconciling item. |
Disclose the impact on each caption for adjustments that impact several captions, such as purchase accounting. |
c) Not reflecting adjustments at the subsidiary level. |
Each GAAP adjustment should be made at the appropriate subsidiary level to determine the impact on items such as minority interest, taxes and the currency translation adjustment. |
d) Recording adjustments for items such as PP&E or goodwill, net of depreciation and amortization expenses. |
These adjustments should be presented gross with separate disclosure of the amounts of accumulated depreciation and amortization. |
NOTE: Registrants should supplementally prepare statements of changes in shareholders’ equity using balances determined under U.S. GAAP as a proof that the reconciliation balances and that it provides appropriate disclosure on changes in the equity accounts on a U.S. GAAP basis. Many registrants elect to include these statements, prepared using U.S. GAAP balances, in the financial statements. Unless easily determined from the information in the financial statements, the staff should request this information supplementally as a part of the comment process.
3. A reconciliation of net income from foreign GAAP to U.S. GAAP that quantifies and describes each significant difference.
4. Disclosure of basic and diluted EPS calculated in accordance with U.S. GAAP, if materially different from foreign GAAP.
Item 17 registrants are also encouraged to:
- Disclose the number of shares used to determine basic and diluted EPS under U.S. GAAP, and
- Describe any differences between the methods utilized to determine the numerators and denominators in the calculations of EPS under U.S. GAAP and the foreign GAAP.
(This information is required for Item 18 registrants.)
5. A cash flow statement prepared under U.S. GAAP or IAS 7, or a reconciliation of a cash flow statement or statement of changes in financial position that quantifies the material differences in the statement presented as compared to U.S. GAAP. Some of the more common deficiencies in this disclosure include:
- failure to identify noncash investing and financing activities;
- presentation of items on a net rather than gross basis;
- inadequate discussion of the differences in the definitions of "cash" and "cash equivalents"; and,
- differences in classification.
Issuers are encouraged to supplementally prepare a statement of cash flows prepared in accordance with U.S. GAAP to confirm the adequacy of the disclosure of the reconciling items.
6. A reconciliation for each required supplemental schedule from foreign GAAP to U.S. GAAP that quantifies and describes each significant difference.
7. SX Article 11 pro forma financial statements should either be prepared on a U.S. GAAP basis or be accompanied by quantified reconciliations to U.S. GAAP prepared in a manner consistent with Item 17. Reconciliations of pro forma information to U.S. GAAP are required even if the historical financial statements of the acquired business are not required to be reconciled. See Section II.B.8 for guidance concerning age of pro forma information. A method consistent with FAS 52 should be used to translate currencies.
8. Disclosure of the accounting method used in the reconciliation to U.S. GAAP for stock-based compensation given to employees and to non-employees. Other than this information, issuers filing under Item 17 are not required to provide the pro forma and other disclosures stipulated in FAS 123.
9. Segment information under FAS 131 need not be provided if the information about separate categories of activity required under Item 1 of Form 20-F is provided in the filing.
10. The disclosures required by FAS 7 for development stage companies should be provided since they are part of the primary financial statements.
B. ITEM 18 REQUIREMENTS
1. Certain information is required to be disclosed under Item 18, but not Item 17. For example (list not all inclusive):
- Reconciliations of the numerators and denominators used in computing basic and diluted EPS, and other EPS-related disclosures (FAS 128)
- Segment information (FAS 131)
- Fair value information (FAS 107)
- Concentrations of credit risk (FAS 105)
- Information about investment securities (FAS 115)
- Information about off-balance sheet financial instruments (FAS 119, FAS 133)
- Pro forma and other disclosures about stock-based compensation to employees and non-employees (FAS 123)
- Components of pensions and benefits other than pensions (FAS 87, FAS 106, FAS 132)
- Components of tax expense and deferred tax liability/asset (FAS 109)
- Income statement classification differences
2. Pervasive Impact of Differences between Home-Country and U.S. GAAP
If differences between home-country and U.S. GAAP have such a pervasive impact on the financial statements that they render a normal reconciliation as described above confusing to investors, full or condensed financial statements prepared in accordance with U.S. GAAP may be necessary in order for the reader to fully understand the impact of the differences in accounting.
For example: A business combination accounted for as a purchase of another company by the registrant under home-country GAAP but as a reverse acquisition under U.S. GAAP (the registrant is acquired by another company) would most easily be understood if the registrant included, in addition to a description of the differences in accounting, audited financial statements prepared under U.S. GAAP. Those financial statements would reflect the change in basis of the registrant on the acquisition date and present the financial statements of the accounting acquirer prior to the date of acquisition as the financial statements of the registrant (see Appendix B for additional guidance related to reverse acquisitions).
C. STATEMENTS OF COMPREHENSIVE INCOME
1. Statements of comprehensive income prepared using either U.S. GAAP or home-country GAAP are required for both Item 17 and Item 18 issuers. These statements may be presented in any format permitted by FAS 130. Reconciliation to U.S. GAAP is encouraged, but not required.
2. Paragraph 26 of FAS 130 requires the presentation of the components of the accumulated balance of other comprehensive income items either on the face of the financial statements or in the footnotes. This requirement does not apply to Item 17 filers.
3. In certain countries, equity components under home-country GAAP are included in retained earnings and are not separately tracked. Reconstruction of these amounts may not be practical. The staff will generally not object if an Item 18 filer concludes, and discloses in its filing, that it is not practical to present the components of the accumulated balance of other comprehensive income items specified by paragraph 26 of FAS 130.
D. ACCOMMODATIONS
1. Cash flow statement
The Commission will accept without reconciliation to U.S. GAAP a foreign issuer’s cash flow statement that is prepared in accordance with IAS 7, "Cash Flow Statements," as amended. [Item 17(c)(2)(iii) of Form 20-F] A reconciliation of home country cash flow presentation to IAS 7 does not meet the requirements of the form.
2. Accounting for effects of hyperinflation
- A foreign private issuer that accounts in its primary financial statements for its operations in a hyperinflationary economy in accordance with IAS 21, "The Effects of Changes in Foreign Exchange Rates," as amended, may omit quantification of any differences that would have resulted from application of the U.S. standard, FAS 52. [Item 17(c)(2)(iv)(B) of Form 20-F]
- IAS 21 requires that amounts in the financial statements of the hyperinflationary operation be restated for the effects of changing prices in accordance with IAS 29, "Financial Reporting in Hyperinflationary Economies," and then translated to the reporting currency. The accommodation is only available if the issuer uses the historical cost/constant currency method of IAS 29. This accommodation relates to financial statements prepared in a stable reporting currency, not to financial statements price-level adjusted for inflation.
3. Certain differences involving business combinations
- In certain circumstances, foreign issuers need not reconcile to U.S. GAAP certain differences attributable to the determination of the method of accounting for a business combination or for the amortization period of goodwill and negative goodwill, provided the financial statements comply with IAS 22, "Business Combinations," as amended (1993). These provisions are not available for business combinations that are promoter transactions, leveraged buyouts, mergers of entities under common control or reverse acquisitions.
- A business combination that qualifies as a uniting of interests under IAS 22 and which was accounted for using that method in the primary financial statements may be considered, for purposes of reconciliation to U.S. GAAP, a pooling of interests.
NOTE: Since the requirements are very difficult to meet, business combinations rarely qualify as a uniting of interests under IAS 22. The staff should bring all transactions accounted for as a unit of interests to the attention of DCAO.
- A business combination that qualifies as an acquisition under IAS 22 and which was accounted for using that method in the primary financial statements may be considered, for purposes of reconciliation to U.S. GAAP, a purchase.
- The reconciliation should quantify differences resulting from applying the business combination method in the primary financial statements and the amounts determined in accordance with U.S. GAAP.
- Foreign issuers need not reconcile to U.S. GAAP amounts arising from differences in the periods used to amortize goodwill and negative goodwill in the primary financial statements if the method used is consistently applied and consistent with IAS 22. [Item 17(c)(2)(viii)] In determining the amount of goodwill or negative goodwill that is subject to amortization for purposes of the reconciliation to U.S. GAAP, foreign private issuers would continue to be required to consider all other provisions of purchase accounting under U.S. GAAP.
- IAS 22 was amended in 1998 to change certain requirements regarding the amortization of goodwill and negative goodwill. Ordinarily, the staff will extend the above accommodations to registrants using the 1998 version. However, the 1998 version permits certain treatments that were not contemplated when the original accommodation was adopted. Situations involving goodwill amortization periods greater than 20 years, and all situations involving negative goodwill, should be brought to the attention of DCAO to determine whether the accommodation is available.
4. Effects of proportional (pro rata) consolidation
- Foreign private issuers that use proportional consolidation under home-country GAAP for investments in joint ventures that would be equity method investees under U.S. GAAP may omit reconciling differences related to classification or display and instead provide summarized footnote disclosure of the amounts proportionately consolidated, such as: [Item 17(c)(2)(vii) of Form 20-F]
- Current assets/liabilities
- Noncurrent assets/liabilities
- Net sales
- Gross profit
- Net Income
- Cash flow information resulting from operating, financing and investing activitiesThe disclosure should allow a reader to reconstruct a U.S. GAAP balance sheet. Summarized totals from the investee financial statements (rather than the amounts proportionally consolidated by the registrant) do not satisfy this condition.
NOTE: This accommodation for proportionately consolidated joint ventures only applies if:· The joint venture is an operating entity, and· Its significant financial operating policies are, by contractual arrangement, jointly controlled by all parties having an equity interest in the entity.
- Separate financial statements of a joint venture being proportionally consolidated are not required.
V. Selection of a Reporting Currency
SX 3-20 allows a foreign private issuer to file financial statements prepared in any currency that management believes is appropriate.
A. CURRENCY OF MEASUREMENT
While there is free choice in the selection of the reporting currency, there is not free choice in the selection of the currency used for measurement. All operations, including those of the parent company, that do not operate in a hyperinflationary environment should be measured using the currency of the primary economic environment to measure transactions. While not specifically referring to FAS 52, SX 3-20 is designed to be conceptually consistent with that standard. Assets and liabilities are translated at the period end exchange rate and the income statement is translated at the weighted average annual exchange rate. The translation effects of exchange rate changes are included as a separate component of equity.
B. DISCLOSURES, IF THE U.S. DOLLAR IS NOT THE REPORTING CURRENCY
1. Currency used to prepare financial statements displayed prominently on the face of the financial statements.
2. Currency in which dividends are declared, if different from the reporting currency.
3. Description of material exchange restrictions or controls relating to the reporting currency, the currency of the issuer’s domicile, or the currency in which the issuer will pay dividends.
4. Five-year history of exchange rates setting form rates at period end, average, highs and lows. [Item 3.A of revised Form 20-F] The noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank in New York can be obtained over the telephone or through the Internet as follows:
- Call (212) 720-6130 and ask for the Federal Reserve Bank certified noon buying rate for foreign currency cable transfers for the respective date and currency.
- Visit the Federal Reserve Bank of New York’s web site at ftp://ftp.ny.frb.org/forex/12noon or the Federal Reserve Board’s web site at http://www.federalreserve.gov/releases/H10/hist
5. Dollar equivalent or convenience translations are generally not permitted, except that a convenience translation may be presented only of the most recent fiscal year and interim period. Translation should be made at the exchange rate on the balance sheet date or most recent date practicable, if materially different. The rate used for the convenience translation should generally be the rate that the issuer would use if dividends were to be paid in U.S. dollars.
6. An issuer filing a registration statement on Form F-2 or Form F-3 that incorporates financial statements previously filed on Form 20-F does not need to amend or otherwise modify these statements to reflect a more current exchange rate in presenting the convenience translation.
NOTE: Amendment or other modification is not necessary even if the company has presented a convenience translation on interim data in the registration statement or by reference to Form 6-K. In this situation, the issuer should disclose in the interim data that different exchange rates have been used for the convenience translation.
C. CHANGE IN REPORTING CURRENCY
1. Financial information for all periods presented in the filing should be recast into the new reporting currency using a methodology consistent with FAS 52. Income statements should be translated from the old reporting currency into the new reporting currency using a weighted average exchange rate for the applicable period. The balance sheet should be translated using the applicable period end exchange rate. The objective of this procedure is to present financial statements as if the issuer had always used the new reporting currency.
2. If the reporting currency used in a registrant’s financial statements is different from that of its predecessor, the predecessor’s financial statements should be recast using the registrant’s reporting currency.
3. Use of the Euro as the Reporting Currency
- Foreign and domestic registrants that change their reporting currency to the Euro should prepare comparative financial statements for periods prior to the Euro’s introduction on January 1, 1999 by recasting previously reported financial statements into Euros using the January 1, 1999 fixed exchange rate between the Euro and the prior reporting currency. This method should not be used for a change to a reporting currency other than the Euro.
NOTE: Investors may inappropriately assume that the financial statements of all registrants that report in Euros are directly comparable for periods prior to January 1, 1999. However, the underlying trends and relationships in those financial statements are based on legacy currency measurements and will not be comparable.
- To highlight the potential lack of comparability in periods prior to January 1, 1999, the registrant should include the disclosures outlined in EITF D-71.
VI. Price-Level Adjustment Financial Statements and Effects of Hyperinflationary Environments
A. REQUIREMENTS
1. An issuer in a hyperinflationary economy must either comprehensively include the effects of price-level changes in the primary statements or, alternatively, present supplemental information to quantify the effects of changing prices using the historical cost/constant currency or current cost/replacement cost approach. [SX 3-20 and 20-F Items 17 & 18(c)(2)(iv)] The quantified effects of applying price-level accounting are not eliminated in the reconciliation to U.S. GAAP. This provision applies to all issuers who price level adjust even if the currency of the primary economic environment is not hyperinflationary as defined under U.S. GAAP.
What is a hyperinflationary economy?
A hyperinflationary economy has cumulative inflation of approximately 100% or more over the most recent three-year period. See EITF D-55 for further guidance.
NOTE: Inflation rates are multiplied in computing cumulative inflation. For example, 1.26 x 1.26 x 1.26 = 2.00. Inflation of at least 26% for three years would result in cumulative inflation of 100%.
2. Issuers in a hyperinflationary economythat elect to report in accordance with U.S. GAAP can report in either the hyperinflationary currency or a stable currency.
Reporting Currency Selected |
Requirement |
Hyperinflationary currency |
Present general price-level financial statements, as discussed in APB Statement 3, paragraph 26. [SOP 93-3, footnote 3] |
Stable currency, such as the U.S. dollar |
Apply the remeasurement principles of FAS 52. The stable currency’s average annual rate should be used for purposes of the income statement. [SX 3-20(c)] |
B. PREPARATION OF PRICE-LEVEL ADJUSTED FINANCIAL STATEMENT
1. All price level adjusted financial information in a foreign private issuer’s registration statement should be presented in equivalent purchasing power units of the reporting currency. For each period presented, all measurements are retroactively restated to the purchasing power unit as of the date of the most recent balance sheet information in the filing.
2. If a company updates to include interim financial information, the prior annual financial information must be recast in equivalent purchasing power units. A company that incorporates by reference a prior annual report on Form 20-F need not amend the prior filing, but must file restated financial statements in the registration statement or under cover of a Form 6-K that is incorporated by reference.
3. If the rate of inflation during the interim period is very low such that the effect of restatement does not materially affect apparent trends and is clearly immaterial (for example, 3% or less), the staff has not insisted that prior period financial information be restated. If the information is not restated, the rate of inflation and the reason why restatement was not considered to be necessary should be disclosed.
4. If interim financial information more current than otherwise required by SEC rules is included in a registration statement solely to comply with Instruction 3 to Item 8.A.5 of revised Form 20-F, the staff encourages, but will not insist, that prior periods be restated. The staff expects companies to provide disclosure necessary to prevent the updated data from being misleading in relation to prior period financial information. For example, the registrant should provide supplemental selected financial data recast in equivalent purchasing power units, accompanied by disclosure of the rate of inflation that would be used to restate all prior financial information in equivalent purchasing power units.
- The cash flow statements of issuers that prepare price-level adjusted financial statements should present the effects of inflation on cash flows separately from their operating, investing and financing activities. The presentation of a "fourth" cash flow statement category, which separately captures these effects, meets this objective. Price-level adjusted cash flow statements that include the effects of inflation in the line items comprising the three major categories may make the presentation less meaningful and possibly misleading.Example of a potentially misleading presentation:
The financing activities section of the cash flows statement, if price-level adjusted for inflation, may depict reductions of foreign-currency denominated debt because of the recasting of prior balance sheet amounts, even though no cash repayments may have actually occurred.
VII. Foreign Auditor Matters
A. QUALIFICATIONS AND INDEPENDENCE
1. In certain instances where the independent accountant is not licensed in the U.S. and not familiar to the staff, OCA may request information about the accountant’s qualifications to practice before the Commission. Reports of unfamiliar foreign accountants should be brought to the attention of OCA via DCAO, who will advise of any procedures necessary to determine the acceptability of the foreign auditor’s report.
2. Auditors licensed outside the U.S. must comply with all requirements of Article 2 of Regulation S-X, including SEC rules on auditor independence.
3. Auditors may be permitted or required by home-country regulations to render reports on the fairness or adequacy of consideration in an audit client’s planned merger or non-monetary transaction. These reports may violate U.S. independence rules. Instances should be brought to the attention of DCAO.
B. REPORTS
1. The report of the independent accountant, except for MJDS filers in Canada, should include a statement that the audit was conducted in accordance with U.S. GAAS. [Instruction 2 to Item 8.A.2 of revised Form 20-F; R33-7745]
2. The reconciliation to U.S. GAAP must be audited. The staff recommends that the report of the independent accountant refer explicitly to the reconciliation, but the absence of that reference does not relieve the auditor of its responsibility to examine the reconciliation. The reconciliation footnote may not be labeled "unaudited". Pursuant to Commission rules and auditing standards, omission of a material item required to reconcile the financial statements to U.S. GAAP pursuant to Item 17 or Item 18 of Form 20-F, or any otherwise inaccurate presentation of that reconciliation, would require a clear reference in the auditor’s report identifying the omission or inaccuracy.
3. If the report includes reference to another accountant, the separate audit report and consent of that accountant must be included. Clarification in one of the reports as to which auditor is responsible for the reconciliation to U.S. GAAP may be necessary.
4. Some foreign private issuers or acquired foreign businesses are jointly audited by more than one firm. Both auditors sign the report and take full responsibility for the audit. Each auditor must comply fully with all requirements of Article 2 of Regulation S-X, including the U.S. independence requirements. In certain cases, one of the firms may be a U.S. firm.
5. Effective January 1, 2000, AICPA SEC Practice Section rules establish minimum requirements for the review of SEC filings by a designated "filing reviewer" within the independent accountant’s U.S. firm or international organization knowledgeable about U.S. GAAP, U.S. GAAS, U.S. auditor independence and SEC reporting requirements. Prior to commencing review of confidential filings, the staff requests written confirmation that the SECPS member firm’s review procedures were applied to the filing. We also request the name of the designated filing reviewer that the staff may contact with any questions concerning the application of those policies and procedures to the confidential filing. The purpose of the procedure is to ensure that foreign auditors appropriately involve their designated filing reviewer prior to submission of filings. The staff will consider deferring the review of a confidential filing where the application of the firm’s established policies and procedures to that filing cannot be confirmed.
C. CHANGE IN ACCOUNTANT
Unlike Regulation S-K, Form 20-F does not require disclosure of changes in accountants. Foreign private issuers are not required to provide disclosure regarding a change in accountants in Exchange Act or Securities Act filings.
Topic Seven: Related Party Matters
I. General Disclosure Requirements [SX 1-02(u) and FAS 57]
A. DEFINITION OF RELATED PARTY
- Principal Owners: persons that hold 10% or more of the enterprise’s securities and their immediate families.
- Management: board of directors, executive officers and other persons with policy-making authority
- Affiliates: a party that directly or indirectly controls, is controlled by or is under common control with the enterprise. [SX 1-02(b)]
- Investees accounted for by the equity method.
- Employee trusts directed by management of the enterprise.
- Entities, the management of which may be controlled or significantly influenced by the enterprise to the extent that it may be prevented from fully pursuing its own separate interests.
- Parties who can influence significantly the enterprise.
- Promoters: persons founding or organizing the entity; persons who receive 10% or more of the stock of the entity in connection with its founding or organization. [SX 1-02(s)]
B. DISCLOSURES
1. All materialrelated party transactions.
- The significance of an item may be independent of its amount; this is often the case with respect to related party transactions. [SAB 4E]
- No disclosure is required by FAS 57 for compensation arrangements, expense allowances and other similar items in the ordinary course of business.
2. Nature of relationship.
3. Description of transaction, including all information necessary for an understanding of its effects.
- If material relative to total notes or accounts receivable, notes or accounts receivable from related parties should be shown separately. [SAB 4E] Dollar amounts of all material related party transactions should be disclosed in the notes.
- SX 4-08(k) requires the dollar amount of related party transactions be disclosed on the face of the balance sheet, income statement, or statement of cash flows, as appropriate. However, the staff may accept footnote disclosure if, giving consideration to the magnitude and nature of the transaction and the relationship of the parties, prominent display on the face is not warranted.
- FAS 57 requires that terms and manner of settlement of amounts due to/from related parties be disclosed unless they are otherwise apparent.
4. Transactions should not be represented in the financial statements as equivalent to arm’s length transactions unless that statement can be substantiated.
5. Forgiveness of debt by a related party typically should be considered a capital transaction. [footnote 1, APB 26.20]
II. Expenses Incurred on Behalf of Registrant
A. REFLECT ALL COSTS OF DOING BUSINESS IN THE FINANCIAL STATEMENTS [SAB 1B.1 AND 5T]
All costs of doing business, including costs incurred by parent and others, should be reflected in historical financial statements. Allocation of common expenses may be required. Footnote disclosure should include management’s assertion that the allocation method is reasonable and management’s estimate of what the expenses would have been on a stand-alone basis, if materially different. See also Section IV, "Components of Larger Entities," below.
1. Organizational and offering costspaid for by a related party should be reflected in the financial statements of the registrant where those costs will be directly or indirectly reimbursed. [SAB 5D] In the absence of an obligation or intent to reimburse directly or indirectly, the staff will not insist on inclusion of these amounts in the issuer’s financial statements.
2. Obligations paid by parent or principal shareholderon behalf of the registrant must be reflected in the registrant’s financial statements [SAB 5T]
B. COMPENSATION ARRANGEMENTS
1. Contributed Services
- Historical financial statements should reflect reasonable compensation levels. Where charges were not made or are unreasonably low, and if material to an understanding of operating results, historical statements should be revised to reflect the value of services rendered as a capital contribution. However, contributed services ordinarily need not be reflected it the entity is in formation or earliest phases of development stage.
- If historical statements reflect compensation that is not unreasonable, but is materially different from that after the offering, disclosure of the salary commitment should be made and pro forma data for the latest year and interim period may be necessary. [SAB 2C]
2. Employee stock plans and other compensation provided by the parent or promoter should be reflected in registrant’s financial statements. [AIN-APB 25, #1]
III. Transfers and Receivables From Shareholders [SAB 5G]
A. TRANSFER OF NONMONETARY ASSETS
In most circumstances, transfers of nonmonetary assets for stock or other consideration of the registrant prior to an initial public offering are recorded at predecessor cost as determined in accordance with GAAP. Where the registrant gives monetary consideration for property conveyed by promoters, the excess over predecessor costs is treated as a reduction of equity (i.e., a special distribution).
NOTE: The guidance in SAB 5G is not intended to modify the requirements of APB Opinion No. 16. The combination of two or more businesses should be accounted for in accordance with APB Opinion No. 16 and its interpretations and SAB 2A.
B . RECEIVABLES
1. Receivables from affiliates which are the equivalent of unpaid subscriptions receivable or capital distributions should be reflected as a deduction from equity. [SAB 4G]
2. Receivables arising in the ordinary course of business and paid in the ordinary business cycle need not be deducted from equity. [SAB 4E]
C. DISTRIBUTIONS TO MAJOR SHAREHOLDERS PRIOR TO OFFERING [SAB 1B(3)]
1. Refer to Topic Three for detailed discussion of pro forma requirements.
2. Distributions should be given retroactive effect in latest balance sheet or reflected in pro forma balance sheet along side of historical balance sheet.
3. If the distribution is compensation for prior services or consideration for prior conveyances, only retroactive presentation would be acceptable.
D. OFFERING PROCEEDS
1. If a material portion of the proceeds of an offering will be distributed to shareholders, present pro forma EPS for the latest year and interim period giving effect to the number of shares whose proceeds will be used to pay dividends in addition to historical EPS.
2. Even if the distribution is not clearly to be paid from offering proceeds, pro forma EPS is required if distribution exceeds current year’s earnings.
IV. Components of Larger Entities [SAB 1B]
A. FINANCIAL STATEMENTS REQUIREMENTS
The financial statements of components of larger entities should consider the following:
1. All costs of doing business should be included in registrant’s financial statements, including expenses incurred on its behalf by its parent or other shareholders.
2. Reasonable method of expense allocation should be applied where specific identification is not practicable; accompanied by footnote explanation, management’s assertion that method is reasonable, and disclosure of what expenses would have been on stand-alone basis.
3. If historical cost-sharing is not continued, present pro forma EPS data for latest year and interim period only.
4. Tax expense is presented, preferably, on stand-alone basis in historical financial statements. (Pro forma may be an alternative.)
5. Interest expense associated with debt "pushed down" to the registrant’s books or to be paid with offering proceeds should be reflected in historical statements. Also, parent’s debt secured by registrant’s assets should be reflected in registrant’s financial statements. [SAB 5J] Where other interest expense on intercompany debt is not included, an analysis of intercompany accounts as well as average balances should be provided for each period.
6. Retained earnings should not be separately reported by a non-corporate entity. The residual interest should be presented as a single component, such as "parent’s equity in division".
7. Push-down accounting of the parent’s basis, including goodwill, if any, should be reflected in the entity’s financial statements. This applies even where the parent is an individual or control group of individuals. [SAB 5J]
- The staff will not object to the application of push down accounting if the parent acquires 80 to 95% of a subsidiary.
- Push down is required at the 95% and above level, unless the entity has outstanding public debt, and is not permitted if less than 80% of a subsidiary is acquired.
- If a subsidiary without public debt becomes 95% owned by the parent or public debt is eliminated from a 95%-owned entity’s financial statements in a subsequent period, the entity’s financial statements must be adjusted at that time to push down the parent’s basis. Also see EITF No. 90-5 for push down of parent’s cost in a transfer of an equity interest in one subsidiary to another controlled subsidiary.
B. STATEMENTS OF REVENUES AND DIRECT EXPENSES
Refer to Topic Two, Section 1.A.3 for a discussion of when less than full financial statements are appropriate as well as form and content requirements.
C. PRO FORMA FINANCIAL STATEMENT REQUIREMENTS
Refer to Topic Three, Section II.K for guidance on pro forma financial information related to acquisitions of components of larger entities.
V. Research & Development Arrangements [FAS 68]
A presumption exists that the registrant will pay back the funding party (i.e., a liability should be recorded) where 10% or more of the funding party is owned by persons deemed to be related parties of the registrant, or where the funding party has any direct interest in the registrant. The apparent absence of financial ability to pay funding party back does not overcome this presumption. [SAB 5O]
VI. Compensation Issues
A. STOCK COMPENSATION
1. Compensatory stock, options or warrants issued to
- employees are accounted for under APB 25 or FASB 123.
- non-employees, including consultants, advisory board members or others providing services to the issuer are accounted for under FAS 123. See also EITF No. 96-18.
2. In evaluating whether a stock issuance is in fact a compensation arrangement or only a restructuring of non-employee ownership rights prior to an offering, the staff will evaluate the circumstances of the issuance and the extent of employee participation.
B. CHEAP STOCK
1. Measurement
Under paragraph 10 of APB 25, the fair value of the company’s stock on the measurement date must be used to measure compensation. In the evaluation of the fair value of the stock, the registrant should consider the proximity of the issuance to the offering, intervening events, transfer restrictions and exercise dates, and profitability and financial condition of the company. The staff looks to objective evidence as the best support for the determination of market value. Examples of objective evidence include transactions with third parties involving issuances or repurchases of stock for cash (including the offering) and/or appraisals by reputable valuation experts independent of the offering at or near the issue date.
2. Cheap Stock vs. Nominal Issuances
Issuances for which compensation or other expense has been appropriately recorded under APB 25 or FAS 123 ordinarily would not be considered nominal issuances since consideration received for issuances of shares may include goods or services. However, even if goods or services are received, it may still be necessary to compare the consideration received, as accounted for in the financial statements, to the fair value of the shares issued to determine whether the consideration is nominal. Also, issuance sin exchange for assets (e.g., SAB 48 transactions) would not be considered nominal issuances, unless the fair value of the assets is nominal.
3. The staff expects nominal issuances to be limited to certain issuances to investors or promoters. Any issuances considered to be nominal should be brought to the attention of DCAO.
C. ESCROWED SHARES
The staff views the placement of shares in escrow as a recapitalization by promoters similar to a reverse stock split. The agreement to release the shares upon the achievement of certain criteria is presumed by the staff to be a separate compensatory arrangement between the registrant and the promoters. Accordingly, the fair value of the shares at the time they are released from escrow should be recognized as a charge to income in that period. However, no compensation expense need be recognized for shares released to a person that has had no relationship to the registrant other than as a shareholder (for example, is not an officer, director, employee, consultant or contractor), and that is not expected to have any other relationship to the company in the future.
Topic Eight: Non-GAAP Measures of Financial Performance, Liquidity and Net Worth
I. Disclosure of Non-GAAP Measures Such as Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
A. COMMON PROBLEMS AND GENERAL GUIDELINES
While it may be required under FAS 131 for some registrants to disclose in a note to the financial statements and discuss in MD&A a non-GAAP measure related to its operating segments (See Section B below), some registrants choose to present a non-GAAP financial measure such as EBITDA or FFO (funds from operations) in their disclosure documents. Although such measures can be useful in some circumstances, an unbalanced presentation can be confusing and lead to undue reliance on the measure by investors. Problems associated with presentation of non-GAAP measures were highlighted by the Commission in Accounting Series Release No. 142. Some comments cited frequently by the staff include the following:
1. Undue authority or prominence |
A non-GAAP measure should be presented in a manner that does not give it greater authority or prominence than conventionally computed earnings or cash flows as reported in the GAAP financial statements. For example, the staff recommends that EBITDA and similar measures be located within an "other data" section in selected financial data. Discussions in MD&A of results as measured in the GAAP financial statements should be no less complete than discussions of performance or liquidity as depicted by non-GAAP measures. |
2. Measures not comparable |
Wherever the non-GAAP measure is used, a footnote or other reference to a complete explanation of its calculation and components should be provided. Since all companies and analysts do not calculate these non-GAAP measures in the same fashion, the staff recommends that the footnote or other disclosure alert investors to the fact that the measure presented may not be comparable to similarly titled measures reported by other companies. |
3. How measures are used by management and investors |
Management should consider how any non-GAAP measure is expected to be used by investors, identify significant factors that should be considered, and discuss significant trends or requirements not captured by the measure to ensure balance and avoid undue reliance on the measure. Notwithstanding disclosures by competitors or requests from financial analysts, the staff believes that most non-GAAP measures generally should be avoided unless management itself believes that the measure provides relevant and useful information. |
4. Balanced presentation |
Non-GAAP measures that measure cash or "funds" generated by operations (liquidity) should be balanced with equally prominent disclosure of amounts from the statement of cash flows (cash flows from operating, investing and financing activities) and, in some cases, the ratio or deficiency of earnings to fixed charges. Explanation may be necessary to the extent that funds depicted by the measure are not available for management’s discretionary use (due to legal or functional requirements to conserve funds for capital replacement and expansion, debt service and balloon maturities, deferred interest and dividend payments, and other commitments and uncertainties). |
5. Measure of operating performance vs. measure of liquidity |
A frequent disclosure issue is the use of a non-GAAP measure in a discussion of operating performance when the measure is primarily a measure of liquidity, capital resources, or debt service capacity. For example, calculations that depict an adjusted or normalized measure of working capital or funds generated by operations and available to meet capital and debt requirements often are presented inappropriately as if they should be used as alternative measures of earnings, return on investment or similar performance or efficiency factors. In that case, the staff will request the measure’s presentation in an appropriate context with clarification of its expected use. |
6. Pro forma measure of performance |
If management is presenting the non-GAAP calculation as an alternative or pro forma measure of performance, the staff discourages adjustments to eliminate or smooth items characterized as nonrecurring, infrequent or unusual. Different unusual items are likely to occur every period, and companies and investors may differ as to what types of events warrant adjustment. Trends may be distorted and disclosure unbalanced if only certain items are adjusted while the effects of other infrequent events or transactions (whether favorable or unfavorable) are not considered or highlighted. Of course, all such special items should be highlighted in the registrant’s disclosures to permit analysis by investors. Where management intends the measure to be indicative of liquidityand communicates that use through the context of its presentation, the staff ordinarily will not object to adjustment for non-cash charges relating to special items if it is meaningful to investors in the circumstances. |
7. Per share presentation |
Per share data other than that relating to net income is not appropriate. |
8. Location of presentation |
Presentation and discussion of non-GAAP measures should be limited to selected and summary financial data, MD&A and notes to pro forma information. Presentation of non-GAAP measures is not appropriate on the face of the audited financial statements or on the face of SX Article 11 pro forma information. |
B. SEGMENT ANALYSIS AND NON-GAAP MEASURES
Where consistent with a registrant’s internal management reports, FAS 131 permits measures of segment profitability that differ from consolidated operating profit as defined by GAAP, or that exclude items included in the determination of the registrant’s net income. Under FAS 131, a registrant also must reconcile key segment amounts to the corresponding items reported in the consolidated financial statements in a note to the financial statements. Similarly, the staff expects that the discussion of a segment whose profitability is determined on a basis that differs from consolidated operating profit as defined by GAAP or that excludes the effects of items attributable to the segment also will address the applicable reconciling items in MD&A. Likewise, the staff expects that the effects of management’s use of non-GAAP measures, either on a consolidated or segment basis, will be explained in a balanced and informative manner, and the disclosure will include a discussion of how that segment’s performance has affected the registrant’s GAAP financial statements.
II. Ratio of Earnings to Fixed Charges [SK 503]
A. Required disclosure |
If debt securities are being registered, a ratio of earnings to fixed charges shall be presented. If preference equity securities are being registered, a ratio of earnings to combined fixed charges and preference security dividend requirements shall be presented. The ratios shall be presented for each of the last five fiscal years and the latest interim period for which financial statements are presented. |
B. Definition of fixed charges |
For purposes of the ratios, fixed charges are defined as the sum of interest, whether expensed or capitalized, amortization of premiums, discounts and capitalized expenses related to indebtedness, amounts accrued with respect to guarantees of other parties’ obligations, and the estimated interest component of rental expense. |
C. Dividend requirements |
Preference security dividend requirements for purposes of the ratio are intended to represent the amount of pre-tax earnings that would be required to pay the dividends on outstanding preference securities of the registrant and other fully or proportionally consolidated entities. The amount shall be computed as the dividend requirement divided by (1 – income tax rate). |
D. Definition of earnings |
For purposes of the ratio, earnings are defined as the registrant’s income from continuing operations before taxes as determined in accordance with GAAP, except that only distributed earnings of less than 50%-owned equity investees are included, plus fixed charges reduced by the amounts of capitalized interest, plus income allocable to minority interests in consolidated entities that hat incurred fixed charges. |
E. Equity in investee’s losses |
Losses from investees that are not fully or proportionally consolidated by the registrant may not be added back to earnings for purposes of the ratio, unless the registrant is obligated directly or indirectly to service the debt, dividend requirements, or rental obligations of the investee. If the registrant is so obligated, its equity in the investee’s loss shall be included in earnings, and fixed charges shall include the investee’s fixed charges that are related to the obligation. |
F. Inadequate earnings to cover fixed charges |
If a ratio indicates less than one-to-one coverage, the registrant shall state that earnigns are inadequate to cover fixed charges and disclose the dollar amount of the coverage deficiency. |
G. Pro forma effect of refinancing |
If proceeds from the sale of the debt or preferred stock being registered will be used to extinguish a portion or all of one or more specific issues of outstanding debt or preferred stock, a pro forma ratio depicting the effect of the refinancing shall be presented if the change in the ratio would be ten percent or greater. The adjustments to derive the pro forma ratio shall be limited to the net change in interest or dividends resulting from the refinancing. If only a portion of the proceeds will be used to retire debt or preferred stock, only a related portion of the interest or preferred dividend should be used in the pro forma adjustment. The pro forma ratio shall be presented for the latest year and interim period only. |
H. Foreign private issuer |
If the registrant is a foreign private issuer, the ratio shall be computed on the basis of the primary financial statements and, if materially different, on a U.S. GAAP basis. |
I. Exhibit 12 |
Calculations demonstrating the determination of the ratios shall be furnished as an exhibit to the registration statement. |
III. Tangible Book Value per Share
There are no rules or authoritative guidelines that define tangible book value. Tangible book value per share is used generally as a conservative measure of net worth, approximating liquidation value. The staff believes generally that tangible assets should exclude any intangible asset (such as deferred costs or goodwill) that cannot be sold separately from all other assets of the business, and should exclude any other intangible asset for which recovery of book value is subject to significant uncertainty or illiquidity.
In some cases, the staff accepts dual calculations of tangible book value. For example, some intangible assets (such as patents) may be sold separately, but the ability to recover their carrying value may be indeterminable. Also, some material deferred costs are accounted for as adjustments to the yield on specific assets or liabilities (debt costs or policy acquisition costs). The staff has accepted tangible book value per share calculations made with and without those assets, with appropriate explanation.
Appendix A: Form and Content of Financial Statements
INTRODUCTION
This outline summarizes information required by Regulation S-X and various accounting standards. The information is supplemented with staff views regarding pertinent implementation and interpretive issues. The outline is intended for use as training and review material. The outline should not be used as a "review checklist," nor should it be used in lieu of the source material to which it refers. Disclosures specified by rules and standards need not be furnished unless they would be material to an investor. SAB 1M discusses some of the factors the staff may consider when determining whether information may be material to an investor.
Financial statements, unlike much of the balance of a public company’s disclosure document, are not free form. Their utility rests in large degree in the uniformity of the underlying measurement and recognition procedures and the consistency of grouping and labeling of financial elements. An important function of the Division’s accounting review of filings is to enforce an appropriate degree of discipline in the financial reporting by public companies. Comments that prod registrants to furnish complete, understandable and explicit explanations in financial statements footnotes regarding accounting procedure and account components can be effective in ferreting out breaches in GAAP, inconsistencies in reporting, and overly broad groupings of transactions that obscure trends or vulnerabilities. The specific requirements of accounting standards and Regulation S-X are the tools staff members have to elicit necessary and useful disclosure. But, of course, immaterial disclosures added in response to unnecessary comments may bury the importance of more material disclosures. Each staff member must exercise professional judgment in the evaluation of whether a compliance comment is warranted.
Other sources of information about how the staff interprets GAAP accounting and disclosure and SEC reporting requirements are available on the SEC’s website, including:
- "Frequently Requested Accounting and Financial Reporting Interpretations and Guidance"
- "Current Accounting and Disclosure Issues in the Division of Corporation Finance," and
- texts of speeches given by the Chief Accountant of the Commission and other members of the Office of the Chief Accountant.
I. Balance Sheet Format and Classifications
A. CLASSIFIED BALANCE SHEET IS GAAP
1. Except forthe following industries:
- financial institutions
- leasing and financing operations
- insurance companies
- broker-dealers
- real estate companies
B. DEFINITIONS
1. Assets: Probable future economic benefits obtained or controlled as a result of past events or transactions. [CON 6.25]
2. Current assets:Cash and other assets reasonably expected to be realized in cash or sold or consumed in the normal operating business cycle. [ARB 43.3A.4]
3. Liabilities: Probable future sacrifices of economic benefits arising from present obligations to transfer assets or provide services. [CON 6.35]
4. Current liabilities: Obligations whose liquidation reasonably is expected to require the use of current assets, or the creation of current liabilities. [ARB 43.3A.7]
5. Operating cycle: The ordinary time intervening between acquisition of materials and the final cash realization from sales. Where a business has no clearly defined cycle, a one-year presumption should be made. [ARB 43.3A.5]
C. OFFSETTING OF ASSETS AND LIABILITIES [SAB 11D; FIN 39]
Prohibited if the specific criteria below are not met:
- Legal right of set-off exists
- Parties have determined the amount to be offset
- There is intent to offset
- Offsetting is enforceable under law
II. Assets
A. CASH AND CASH ITEMS [SX 5-02.1]
1. Restrictions as to use, including compensating balance requirements. Restricted cash generally is disclosed separately on the face of the balance sheet, and is not included in the cash total on the statement of cash flows. [SX 5-02.1, FRC 203]
2. Definition of cash equivalents for purposes of cash flow presentation. [FAS 95.10]
3. Cash and cash equivalents disclosed on the face of the balance sheet must agree to the amount disclosed in the statement of cash flows. [FAS 95.7]
B. ACCOUNTING AND NOTES RECEIVABLE [SX 5-02.3]
1. If notes receivable exceed 10% of receivables, state separately.
2. Separate disclosure of amounts not arising in ordinary course of business and amounts due from related parties.
3. On the face of the balance sheet or in a note thereto, allowance for doubtful amounts, and S-X Schedule 12-09 (valuation accounts).
4. If operating cycle is longer than a year, disclose estimate of amounts realizable within one year.
5. If amounts of installment receivables that will be collected after one year is material to an understanding of liquidity, a schedule of annual amounts due should be furnished. [SP]
6. Amounts due under long term contracts should include disclosure of amounts billed but not paid under retainage, amounts not billed or billable, amounts of uncertain claims, amounts expected to be collected after one year.
C. INVENTORIES [SX 5-02.6]
1. Disclose:
- Major classes (finished, work-in-process, raw materials, etc.).
- Elements of cost, valuation and cost flow methods.
2. If LIFO:
- Disclose excess of replacement or current value amounts over LIFO valuation.
- Other LIFO issues — SAB 5L (LIFO Inventory Practices) & 11F (LIFO Liquidation)
3. For inventoried costs relating to long term contracts, disclose progress payments netted against inventory, amounts involving uncertainties, amounts which are not expected to be recovered under contract, elements of deferred costs. [FRC 206]
D. INVESTMENTS IN DEBT AND EQUITY SECURITIES [SX 5-02.2; SX 7-03]
1. FAS 115 applies to equity securities that have readily determinable fair values and to all investments in debt securities. Investments accounted for under the equity method do not fall under the scope of FAS 115 (see K.below).
2. Declines of value below cost that are other than temporary must be reflected in income.
- Other than temporary does not mean permanent. [SAB 5M; FAS 121]
- Post-balance sheet decline should be disclosed if substantial. [SAB 6A]
3. Insurance companies shall disclose the following:
- The name of any issuer in which the total amounts invested exceeds ten percent of total stockholders’ equity of the registrant, the category of the investment, and the amount invested (except U.S. Government and U.S. Government Agency obligations).
- The amount of investments in each investment category that have been non-income producing for the twelve months preceding the balance sheet date. [SX 7-03]
E. LOANS [SX 9-03.7]
1. Major categories (commercial, financial and agricultural; real estate-construction; real estate mortgage; installment loans to individuals; lease financing; foreign; other).
2. Disclose the components of changes in the allowance for loan losses in a note.
3. The allowance should include a provision related only to loans. All other provisions for losses of other balance sheet items and off-balance sheet items should be reflected elsewhere in the financial statements and clearly labeled, if material. [SP]
4. Loans to officers, directors and principal holders of equity securities should be separately disclosed.
5. Disclose the total carrying value of loans pledged as collateral for borrowings [see 6.73 of the AICPA Audit and Accounting Guide for Banks and Savings Institutions].
F. OTHER CURRENT ASSETS [5-02.8]
State separately any amounts in excess of 5% of total assets.
G. ASSETS SUBJECT TO REPURCHASE AGREEMENTS [SX 4-08(m)(2)]
If reverse repurchase agreements exceed 10% of total assets, the following disclosures are required:
- The name(s) of the counterparty(ies)
- The amount at risk
- The weighted average maturity of the agreements
- Whether or not there are any provisions to ensure that the market value of the underlying assets remains sufficient to protect the registrant in the event of default of the counterparty and disclosures of the nature of such provisions.
H. REINSURANCE RECOVERABLE [SX 7-03(a)6]
A ceding enterprise shall disclose concentrations of credit risk associated with reinsurance receivables and prepaid reinsurance premiums pursuant to FAS 105. Identification of balances from individual reinsurers and/or a breakdown of aggregate balances by rating category (as to claims-paying ability) may be necessary as part of the description of business.
The present value of future profits is recorded as an asset in a purchase acquisition of a life insurance company. In addition to the disclosure required by EITF 92-9, registrants should disclose the discount rate used to value the PVFP asset in purchase accounting. Since the discount rate used is evidence of the risk characteristics of the insurance portfolio acquired, continued disclosure may be necessary for an investor to assess the results of the portfolio on results of operations.
I. DEFERRED POLICY ACQUISITION COSTS (DAC)
Paragraph 60.c of FAS 60 requires certain disclosure related to acquisition costs. Disclosures of cost capitalized should be explicit as to the nature of the costs incurred, rather than using general terms, such as "other" and "marketing".
Disclosure of the DAC amortized for the period should include disclosure of any income statement amounts netted against the amortization expense which would normally be classified elsewhere in the income statement, such as realized gains and losses on investments. Transparent disclosure of such adjustments to DAC amortization should be included in other appropriate sections, such as Selected Financial Data and MD&A.
J. PROPERTY, PLANT & EQUIPMENT [SX 5-02.8]
1. Balances, methods and periods of depreciation. If PP&E is significant, registrants should disclose balances and depreciation methods and periods for each major class of depreciable assets.
2. Assets held for rental may be included in depreciable items, unless they are primarily held for sale.
K. OTHER INVESTMENTS [5-02.12]
1. Investments in common stock accounted for under the equity method require disclosure specified by APB 18.20.
2. Separate summarized financial information or audited financial statements may be required for other investments. Refer to Topic Two for financial statement requirements.
L. INTANGIBLE ASSETS [5-02.15]
1. Separately state any item exceeding 5% of total assets; significant changes should be explained in a note. In particular, intangible assets groups that are amortized over different periods or using different methods should be disclosed separately.
2. Policies for amortization and the accumulated amount should be separately stated.
3. Policies for impairment [FAS 121; APB 17; SAB 2A.3 and SAB 5CC]
- The accounting policies for FAS 121 and APB 17 impairment should be separately disclosed.
- Need to be explicit and refer to objective rather than discretionary factors that would trigger impairment for assets not evaluated for impairment under FAS 121.
- A change from one method of evaluating impairment to another is viewed by the staff as a change in estimate inseparable from a change in accounting principle.
- Discussion in MD&A may be necessary if measurement of impairment under FAS 121 would materially impact the financial statements.
4. Intangible assets acquired in a business combination
- Recognition of identifiable intangible assets for tax reporting purposes may indicate that those assets should be recognized in the financial statements also.
- Acquired Research and Development
Registrants that acquire research and development (R&D) assets that have no alternative future use should allocate a portion of the purchase price to expense, based on fair value. [FIN 4] Where material, the following disclosure about acquired R&D should be provided in a note to the financial statements:
- Appraisal method (e.g., based on discounted probable future cash flows on a project by project basis).
- Significant assumptions, such as
- period in which material net cash inflows from significant projects are expected to commence;
- anticipated material changes from historical pricing, margins and expense levels; and
- the risk adjusted discount rate applied to the project’s cash flows.
MD&A disclosure about required R&D should include separately by major project:
- Specific disclosure describing the nature of the projects acquired
- Where multiple projects are involved, a summary of values assigned to IPR&D by technology/project.
- The status of the development and the complexity or uniqueness of the work completed at the acquisition date.
- The stage of completion at the acquisition date.
- The nature and timing of the remaining efforts for completion.
- The anticipated completion date and the date the registrant will begin benefiting from the IPR&D.
- Projected costs to complete by project (or category of projects).
- The risks and uncertainties associated with completing development within a reasonable period of time.
- The risks involved if the IPR&D is not completed on a timely basis.
- In subsequent filings, disclosure of the status of the registrant’s efforts for completion of the R&D project(s) and the impact on the registrant from any delays.
- In subsequent filings, an explanation of material variations between projected results and actual results and how failure to achieve projected results impacted (or will impact) expected return on investment, future results, and financial condition.
M. OTHER ASSETS [SX 5-02.17]
Separately state any item exceeding 5% of total assets; explain any material changes.
N. DEFERRED COSTS
1. Generally, deferral of costs is not appropriate, except in the situations described below. Policies regarding deferred charges should be disclosed.
2. Debt issues costs should be reported as a deferred charge rather than included in discount on debt. [TPA 3200.01]
3. Deferred Offering Costs [SAB 5A]
- Limited to direct, incremental costs of issuing the security; should not include any allocation of salaries, overhead, or any costs that would have been incurred in the absence of the issuance. Costs that will recur periodically after issuance of the debt (for example, due to Exchange Act reporting obligations) should not be deferred as debt issuance costs. [TPA 4110.01]
- Are deducted from proceeds of the offering. If the offering is aborted, the costs should be charged against operations. A postponement up to 90 days would not be considered an aborted offering. [TPA 4110.07; SAB 5A] However, costs of an offering should be expensed if no proceeds will be received in the offering (such as costs associated with a selling shareholder document) or proceeds are not reasonably expected to exceed costs.
III. Liabilities
A. ACCOUNTING AND NOTES PAYABLE [SX 5-02.19]
1. Separately state amounts due to trade creditors, banks, other financial institutions, commercial paper holders, and related parties.
2. Amount and material terms of unused lines of credit, noting amounts supporting commercial paper borrowing.
3. Disclose the weighted average interest rate on short-term borrowings outstanding as of each balance sheet date presented.
B. OTHER CURRENT LIABILITIES [SX 5-02.20]
State separately amounts exceeding 5% of current liabilities.
C. LONG TERM DEBT [SX 5-02.22]
1. Disclosures required:
- Separately disclose each issue and obligation, describing rates of interest, maturities, priorities, convertibility, and other material terms, including the currency of denomination. Disclose reason for significant changes.
- Identify assets mortgaged, pledged, or otherwise subject to lien, describing carrying value and related obligation.
- Describe defaults existing at latest balance sheet date and not subsequently cured; if conditions waived, state period of waiver. [SX 408(c)]
- Disclose principal payments for each of the five succeeding years. [FAS 47.10]
- To the extent that derivative financial instruments are designated to long-term debt, the nature, terms and cash requirements disclosures required by FAS 119 should be included in the long-term debt footnote. The disclosures should be in sufficient detail to enable the reader to understand how the nature, terms and cash requirements of long-term debt have been effectively modified. [R33-7250]
2. If covenant violations have occurred or where covenants have been modified to avoid violation, consider the need to classify debt as short term. [FAS 78; FAS 6; EITF 86-30]
3. Beneficial conversion feature [EITF D-60; 98-5]
For a convertible debt security with a conversion feature that is "in the money" at the date of issue, allocate a portion of the proceeds equal to the intrinsic value of that feature to debt discount using the conversion terms most beneficial to the holder. The proceeds allocated to the beneficial conversion feature should be amortized as interest expense from the date the security was issued to the date the debt first becomes convertible.
4. Gain or loss on extinguishment of debt should be recognized in the period in which the debt is considered extinguished. [SAB 5AA]
D. ASSETS SOLD UNDER REPURCHASE AGREEMENTS [SX 4-08(m)(1); SOP 85-2]
If repurchase agreements exceed 10% of stockholders equity, the following disclosures are required:
- The name(s) of the counterparty(ies);
- The amount at risk; and
- The weighted average maturity of the agreements.
E. PENSIONS AND EMPLOYEE BENEFIT PLANS [FAS 87; FAS 106 and FAS 132]
1. The disclosure requirements previously required by FAS 87, FAS 88 and FAS 106 have been replaced with the disclosures specified in FAS 132.
2. Discount rates used to measure obligations for pension and postretirement benefits are expected to reflect the current level of interest rates at the measurement date. The rate to be used corresponds with the rate equal to high-quality, fixed rate debt instruments. The staff believes a "high-quality" security is generally considered to be one receiving a rating no lower than the second highest rating given by a recognized rating agency. That is "AA". The particular weighted average rate disclosed for each registrant can vary based on the plan and employee demographics particular to each registrant.
3. Companies must reevaluate the discount rate at each measurement date (at least annually). If the general level of interest rates rises or declines, the assumed discount rate should change in a similar manner. If management believes that it is reasonably likely that the registrant will change its discount rates at the next measurement date to reflect changes in the general level of interest rates and the change could have a material effect on the registrant’s financial position or results of operations, the staff believes that the registrant should disclose in MD&A, among other things, the expected effects of the discount rate change on its financial statements.
4. Discussion in MD&A should include the impact of a registrant’s pension plan(s) on results of operations, liquidity and financial condition, where material. It should highlight, for example, significant net pension credits that may be enhancing income from operations, trends or reasonably likely changes in the financing or investment component of pension cost, or an increase in cash flows due to lower funding requirements of pension plans.
F. OTHER LIABILITIES [SX 5-02.24]
State separate items exceeding 5% of total liabilities.
G. POLICY LIABILITIES AND ACCRUALS [SX 7-03.a.13; FAS 113]
1. On the face of the balance sheet, disclose:
- future policy benefits and losses, claims and loss expenses
- Property/casualty claim liabilities should be shown separately from life insurance policy benefit liabilities on the face of the balance sheet. Policyholder balances under FAS 97 contracts (universal-life type and investment contracts) should be shown separately from FAS 60 (traditional) policy benefit liabilities.
- Where property casualty claims are discounted, disclose the basis for the selection of the discount rate, the rate used for each period or category of claim, and the effects of discounting on the amounts of aggregate claim liabilities at each balance sheet date and earnings for each period. If discount rates are not determined pursuant to SAB 5N, all conditions in EITF 93-5 and SAB 5Y must be met.
- Generally, FAS 5 disclosures regarding reasonably possible losses in excess of those accrued are not required for property/casualty loss liabilities. However, SAB 5W requires such financial statement disclosure of specific uncertainties related to unpaid insurance claims whose nature or significance makes them not susceptible to normal, recurring reserve estimates. Examples include claims arising from product liability or environmental pollution. The notes should also include clear disclosures regarding the accounting policies and methods for recognizing reserves for these types of claims. Where exposure is material, disclosures regarding these types of claims also will be necessary pursuant to Industry Guide 6 and MD&A. The disclosure guidance in SAB 5Y should also be considered.
- unearned premiums
- other policy claims and benefits payable
2. In the notes to the financial statements, disclose:
- the basis of assumptions (interest rates, mortality, withdrawals) for future policy benefits and claims and settlements which are stated at present value
- a description of the significant types of reinsurance agreements, including:
- the nature, purpose and effect of ceded reinsurance transactions. (Ceding enterprises also shall disclose the fact that the insurer is not relived of its primary obligation to the policyholder.)
- nature and effect of material nonrecurring reinsurance transactions
- for short-duration contracts, premiums from direct business, reinsurance assumed, and reinsurance ceded, on both a written and an earned basis.
- for long-term duration contracts, premiums and amounts assessed against policyholders from direct business, reinsurance assumed and ceded, and premiums and amounts earned.
- for all contracts, amounts of recoveries recognized (i.e., ceded losses or policy benefits)
- methods used for income recognition on reinsurance contracts.
H. OTHER POLICYHOLDERS' FUNDS [SX 7-03.a.14]
1. Include amounts of supplementary contracts without life contingencies, policyholders’ dividend accumulations, undistributed earnings on participating business, dividends to policyholders and retrospective return premiums. State separately any item the amount of which is in excess of 5% of total liabilities.
2. In a note to the financial statements, disclosure the relative significance of participating insurance expressed as a percentage of (1) insurance in force and (2) premium income. Disclose the method by which earnings and dividends allocable to such insurance is determined.
I. DEPOSITS [SX 9-03.a.12]
1. Disclose separately:
- the amounts of noninterest and interest bearing deposits
- deposits in foreign banking offices (see Industry Guide 3 for the definition of a foreign banking office)
2. Industry Guide 3 requires additional detail about deposit liabilities, including:
- average amounts and rates paid on deposits by major categories
- information about jumbo certificates of deposits
J. COMMITMENTS AND CONTINGENCIES [SX 5-02.25; FAS 5; SAB 5Y]
1. Accrue for amounts when
- an asset is impaired or a liability at the balance sheet date is probable, and
- amount is reasonably estimable.
2. Disclose all material unaccured loss contingencies that are reasonably possible or clearly state that a range cannot be estimated. The range of additional reasonably possible loss should be disclosed if only minimum of range was accrued. [FIN 14]
3. Accrual is appropriate when an event giving rise to an obligation has actually occurred and amounts to be expended in the future are not discretionary. Careful analysis is often necessary to separate costs to be incurred related to a real obligation and costs necessary to maintain or enhance current or future operations.
4. Contingent liability and anticipated recovery amounts should be presented at their gross amount (not discounted) unless the amount and timing of payments is fixed or reliably determinable. [EITF 93-5]
5. All material guarantees and commitments:
- Oral guarantees, even if legally unenforceable, may have the same financial reporting significance as written guarantees. [FRR 104]
- Disclosures by guarantors (SAB 11J]
- Royalty commitments [TPA 6500.03]
- Unconditional purchase obligations [FAS 47]
- Leases [FAS 13; FAS 98]
- Commitments to originate loans and standby commitments, which are in substance a put option and fall under FAS 119. See 6.68-6.70 of the AICPA Audit and Accounting Guide for Banks and Savings Institutions.
K. DEFERRED CREDITS AND MINORITY INTERESTS [SX 5-02.26]
1. State separately material items, including deferred taxes and deferred income
2. Unearned revenue should be classified as a liability. [TPA 3600.01]
3. Note the amount of minority interest represented by preferred stock and its dividend requirement, if applicable.
L. MIPS, QUIPS, TRUST SECURITIES, ETC. (MANDATORILY REDEEMABLE SECURITIES ISSUED BY A FINANCE SUBSIDIARY OF A PARENT COMPANY WHEN THE FINANCIAL SUBSIDIARY HOLDS ONLY DEBT INSTRUMENTS OF THE PARENT)
Additional disclosures may be necessary for these instruments in order to provide investors with a fair and balanced picture of the registrant’s capitalization and leverage, particularly if the outstanding security of the finance subsidiary is guaranteed by the parent and mirrors the cash flows of the debt of the parent held by the finance subsidiary. Inclusion of the outstanding public security in minority interest with minimal disclosure of its characteristics is not adequate, particularly when Section 12(h) reporting relief is requested for the finance subsidiary. The parent should disclose the subsidiary’s outstanding securities as a separate line item in the parent’s balance sheet captioned "Company-obligated mandatorily redeemable security of subsidiary holding solely parent debentures," "Guaranteed preferred beneficial interests in Company’s debentures," or similar descriptive wording. Notes to the financial statements should describe fully the terms of the securities and explain that those terms parallel the terms of the company’s debentures, which comprise substantially all of the assets of the consolidated trust or subsidiary.
IV. Redeemable Stock and Other Equity
A. REDEEMABLE EQUITY SECURITIES [SX 5-02.28]
1. Guidance in SX 5-02, FRC 211, SAB 3C, and SAB 6B.1 is applicable to all equity securities (not only preferred stock) the redemption of which is outside the control of the issuer. For example, common stock subject to a put and stock subject to rescission is subject to this guidance. [SP]
2. Report separately from "stockholders’ equity" if redeemable at the option of holder, or at fixed date at fixed price, or redemption is otherwise beyond the control of registrant. This presentation is required even though the likelihood of the redemption event is considered remote.
- If a registrant is required to purchase common stock from an employee at death and obtains an insurance policy that will fully fund that obligation, the staff has not objected if the stock subject to redemption is classified as permanent equity.
- Accounting for put options, and other financial instruments indexed to, and potentially settled in, a company’s own stock, depends on how the security may be settled. [EITF 96-13, 98-12 and 99-3]
If a registrant has the choice of settling put options with either cash or shares. |
Measure the put options initially at fair value and include in permanent equity. Then transfer an amount equal to the redemption price of the shares under physical settlement to temporary equity. |
If a counterpartyhas the choice of settling put options with either cash or shares |
Measure the put options initially at fair value and record as a liability. Subsequently, mark the liability to market with gain or losses included in earnings and disclosed. |
NOTE: In an IPO, a registrant will need to apply EITF 96-13 for periods prior to going public. If put warrants convert to regular warrants upon the IPO, any warrants recorded as a liability under EITF 96-13 should be reclassified to equity in the period in which the IPO is effective (not in the financial statements included in the IPO document.
3. State title, carrying amount and redemption amount on face of balance sheet; in notes, disclose general terms, redemption requirements in each of the succeeding five years, number of shares authorized, issued and outstanding. [FAS 129]
4. Redeemable securities initially are recorded at their fair value. If redeemable currently, the security should be adjusted to its redemption amount at each balance sheet date. If the security will become redeemable at a future determinable date, the security should be accreted in each period to the ultimate contractual redemption amount using an appropriate methodology, usually the interest method. The resulting increases or decreases in the carrying amount of the redeemable security reduce or increase income applicable to common shareholders in the calculation of earnings per share. [SAB 3C] If charges or credits are material, separate disclosure of income applicable to common shareholders on the face of the income statement is required. [SAB 6B.1]
5. Extinguishment of redeemable securities for consideration that exceeds the carrying amount of the securities at that time should be deducted from income applicable to common shareholders. Likewise, the amount by which the fair value of the consideration transferred to holders of convertible preferred stock exceeds the fair value of securities issuable pursuant to the original conversion terms (the inducement) should be treated as a reduction. [EITF D-42; EITF D-53]
6. The staff has not objected to the presentation of redeemable preferred stock as debt, so long as such presentation is made on a consistent basis. If classified as debt, dividend payments from such instruments should be presented as interest expense.
7. Canadian registrants must classify redeemable equity securities as debt pursuant to requirements of Canadian GAAP. The staff has not required that such classification be discussed in the footnote that reconciles Canadian GAAP to U.S. GAAP.
B. OTHER STOCK [SX 5-02.29; SX 5-02.30]
1. Disclose each issue, number shares authorized (may also be presented in the notes), issued and outstanding, and liquidation value (if any) on face of balance sheet; in notes, disclose terms of convertibility, etc. [SX 5-02] Also disclose number of shares issued upon conversion, exercise or satisfaction of required conditions during most recent fiscal year and subsequent interim period. [FAS 129]
2. Subscriptions receivable should be separately deducted, unless paid prior to issuance of the financial statements. Deferred compensation on stock issued to officers and directors for services or other consideration to be received in the future are treated similarly as reductions of equity. [SAB 4E]
3. Changes in capital structure due to stock splits and dividends after the balance sheet date but before the effective date of a registration statement should be reflected retroactively. [SAB 4C]
4. For convertible preferred securities issued with a conversion feature that is "in the money" at the commitment date, allocate a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The proceeds allocated to the beneficial conversion feature should be recognized as a return (dividend) to the preferred shareholders over the minimum period in which the preferred shareholders can realize that return. [EITF 98-5]
C. ACCUMULATED OTHER COMPREHENSIVE INCOME [FAS 130]
1. Display separately from retained earnings and additional paid-in capital as a component of equity in the balance sheet.
2. Disclose accumulated balances for each classification of other accumulated comprehensive income included in equity:
- on the face of the balance sheet, or
- in a statement of changes in equity, or
- in notes to the financial statements.
3. Classifications should correspond to classifications used elsewhere in the financial statements, i.e., foreign currency items, minimum pension liability adjustments, change in market value of futures contracts qualifying as hedges of asset reported at fair value, and unrealized gains and losses on debt and equity securities.
D. OTHER STOCKHOLDERS' EQUITY [SX 5-02.31]
1. State separately paid-in capital, other capital, retained earnings (appropriated and unappropriated).
2. Restrictions on dividends [SX 4-08(e)] Disclose:
- Source and provisions of dividend restrictions, and the amount of any restricted retained earnings.
- Amount of retained earnings that is the undistributed earnings of 50% or less owned persons accounted for on the equity basis.
- Amount and nature of restrictions if the restricted net assets of consolidated and unconsolidated subsidiaries and the parent’s equity in undistributed income of 50% or less owned persons exceeds 25% of consolidated net assets.
3. State the amount of dividends per share and in aggregate for each class of shares.
4. For warrants, stock rights, options, etc.: Disclose aggregate number of shares under option or call, and number of shares as to which rights are exercisable at period-end; date and price exercisable; as to rights exercised in period, disclose number of shares involved and exercise price. [ARB 43, Chapter 13.15] This disclosure normally should be furnished for all periods presented.
5. Contingent stock purchase warrants should be accounted for at fair value. [FAS 123]
6. Undistributed earnings (or accumulated losses) of Sub-S corporation should be reclassified as paid in capital upon termination of election. [SAB 4B]
7. Insurance companies. Disclose in the notes the amounts of statutory stockholders’ equity at each balance sheet date and statutory net income/loss for each period, segregated by property/casualty and life insurance operations where applicable.
E. CHANGES IN STOCKHOLDERS' EQUITY [SX 3-04] [APB 12]
In a separate statement or a note, all individually material changes in the components of equity (dollar amounts and number of securities) should be disclosed. More detailed disclosure is required of development stage companies (FAS 7) in a separate statement from the companies’ inception.
V. Statement of Operations
A. TITLE
Where registrant incurs losses, should be titled statement of operations, rather than income. [TPA 1200.04]
B. NET SALES AND GROSS REVENUES; COSTS AND EXPENSES OF SALES (COMMERCIAL COMPANIES) [SX 5-03]
1. State separately:
- net sales of tangible products
- income from services
- income from rentals
- other revenues
- If excise taxes comprise 1% or more of sales, parenthetical disclosure of the amount should be made.
- Revenues of agents should not be reported as revenues of the registrant. Generally revenues are revenues of the registrant if that entity takes title to goods and has risks and rewards of ownership, such as risk for collection, delivery and returns. If the registrant performs solely as an agent or broker without taking title to the goods, sales should be reported on a margin only basis. [SAB 13A.5]
- Sales of leased departments should not be included in a retailer’s gross revenue, however, rental income form the leased departments may be included. [SAB 8A]
- Revenues representing operating subsidies from governmental entities should be reported in a separate line item in the income statements either under a revenue caption or as credit in the costs and expenses section. [SAB 11A]
2. Footnote disclosures should include a description of the registrant’s revenue recognition policy, even if management perceives that no alternative methods exist. [APB 22, SAB 13B]
3. State separately the costs and expenses applicable to each category of sales and revenues. That is, if revenues are presented on a disaggregated basis, the costs of such revenues also must be presented on a disaggregated basis.
4. Exclusion of depreciation from cost of sales should be presented in a manner that avoids reporting a figure for income before depreciation. [SAB 11B]
C. PREMIUMS (INSURANCE COMPANIES) [SX 7-04]
Presentation of premiums ceded under reinsurance contracts on the face of the income statement (as a separate caption reducing premiums earned, or parenthetically) is encouraged. If not shown on the face, FAS 113 requires note disclosure of premiums ceded.
D. NET INVESTMENT INCOME (INSURANCE COMPANIES) [SX 7-04]
In a note to the financial statements, disclose:
- Investment income for categories that exceed 5% of total investment income
- Total investment income
- Applicable investment expenses
- Net investment income
E. RELATED INVESTMENT IN GAINS AND LOSSES (INSURANCE COMPANIES) [SX 7-04]
1. Present net realized investment gain/loss separately on the face of the income statement regardless of size.
2. Disclose in a footnote the registrant’s policy with respect to whether investment income and realized gains and losses allocable to policyholders and separate accounts are included in the income statement. If so, disclose the amounts of such allocable investment income and realized gains and losses and the manner in which the insurance company’s obligations to policyholders with respect to such items is accounted for.
F. BENEFITS, CLAIMS LOSSES, AND SETTLEMENT EXPENSES (INSURANCE COMPANIES)
Presentation of recoveries recognized (i.e., ceded losses or policy benefits) under reinsurance contracts on the face of the income statement (as a separate caption reducing claims and policy benefits expense, or parenthetically) is encouraged. If not shown on the face, FAS 113 requires note disclosure of recoveries recognized.
G. UNDERWRITING, ACQUISITION, AND INSURANCE EXPENSES (INSURANCE COMPANIES) [SX 7-04]
State separately on the face of the income statement or in a note to the financial statements the following:
- deferred policy acquisition costs amortized during the period
- amount of other operating expenses
H. INTEREST INCOME (FINANCIAL INSTITUTIONS) [SX 9-04]
Disclose separately on the face of the income statement or in the notes to the financial statements the following:
1. Interest and fees on loans, including commitment and origination fees, late charges, and current amortization of premium and accretion of discount.
2. Interest and dividends on investment securities, with the following items disclosed separately:
- taxable interest income
- non-taxable interest income
- dividend income
3. Trading account interest
4. Total interest income
I. INTEREST EXPENSE (FINANCIAL INSTITUTIONS) [SX 9-04]
Disclosure separately on the face of the income statement or in the notes to the financial statements the following:
- interest on deposits
- interest on short-term borrowings
- interest on long-term borrowings
- total interest expense
J. PROVISION OF LOAN LOSSES (FINANCIAL INSTITUTIONS) [SX 9-04]
Should include only a provision for loan losses. All other provisions should be separately disclosed and/or reconciled in the notes to the financial statements.
K. OTHER DISCLOSURES — OPERATING EXPENSES (COMMERCIAL COMPANIES)
1. Other opearting costs or expenses
- Finance charge of retail operations should be disclosed separately. [SAB 8B]
2. Selling, general & administrative expenses
3. Provision for doubtful accounts
4. Depreciation and amortization of intangible assets
5. Income before depreciation should not be presented [SAB 7D]
6. The staff has been requesting that gains or losses arising from the disposition of businesses that are classified in operating incomeas well as from dispositions of long-lived assets be reported as a component of ‘other general expenses'with any material item sated separately. [S-X 5-03(b)(6)]
L. RESTRUCTURING CHARGES [EITF 94-3; EITF 95-3; FAS 121; APB 16; SAB 5P]
1. "Restructuring charges" and "special charges" descriptions should be evaluated to ensure that the components do notinclude:
- costs not qualifying to be recognized solely upon management’s commitment
- amounts accrued without sufficient objective basis
- ordinary costs and write-offs that are misclassified as "restructuring" or "special," like environmental charges and write-downs of inventories or productive assets
- costs and write-offs that should have been recognized at an earlier date
- costs and activities that warrant more thorough discussion in MD&A
2. Required disclosure:
- Costs to Exit Activities
- Activities to be discontinued and the major actions to be taken, including disposition methods and anticipated completion dates.
- Types and amount of exit costs recognized as liabilities and their income statement classification.
- Types and amounts of exit costs paid and charged against the liability
- Adjustments to the liability, including changes in estimates
- Revenues and net operating income for those exited activities that have separately identifiable operations.
- Employee Terminations
- Amount and classification of the costs
- Number of people and employee groups to be terminated
- Actual amounts paid and actual employees terminated
- Any adjustments of the liability
- Exit or employee Termination Cost of an Acquired Business
- Whether the company began to formulate an exit plan as of the acquisition date
- Types and amounts of exit liabilities assumed and included in the acquisition cost allocation
- Unresolved issues and the types of additional liabilities that may result in an adjustment of the purchase cost allocation
- Common types of restructuring costs that should be separately disclosed.
Identify major types and amounts of costs included in restructuring charges and liabilities in the financial statements.
- Termination payments to employees
- Other employee related costs
- Inventory write-downs
- Purchase commitment losses
- Other contract losses
- Warranties and product returns
- Leasehold termination payments
- Other facility exit costs
- Litigation and environmental clean-up costs
- Asset Impairments
- Description of the assets and the segments affected
- Reasons write-downs became necessary
- Amount of loss for each material asset category
Property, plant and equipment
Intangible assets
- Method of determining fair value
- Classification of loss in the statements of operations
- If the assets are held for disposal, disclose:
- Carrying amount of assets held for disposal and subsequent changes in carrying amount
- Expected disposal dates
- Results of operations for the assets to the extent that those results are included in the period and can be identified
- Effect of suspending depreciation
3. Additional disclosure may be required in MD&A to enable readers to understand an exit plan’s cash requirements and how future periods are relieved as costs are expected to be incurred.
4. In periods after the initial accrual of exit costs, EITF 94-3 and 95-3 require disclosure of the type ad amount of costs charged against the liability, and any changes in estimates of the types and amounts of exit costs. Reconciliation of beginning and ending liability balances should be included in a note to the financial statements which describe the changes in cost components.
M. NON-OPERATING INCOME AND EXPENSES (COMMERCIAL COMPANIES) [SX 5-03.7 through .9]
1. Separately disclose dividends, interest on securities, net gain (loss) on securities, and other income.
2. Interest and debt discount amortization expense.
- Interest income and interest expense should be separately disclosed, rather than netted.
- Disclose amount incurred and the portions expensed and capitalized.
N. OTHER INCOME AND EXPENSES (FINANCIAL INSTITUTIONS) [SX 9-04]
1. Other income — Disclose the following items separately if they exceed 1% of total interest income. Investment securities gains and losses must be shown separately regardless of size.
- Commissions and fees from fiduciary activities.
- Commissions, broker’s fees and markups on securities underwriting and other securities activities.
- Insurance commissions, fees and premiums.
- Fees of other customer services.
- Profit or loss on transactions in securities in dealer activities.
- Equity in earnings of equity method investees.
- Gains/loss on disposition of equity in securities of unconsolidated subsidiaries.
2. Other expenses — Disclose the following items separately if they exceed 1% of total interest income and other income.
- Salaries and employee benefits.
- Net occupancy expense of premises.
- Goodwill amortization.
- Net cost of operations of other real estate.
- Minority interest.
O. DISCONTINUED OPERATIONS [SX 5-03.15; APB 30; SAB 5Z]
1. The term segment used in APB 30 refers to a component of an entity whose activities represent a separate major line of business or class of customer. A separate line of business that is not a major line of business does not qualify for discontinued operations accounting treatment under APB 30.
- A segment as defined in FAS 131 may or may not be the same as that in APB 30 since FAS 131 does not require that segments be identified on a products and services basis. FAS 131 generally requires disclosure of revenues for each product and service or each group of similar products and services but with no quantitative threshold.
- Item 101(c)(l) of Regulation S-K requires quantitative and qualitative information for "any class of similar products and services". The staff has interpreted "any class of similar product or class of customer" to be analogous to major line of business in APB 30.
- MD&A also requires registrants to identify events, trends and uncertainties that are material to investors on a disaggregated basis. That disclosure, however, may be based on FAS 131 reportable segments rather than major lines of business.
- In situations where a disposition of a business that was not separately reported as a segment under FAS 131 is classified as a discontinued operation, the staff looks to disclosures by registrants in the description of the business and MD&A to determine whether those disclosures communicate to investors expected relevant information for a major line of business.
2. If shareholder approval is required to dispose of the major line of business, the disposal should not be reported in the financial statements as discontinued operations until such approval is obtained.
3. To qualify for classification outside of continuing operations, the plan of disposal must contemplate the likely consummation of the sale, abandonment, or other disposition of all portions of the business segment within twelve months of the plan’s adoption. [SA 5Z]
P. INCOME TAX EXPENSES [SX 4-08(h); FAS 109; FAS 130]
Disclose:
1. Accounting policy for investment tax credits.
2. Amount of taxes currently payable and amount deferred due to timing differences. [SX 4-08(h)]
3. Reconciliation of the difference between the "expected tax" and the actual tax, identifying each individual item the effect of which exceeds 5% of the "expected tax". Disclose components of income as either domestic or foreign.
4. The components of net deferred tax liability or assets (total amounts and amount of valuation allowance disclosed separately) and the net change in the total valuation allowance.
5. Significant components of income tax expense attributable to continuing operations for each year presented.
6. The amount of income tax expense or benefit allocated to continuing operations.
7. The amount of income tax expense or benefit allocated to each component of other comprehensive income. [FAS 130]
8. Refundable taxes arising from carryback and investment credits; future tax benefits of loss carryforwards available.
9. When an entity is a member of a group that files a consolidated tax return.
Q. EXTRAORDINARY ITEMS [SX 5-03,17; APB 30]
1. Limited to items that are both:
- unusual in nature, and
- infrequent of occurrence.
2. The severity of a natural catastrophe ordinarily would not impact the determination of whether an item is extraordinary if such events occur with relative frequency, though with less severity. For example, losses incurred as a result of a hurricane in Florida would not qualify for extraordinary items no matter how severe the storm, since tropical storms and hurricanes occur in that region on a regular basis. [SP]
3. The gain or loss incurred on the extinguishment of long-term debt is classified as an extraordinary item. Gains or losses on derivative instruments designated to long-term debt that is extinguished would result in a basis adjustment of only long-term, fixed-rate debt at extinguishment. Therefore, the gains or loss on that derivative instrument could impact the amount of the extraordinary item recognized. Gains or losses on derivative instruments designated to anticipated transactions such as variable-rate debt that are no longer probable generally do not result in basis adjustments of those items. Therefore, gains and losses on those derivatives instruments would not be classified as extraordinary. [EITF D-50]
4. The costs of demutualizing are not extraordinary. [SP]
R. NET INCOME AND INCOME APPLICABLE TO COMMON SHAREHOLDERS [SX 5-03.19]
Where income applicable to common shareholders differs from net income by 10% or more (due to dividends or amortization on preferred stock), a separate line on the face of the income statement should disclose income applicable to common shareholders. [SAB 6B.1]
S. COMPREHENSIVE INCOME [FAS 130]
1. Includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
2. Must be displayed with the same prominence as other financial statements. Either :
- face of income statement, or
- separate statement of comprehensive income that begins with net income, or
- statement of changes in equity
3. The staff will not object to presentation of comprehensive income per share.
T. EARNINGS PER SHARE [SX 5-03.20; FAS 128]
1. Basic and diluted (if applicable) should be presented on the face of the income statement, rounded to the nearest cent, in order not to imply a greater degree of precision than exists.
2. In interim or start-up period, weighted average method, rather than annualized method, should be used. [TPA 5500.03]
3. Disclose:
- Reconciliation of numerators and denominators of the basic and diluted per-share computations.
NOTE: For interim financial statements, EPS reconciling disclosures should be provided in Exhibit 11 if not included in notes to the financial statements.
- Effect of preferred dividends on income available to common shareholders.
- Securities that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS because to do so would have been antidilutive.
- Any transaction that occurs after the end of the most recent period but before issuance of the financial statements that would have changed materially the number of common shares or potential common shares outstanding at the end of the period if the transaction had occurred before the end of the period.
4. Change in Capital Structure
See also Topic Three for more detailed discussion of pro forma requirements.
- Some changes that occur upon effectiveness may require pro forma presentations in order to best demonstrate to the investor the capital structure of the entity going forward. [SP]
- If historical arrangement is not indicative of continuing capital structure, pro forma EPS presented for latest year and interim period may also be required. [SAB 1B.2] However, historical EPS should also be presented to comply with FAS 128.
- Stock splits or stock dividends are reflected retroactively regardless of whether the impact is antidilutive. [FAS 128.54]
- In filings subsequent to an IPO:
- Stock, options and warrants which were treated as if common stock prior to the IPO should continue to be treated as if common stock subsequent to the IPO.
- Pro forma basic EPS reflecting the conversion of preferred stock into common stock at the IPO date should not be presented in financial statements issue subsequent to the IPO.
VI. Statement of Cash Flows
A. PRESENTATION
1. The statement may be prepared using either the direct or indirect method of presenting cash flows from operating activities. Cash flows are classified and presented as being related to operating, financing and investing activities.
2. Other presentations or discussions of cash flows in the prospectus should be consistent with and clearly reconcilable to the Statement of Cash Flows. No per share presentation is permitted.
B. APPLICATION
1. Netting of cash flow items is permitted when turnover is quick, the amounts are large and the maturities are three months or less. Revolving credit agreements must have underlying maturities of three months or less. Netting is not permitted for changes in property.
2. Generally, cash overdrafts should be presented as a financing activity. [TPA 1300.15]
3. Restricted cash (restricted by third parties) should not be included in the beginning or ending balance of cash equivalents as presented on the statement of cash flows.
4. Registrants should not include cash flow amounts in the table of selected financial data that are "derived from" the statement of cash flow unless such item is defined in FAS 95 (e.g., cash flow from operating activities). [ASR 142] See discussion of non-GAAP measures at Topic Eight.
5. Proceeds from sales of held-to-maturity investment securities should be presented separately from proceeds from maturities of investment securities.
6. Cash payments for debt issue costs should be classified in the statement of cash flows as a financing activity.
VII. Other Typical Disclosures
A. SIGNIFICANT ACCOUNTING POLICIES
1. Principles of consolidation
2. Revenue recognition [SAB 13B]
3. Principles which are unusual, industry-specific, or chosen from among acceptable alternatives.
B. Segment Reporting
1. The staff strictly interprets the aggregation guidance provided in paragraphs 16-24 of FAS 131. Segments may be aggregated in the disclosure only to the limited extent permitted by the standard. If segments are aggregated, that fact must be disclosed.
2. Under FAS 131, a registrant must reconcile key segment amounts to the consolidated financial statements. Similarly, the staff expects that the discussion in MD&A of a segment whose profitability is determined on a basis that differs from consolidated operating profit as defined by GAAP, or that excludes the effects of items attributable to the segment, will discuss those reconciling items in MD&A, along with the segment profitability measure itself. [FRC 501.06.a]
C. MAJOR CUSTOMERS AND ECONOMIC DEPENDANCY [FAS 131]
1. Major Customers
- If 10% or more of revenue is derived from any single customer, disclose the amount for each customer separately.
- FRR Section 503.02 requires registrants to disclose the names of significant customers and suppliers that exceed 10% of sales and purchases. This disclosure generally is not required in the notes to the financial statements but must appear in the description of the business section of the document.
2. Product and Services
Disclose revenues for each product and service or each group of similar products and services.
D. FINANCIAL STATEMENTS WHICH DIFFER FROM THOSE PREVIOUSLY FILED WITH THE COMMISSION
1. Changes resulting from a pooling-of-interests, error corrections, reclassifications, etc., should be reconciled as to revenues and income. [SX 3-03(c); 10-01(b)(7)]
2. The nature of an error in previously issued financial statements and the effect of its correction on income before extraordinary items, net income, and related EPS should be disclosed in the first Form 10-Q and 10-K after correction. [APB 20, paragraph 37] All columns should be labeled "restated".
3. A change in accounting principle ordinarily requires cumulative effect reported, net of tax ,after extraordinary items. Pro forma EPS effect on all prior years as if restated should be presented on the face of the income statement.
4. A change in accounting estimate is prospective, but if material or not customary, the effect on net income and EPS should be disclosed in a note.
E. REORGANIZED REGISTRANT
1. If about to emerge from reorganization, present an additional pro forma balance sheet giving effect to reorganization plan, with explanatory disclosure. After reorganization, a note should explain and summarize the effect of reorganization. [SOP 90-7]
2. After quasi-reorganization, the date of the event should be noted for the following ten years; the amount of the deficit eliminated should be noted on the face of the balance sheet for three years. See also SAB 5S.
F. FAIR VALUE OF FINANCIAL INSTRUMENTS [FAS 107]
1. Disclose the fair value of all financial instruments for which estimation is practical, either on the face of the financial statements or in the notes along with the carrying value. Disclose the method(s) and significant assumptions used to estimate the fair value.
2. If it is not practical to estimate fair value, disclose all information pertinent to estimating the fair value such as the carrying amount, effective interest rate and maturity, and the reasons why it is not practical to estimate fair value.
G. DERIVATIVE INSTRUMENTS & HEDGING ACTIVITIES [SX 4-08(n); SB 310]
1. In addition to GAAP required disclosures (FAS 119 and FAS 133), disclose accounting policies for derivative financial and derivative commodity instruments as described in SX 4-08(n):
- accounting methods and types of instruments accounted for under each method;
- criteria required to be met for each accounting method used;
- accounting method used if the criteria specified above are not met;
- accounting for terminations of hedging derivative instruments;
- accounting for sale, extinguishment, or termination of hedged items, along with accounting for derivatives designated to an anticipated transaction when that transaction is no longer likely to occur; and
- where and when derivative instruments and their related gains and losses, are reported in the financial statements.
2. Accounting policy disclosure should distinguish between derivatives used in trading and non-trading activities.
3. Additional information about disclosure of accounting policies used to account for derivatives and the quantitative and qualitative information about market risk required by SK 305 may be found in "Questions and Answers About the New "Market Risk Disclosure Rules" dated August 15, 1997 posted at the Commission’s website.
H. ADOPTION OF NEW ACCOUNTING STANDARDS
1. Staff Accounting Bulletin 74 (Topic 11M) discusses disclosures that a registrant should provide in its financial statements and/or MD&A regarding the impact that recently issued accounting standards will have on its financial statements when the standard is adopted in a future period. Disclosure of the effects of not only standards recently issued by the FASB, but also Statements of Position and Practice Bulletins issued by the AICPA and consensus positions of the EITF may warrant this disclosure. Disclosures that should be considered include:
- a brief description of the standard and its anticipated adoption date, and the method by which the standard will be adopted,
- the impact that the standard will have on the financial statements to the extent reasonably estimable or a statement that the impact is not known, and
- any other effects that are reasonably likely to occur (e.g., changes in business practices, changes in availability or cost of capital, violations of debt covenants, etc.).
2. If adoption of new standard occurs in an interim period, registrants should describe the accounting change and its impact pursuant to APB 28, as amended by FAS 3. In addition, the interim financial statements should include, to the extent applicable, all disclosures identified by the adopted standard as required to be included in annual financial statements. If the change in accounting principle is made in a period other than the first quarter of the year, no amendment of prior filings is required; however, a restatement of each of the prior quarter’s results should be included in the filing for the quarter in which the new accounting principle is adopted pursuant to FAS 3. If the new accounting principle is applied retroactively to prior years, the prior comparable interim quarters should be presented on a restated basis also.
VIII. Disclosures in Interim Financial Statements [SX 10]
A. LEVEL OF DETAIL REQUIRED
1. Balance Sheet
- Need only include major captions outlined by Regulation S-X, with the exception of inventories (see below).
- Inventories. Disclose data as to raw materials, work in process and finished goods.
- Where any item is less than 10% of total assets, and amount of change is not greater than 25% since fiscal year-end, the caption may be combined with others.
2. Income Statements
- Need only include major captions outlined by Regulation S-X.
- Where any item is less than 15% of net income for the most recent fiscal year and change is not greater than 20%, caption may be combined with others.
- Banks must show gains and losses from investment securities, regardless of size.
3. Statement of Comprehensive Income
Must present the amount of comprehensive income but presentation of its components is not required.
4. Statement of Cash Flows
- May start with single figure of cash provided by operating activities (indirect method).
- Show other changes in investing activities and financing activities where they exceed 10% of average of last three years’ cash flow from operations.
- Schedule of the changes in non-cash current items is not required.
- The amount of cash interest and income taxes paid during the interim period is not required.
B. OTHER DISCLOSURES
1. Notes to interim data
- Need not duplicate fiscal year-end disclosures.
- Material events (new borrowings, changes in accounting principles or estimates, other material transactions) occurring subsequent to fiscal year-end should be disclosed.
- Material contingencies should be disclosed, even if no changes occur since fiscal year-end.
- Must be sufficient to keep the interim data from being misleading.
- Changes in accounting principles including adoption of recently issued standards must be accompanied by all material disclosures required by the applicable standard unless such disclosures were previously provided in an annual report.
2. Miscellaneous
- Development stage companies must provide cumulative information through interim period. [SX 10-01(a); FAS 7]
- Interim statements should reflect the effect of business combinations, discontinued operations, changes in accounting principles, etc., in accordance with GAAP. When these events occur in an interim period other than the first quarter, the interim period report should disclose the effects of the new principle on previously reported interim periods. Previously filed interim reports which were correct when filed need not be amended for retroactive effects of these changes.
Appendix B: Reverse Acquisitions
I. Accounting Issues
A. IDENTIFYING THE ACQUIRING COMPANY
APB No. 16, paragraph 70, states that "presumptive evidence of the acquiring corporation in combinations effected by an exchange of stock is obtained by identifying the former common stockholder interests of a combining company which either retain or receive the larger portion of the voting rights in the combined corporation. That corporation should be treated as the acquiror unless other evidence clearly indicates that another corporation is the acquiror…" SAB Topic 2A affirms the above principle and discusses some of the factors which may rebut the normal presumption.
In December 1989, the Emerging Issues Committee of the Canadian Institute of Chartered Accountants reached a consensus concerning Reverse Takeover Accounting, which is compatible with the guidance included in Topic 2A. The EIC consensus indicates that the post reverse-acquisition comparative historical financial statements furnished for the "legal acquirer" should be those of the "legal acquiree" (i.e., the "accounting acquirer"), with appropriate footnote disclosure concerning the change in the capital structure effected at the acquisition date. Ordinarily, the guidance of APB 16 is applied in the allocation of the purchase price to all of the assets and liabilities of the accounting acquiree. [Paragraph 71 of APB 16]
NOTE: The staff believes the "partial step-up" methodology of EITF 90-13 applies only in the particular facts and circumstances specified in that consensus.
The merger of a private operating company into a non-operating public shell corporation with nominal net assets typically results in the owners and management of the private company having actual or effective operating control of the combined company after the transaction, with shareholders of the former public shell continuing only as passive investors. These transactions are considered by the staff to be capital transactions in substance, rather than business combinations. That is, the transaction is equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation, accompanied by a recapitalization. The accounting is identical to that resulting from a reverse acquisition, except that no goodwill or other intangible should be recorded.
B. TRANSACTION COSTS
Transaction costs (e.g., legal and investment banking fees, stock issuance fees, etc.) may be incurred in a reverse acquisition. In the merger of two operating companies, those costs will be, depending on their nature, either part of the purchase consideration that is allocated to the net assets of the acquired business, charged directly to equity as a reduction from the fair value assigned to shares issued, or expenses of the period. In contrast, an operating company’s reverse acquisition with a nonoperating company having some cash has been viewed by the staff as the issuance of equity by the accounting acquirer for the cash of the shell company. Accordingly, we believe transaction costs may be charged directly to equity only to the extent of the cash received, while all costs in excess of cash received should be charged to expense.
II. Reporting Issues
A. GENERAL
1. Commission rules do not address directly a registrant’s reporting obligations in the event that it acquires another entity in a transaction to be accounted for as a reverse acquisition. For accounting purposes, the acquiree is treated as the continuing reporting entity that acquired the registrant. The staff believes the reports filed by the registrant after a reverse acquisition should parallel the financial reporting required under GAAP — as if the acquiree were the legal successor to the registrant’s reporting obligation as of the date of the merger.
2. To comply with Exchange Act requirements, the registrant should assure that
- its filings with the Commission result in timely, continuous reporting, with no lapse in periods presented in the financial statements, and
- no audited period exceeds 12 months.
B. FORM 8-K
1. A Form 8-K should be filed not later than 15 days after the consummation of the reverse acquisition. That Form 8-K should note under the appropriate Form 8-K item number any intended change in independent accountants and changes in fiscal year end from that used by the registrant prior to the acquisition. Most typically, registrants adopt the fiscal year and auditor of the accounting acquirer, but that is not necessary.
2. The Form 8-K reporting the acquisition should contain financial statements of the accounting acquirer (the legal acquiree). Those financial statements thereafter become the financial statements of the registrant pursuant to GAAP. Audited financial statements of the accounting acquirer for the three most recently completed fiscal years should be included; or two years, if the registrant was eligible to use S-B forms and effected that election in its initial filing in the fiscal year in which the merger occurred. NOTE: Refer to Topic Five, Small Business Issuers, for a discussion of eligibility requirements.
3. Unaudited interim financial statements of the accounting acquirer for any interim period and the comparable prior year period, and pro forma information depicting the effects of the acquisition, should be included in the Form 8-K. If the financial statements of the accounting acquirer are not available, the registrant has up to 75 days from the date the acquisition was consummated to furnish the required information.
C. CHANGE OF ACCOUNTANTS
1. Unless the same accountant reported on the most recent financial statements of both the registrant and the accounting acquirer, a reverse acquisition always results in a change in accountants. A Form 8-K filed in connection with a reverse acquisition should provide the disclosures required by SK Item 304 under Item 4 of Form 8-K for the change in independent accountants, treating the accountant that no longer will be associated with the registrant’s financial statements as the predecessor accountant.
2. The disclosures required by Item 304 with respect to any changes in the accounting acquirer’s auditor which occurred within 24 months prior to, or in any period subsequent to, the date of the acquirer’s financial statements must be provided in the first filing containing the accounting acquirer’s financial statements.
D. CHANGE IN FISCAL YEAR
A Form 8-K filed in connection with a reverse acquisition should note under the appropriate Form 8-K item number any intended change in fiscal year from that used by the registrant prior to the acquisition.
If the registrant adopts the fiscal year of the accounting acquirer: |
If the registrant continues the fiscal year of the legal acquirer (registrant): |
No transition report necessary.
File periodic reports for periods ending prior to the consumation of the merger as they become due in the ordinary course of business. Starting with the periodic report for the quarter in which the merger was consummated, file reports based on the fiscal year of the accounting acquirer. Those financial statements would depict the operating results of the accounting acquirer, including the acquisition of the registrant from the date of consummation. |
· File periodic reports for periods ending prior to the consumation of the merger as they become due in the ordinary course of business.
· A transition report on Form 10-K is required containing the audited financial statements of the accounting acquirer for the necessary transition period (generally, from the end of the legal acquiree's most recently completed fiscal year to the next following date corresponding with the end of a fiscal year of the legal acquirer).
· The transition report is due 90 days after the consummation of the acquisition. The Form 10-Q for the combined entity should be filed within 45 days after the end of the quarter. |
Appendix C: Effects of Subsequent Events on Financial Statements Required in Filings
I. General
Certain events that occur after the end of a fiscal year will require retroactive restatement of that year’s financial statements if they are reissued. Such events include consummation of a business combination to be accounted for as a pooling of interests and adoption of a formal plan to discontinue a business segment.
- If the pre-event financial statements are not reissued in connection with any filing under the Securities Act or Exchange Act, annual information does not need to be restated until that information is included in the registrant’s next Annual Report on Form 10-K.
- Restated quarterly information is required in Form 10-Qs filed after the event.
- For the information of investors, a registrant may elect to file under cover of Form 8-K (Item 5) audited restated financial statements following such an event. However, those financial statements must be furnished if a registrant is required to include its financial statements in a filing made under the Securities Act or Exchange Act that will be made effective subsequent to an event requiring retroactive restatement under GAAP. Information on how to present that information is provided below.
II. Business Combination Accounted for as a Pooling of Interests
In some cases, registrants elect to present as promptly as possible their historical financial statements on a basis that reflects consummation of a post-balance sheet merger accounted for as a pooling of interests. In addition, Item 11(b) of Form S-3 requires "restated financial statements prepared in accordance with Regulation S-X" in registration statements filed or amended after the date of a business combination accounted for as a pooling of interests.
NOTE: The staff believes the guidance in Form S-3 is applicable to any registration statement or proxy following a pooling of interests except Form S-8.
However, paragraph 61 of APB Opinion No. 16 provides that until the financial statements for the period encompassing consummation of the combination have been issued, "the financial statements issued should be those of the combining company and not those of the resulting combined corporation." Paragraph 61 also requires that each combining company "disclose as supplemental information in notes to financial statements or otherwise, the substance of a combination consummated before financial statements are issued and the effects of the combination on reported financial position and results of operations."
The form of the financial statements of the registrant to be furnished in Commission filings depends on whether financial statements for a post-consummation period have been published. The post-merger results reporting requirement of paragraph 61 of APB 16 can be satisfied by the release of summary financial information [S-X 1-02(bb)] in a Form 8-K for a post-combination period of not less than one month.
A. IF POST-CONSUMMATION PERIOD RESULTS HAVE NOT BEEN PUBLISHED
1. Financial statements giving effect to the pooling should be presented in transactional filings or in voluntary supplemental filings as "supplemental financial statements."
2. If the financial statements are required to be furnished in connection with an Exchange Act or Securities Act filing, the supplemental financial statements should:
- be audited,
- comply with Regulation S-X, and
- include an audit report dated subsequent to the consummation of the transaction but prior to publication of post-combination results.
3. Typically supplemental financial statements are filed on an Item 5 Form 8-K. If the restated financial statements are furnished pursuant to the requirements of a registration statement or proxy, MD&A and applicable industry guide information should also be restated or expanded to provide necessary information about the combined entity.
4. Any registration statement made effective or proxy materials mailed prior to publication of post-combination financial information must include the audited historical financial statements of the registrant, without giving effect to the business combination. Presentation of audited supplemental financial statements restated for the pooling-of-interests does not satisfy the requirement to furnish the registrant’s financial statements.
B. IF POST-CONSUMMATION PERIOD RESULTS HAVE BEEN PUBLISHED
1. The financial statements required in registration statements and proxies are the complete set of audited restated financial statements (not supplemental) giving retroactive effect to the pooling.
2. A Form 10-K reporting on the year ending prior to the consummation date of the pooling must include the registrant’s historical financial statements without giving effect to the pooling, even if post-combination operating results have been published prior to filing the Form 10-K. Inclusion of audited supplemental financial statements in the Form 10-K is encouraged, but not required.
3. Interim reports on the Form 10-Q and other interim financial statements filed for periods ending after consummation should be presented on a basis that retroactively reflects the pooling of interests for all periods presented. Prior Exchange Act filings reporting on periods ending before consummation of the merger should not be amended, although the registrant may elect to furnish recast information for earlier periods in accordance with the guidance in this section.
III. Business Combination Accounted for in a Manner Similar to a Pooling of Interests
Consummation of a transaction accounted for in a manner similar to a pooling of interests, i.e., a reorganization of entities under common control, results in the restatement of the registrant’s financial statements when the financial statements are issued for a period that includes the date the transaction was consummated.
If a reorganization is consummated after a year end balance sheet date but before that year end Form 10-K is filed, the financial statements in the Form 10-K should not be restated to reflect the reorganization.
IV. Discontinued Operations
If financial statements as of a date on or after the date management adopts a qualifying plan to discontinue a business segment (the measurement date) are required in a registration statement or proxy, restatement of all periods prior to the measurement date in accordance with APB 30 is required. This guidance is applicable even where the filing incorporates by reference annual audited financial statements issued prior to the measurement date. The auditor's consent to incorporation of those financial statements in a registration statement or proxy is deemed a reissuance that requires consideration of the effects of subsequent events. Moreover, the financial statements prepared by management and included in the filing are required to comply with GAAP at the date of effectiveness or mailing, necessitating restatement pursuant to APB 30.
V. Stock Splits
Stock splits also require retroactive presentation. Ordinarily, the staff would not require restatement of previously filed financial statements that are incorporated by reference into a registration statement or proxy for reasons solely attributable to a stock split. Instead, the registration statement or proxy may include selected financial data which includes relevant per share information for all periods, with the stock split prominently disclosed.
Appendix D: Tender Offers
I. Regulatory Schemes
Tender offers may be made by either the issuer of the securities or by a third party. The essence of the tender offer is that the offeror, or bidder, can go directly to security holders of the target company with an offer to buy their shares.
In a tender offer, the offeror may offer cash, securities, or a combination of cash and securities. If the consideration consists of all or partly of registered securities, the offeror generally will have to register them under the Security Act. The information required to be sent to the security holders of the target varies based on the type of consideration offered and other factors.
The following summarizes the regulatory process for tender offers:
- Cash tender offer — either issuer or third party. The bidder commences the offer by sending tender material to security holders, including a request that they tender their shares. On the same day, the bidder files this material publicly with the Commission, along with a tender offer schedule that contains additional information. The offer must remain open for at least 20 business days, and then the bidder can purchase the shares if all conditions to the offer have been satisfied or waived. Unlike a stock tender offer, the Commission staff does not have the opportunity to review the tender offer material until after the tender offer has begun. If the staff decides to review the filed material, the staff gives comments to the bidder during the tender offer and the bidder addresses the comments appropriately. For example, the bidder may need to send additional information to the security holders of the target and the offer may have to be extended in order for the security holders to have time to consider the information.
- Exchange offer (stock tender offer) — either issuer or third party. The bidder files a Securities Act registration statement containing a preliminary prospectus covering the securities it is offering to security holders of the target in exchange for their shares. The prospectus also contains the information about the exchange offer required by the tender offer rules. This is a public document. The bidder may send the preliminary prospectus to security holders of the target, but it usually does not do so because it cannot request tenders or buy any shares until the registration statement is declared effective. If the staff decides to review the registration statement, it may give comments to the bidder. After these comments are resolved, the bidder requests that the staff declare the registration statement effective. Once the registration statement is effective, the tender offer may commence, the bidder sends the combined final prospectus/tender offer document to security holders, and requests that they tender their shares. In a change to the rules in the Regulation M-A release, the bidder may commence the offer before effectiveness under specified circumstances. On the same day, the bidder files with the Commission the same tender offer schedule as for a cash tender offer. The offer must remain open for at least 20 business days from this point before the bidder can purchase any shares.
II. Documents Filed
The primary report used to file tender offers is Schedule TO. EDGAR tags to Schedule TO are TO-I, Tender Offer/Issuer; TO-T, Tender Offer/Third Party, and TO-C, Tender Offer/Communications. The TO-T is required in a transaction that would result in the third party owning greater than 5% of the class of securities subject to the offer.
The tender offer may be a "going private" transaction, in which case schedule 13E-3 has to be filed as well. Here, companies or their affiliates engage in specified transactions ("going private") that cause a class of the company’s equity securities registered under the Exchange Act to be: (1) held by fewer than 300 record holders, or (2) de-listed from a securities exchange or inter-dealer quotation system must file and disseminate to security holders the information specified in this schedule. This schedule requires detailed information addressing whether the filing persons believe the transaction is fair to unaffiliated security holders and why. Schedule 13E-3 can be combined with Schedule TO, in which case the Rule 13e-3 box on the cover page to Schedule TO must be checked.
III. Cash Offer Financial Statement Requirements
NOTE: Tender offers involving registered securities follow the requirements of Forms S-4 of F-4.
A. FINANCIAL STATEMENT REQUIREMENTS OF SCHEDULE TO
1. If material, the financial information required by Item 1010(a) and (b) of Regulation M-A for the issuer in an issuer tender offer and for the offeror in a third-party tender offer must be filed.
2. Instructions to Item 10 of Schedule TO provide the following:
- Financial statements must be provided when the offeror’s financial condition is material to a security holder’s decision whether to sell, tender or hold the securities sought. The facts and circumstances of a tender offer, particularly the terms of the tender offer, may influence a determination as to whether financial statements are material, and thus required to be disclosed.
- Financial statements are not considered material when:
- the consideration offered consists solely of cash;
- the offer is not subject to any financing condition; and either:
- the offeror is a public reporting company under Section 13(a) or 15(d) of the Act that files reports electronically on EDGAR, or
- the offer is for all outstanding securities of the subject class.
- The filer may incorporate by reference financial statements contained in any document filed with the Commission, solely for the purposes of this schedule, if:
- the financial statements substantially meet the requirements of this item,
- an express statement is made that the financial statements are incorporated by reference,
- the information incorporated by reference is clearly identify by page, paragraph, caption or otherwise; and
- if the information incorporated by reference is not filed with this schedule, an indication is made where the information may be inspected and copies obtained.
Financial statements that are required to be presented in comparative form for two or more fiscal years or periods may not be incorporated by reference unless the material incorporated by reference includes the entire period for which the comparative data is required to be given. - If the offeror in a third-party tender offer is a natural person, and that person’s financial information is material, the net worth of the offeror must be disclosed. If the offeror’s net worth is derived from material amounts of assets that are not readily marketable or there are material guarantees and contingencies, the nature and approximate amount of the individual’s net worth that consists of illiquid assets and the magnitude of any guarantees or contingencies that may negatively affect the natural person’s net worth must be disclosed.
- Pro forma financial information is required in a negotiated third-party cash tender offer when securities are intended to be offered to remaining target security holders in a subsequent merger (two-tier transaction) and the acquisition of the target company is significant to the offeror. The offeror must disclose the financial information specified in Item 3(f) and Item 5 of Form S-4 in the schedule filed with the Commission, but may furnish only the summary financial information specified in Item 3(d), (e) and (f) of Form S-4 in the disclosure document sent to security holders. When pro forma financial information is required, then the bidder’s historical financial statements are required as well.
- The materials sent to security holders may contain the summarized financial information specified by Item 1010(c) instead of the financial information required by Item 1010(a) and (b). In that case, the full financial information required by Item 1010(a) and (b) must be disclosed in the statement. If summarized financial information is sent to security holders, instructions on how more complete financial information can be obtained must be disclosed. If the summarized financial information is prepared on the basis of a comprehensive body of accounting principles other than U.S. GAAP, the summarized financial information must be accompanied by a reconciliation as described in Instruction 8 of this Item.
- If the offeror is a non-reporting company, the financial statements required need not be audited if audited financial statements are not available or obtainable without unreasonable cost or expense. A statement to that effect and the reasons for their unavailability must be disclosed.
- If the financial statements required by this Item are prepared on the basis of a comprehensive body of accounting principles other than U.S. GAAP, a reconciliation to U.S. GAAP in accordance with Item 17 of Form 20-F must be provided, unless a reconciliation is unavailable or not obtainable without unreasonable cost or expense. At a minimum, however, when financial statements are prepared on a basis other than U.S. GAAP, a narrative description of all material variations in accounting principles, practices and methods used in preparing the non-U.S. GAAP financial statements from those accepted in the U.S. must be presented.If a bidder’s (non-U.S. GAAP) financial statements are not required to be filed in conjunction with an all-cash tender offer based on Regulation M-A, but the bidder includes its financial statements anyway (for example, in order to comply with a foreign jurisdiction’s rules and regulations), a U.S. GAAP reconciliation is not required. Required disclosure:
- The headnote to those financial statements should explain why the bidder’s financial statements are included that they are not required to be filed under the SEC’s rules, and that they don't include all the disclosures that would be required under the SEC’s rules, such as a U.S. GAAP reconciliation.
- In this circumstance, a textual description of the GAAP differences that normally would be required under 3-19(f) of Regulation S-X is not required.
B. FINANCIAL STATEMENTS REQUIRED OF SCHEDULE 13E-3
1. The financial information required by Item 1010(a) through (b) of Regulation M-A for the issuer of the subject class of securities must be filed.
2. Instructions to Item 13 provide the following:
- The disclosure materials sent to security holders may contain the summarized financial information required by Item 101(c) instead of the financial information required by Item 1010(a) and (b). In that case, the financial information required by Item 1010(a) and (b) must be disclosed directly or incorporated by reference in the statement. If summarized financial information is sent to security holders, instructions on how more complete financial information can be obtained must be disclosed. If the summarized financial information is prepared on the basis of a comprehensive body of accounting principles other than U.S. GAAP, the summarized financial information must be accompanied by a reconciliation.
- If the financial statements required are prepared on the basis of a comprehensive body of accounting principles other than U.S. GAAP, a reconciliation to U.S. GAAP In accordance with Item 17 of Form 20-F must be provided.
- The filer may incorporate by reference financial statements contained in any document filed with the Commission, solely for the purposes of this schedule, if:
- the financial statements substantially meet the requirements of this Item;
- an express statement is made that the financial statements are incorporated by reference;
- the matter incorporated by reference is clearly identified by page, paragraph, caption or otherwise; and
- if the matter incorporated by reference is not filed with this Schedule, an indication is made where the information may be inspected and copies obtained.
Financial statements that are required to be presented in comparative form for two or more fiscal years or periods may not be incorporated by reference unless the material incorporated by reference includes the entire period for which the comparative data is required to be given.
IV. Item 1010 of Regulation M-A — Financial Statements
A. FINANCIAL INFORMATION
1. Audited financial statements for the two fiscal years required to be filed with the company’s most recent annual report under Sections 13 and 15(d) of the Act.
2. Unaudited balance sheets, comparative year-to-date income statements and related earnings per share data, statements of cash flows, and comprehensive income required to be included in the company’s most recent quarterly report filed under the Act;
3. Ratio of earnings to fixed charges, computed in a manner consistent with Item 503(d) of S-K, for the two most recent fiscal years and the interim periods provided under paragraph A.2; and
4. Book value per share as of the date of the most recent balance sheet presented.
B. PRO FORMA INFORMATION
If material, pro forma information must be filed disclosing the effect of the transaction on:
1. The company’s balance sheet as of the date of the most recent balance sheet presented under paragraph A;
2. The company’s statement of income, earnings per share, and ratio of earnings to fixed charges for the most recent fiscal year and the latest interim period provided under paragraph A.2; and
3. The company’s book value per share as of the date of the most recent balance sheet presented under paragraph A.
C. SUMMARY INFORMATION
A fair and adequate summary must be filed of the information specified in paragraphs A and B of this section for the same periods specified. A fair and adequate summary includes:
1. The summarized financial information specified in 1-02(bb)(1) of S-K;
2. Income per common share from continuing operations (basic and diluted, if applicable);
3. Net income per common share (basic and diluted, if applicable);
4. Ratio of earnings to fixed charges, (computed in a manner consistent with Item 503(d) of S-K);
5. Book value per share as of the date of the most recent balance sheet; and
6. If material, pro forma data for the summarized financial information specified in paragraph C.1 through C.5 disclosing the effect of the transaction.
Appendix E: Employment Stock Benefit Plans
I. Filing Requirements of Form S-8 and Form 11-K
A. EMPLOYEE BENEFIT PLAN A SEPARATE REGISTRANT
Where an employee benefit plan (Plan) registers Plan interests as separate securities from the issuer’s securities offered under the Plan, the Plan incurs a separate reporting obligation under §15(d) of the Exchange Act. This obligation requires the Plan to file an annual report on Form 11-K. Late or incomplete filings on Form 11-K by the Plan do not adversely affect the issuer’s ability to use Form S-3 or rely on Rule 144 because the Plan is a separate issuer.
B. FINANCIAL STATEMENT REQUIREMENTS
1. The financial statement requirements in Form 11-K are specified by the Form and Article 6A of Regulation S-X, which follow generally the form and procedures as in Topic One, Section I.A.
2. In addition, consider ERISA requirements.
Plans Subject to ERISA |
Plans Not Subject to ERISA |
a) May file the financial information prepared in accordance with ERISA requirements in lieu of the financial statements required by Article 6A of Regulation S-X |
Must provide the schedules required by Rule 6A-05 of Regulation S-X |
b) To the extent required by ERISA, such financial statements shall be audited. However, the "limited scope exemption" contained in Section 103(a)3(C) of ERISA shall not be available. [Instructions to Form 11-K] | |
c) If the financial statements filed with ERISA do not require an opinion of the independent accountant, no opinion is required for Form 11-K. |
3. Registration on Form S-8, for a New Plan
- Form S-8 becomes effective automatically upon filing and incorporates by reference filings made under Sections 13, 14 and 15(d) of the Exchange Act.There is no separate requirement for financial statements required by Regulation S-X. Registrant information is updated by the filing of Exchange Act reports, which are incorporated by reference. Any material changes in the registrant’s affairs required to be disclosed in the registration statement, but not required to be included in a specific Exchange Act report, are reported on Form 8-K pursuant to Item 5 of that form [General Instruction G.2].
NOTE: Form S-8 is not subject to the same financial statement updating requirements as other registration statements. For example, the sponsor’s financial statements incorporated by reference into Form S-8 need not comply with the 45-day year end rule (See Topic One, Section II.B).
- Form S-8 requires the following financial statements for both the sponsor (the registrant) and the Plan:
- For the Sponsor incorporate by reference [Item 3 of Form S-8]:
- The registrant’s most recent annual report under the Exchange Act (or the registrant’s filing under cover of Forms 10 and 10-SB) or the most recent prospectus filed under the Securities Act (if that prospectus contains the registrant’s financial statements for the most recent fiscal year), and
- All other reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act since the filing of the most recent annual report or prospectus in (a) above.
- For the Plan, if interests in the Plan are being registered (General Instruction A.2):
- Incorporate the Plan’s latest annual report filed pursuant to Section 15(d), or
- If the Plan has not previously been subject to the reporting requirements of Section 15(d), file an annual report for the Plan’s latest fiscal year, in the form required under Section 15(d), Form 11-K, at the same time the Form S-8 is filed.
(a) If the Plan has not yet completed its first fiscal year, file an annual report for a period ending not more than 90 days prior to the filing of the registration statement at the same time the Form S-8 registration statement is filed.
(b) If the Plan has not been in existence for at least 90 days prior to the filing date, the requirement to file an employee plan annual report at the same time the Form S-8 registration statement is filed shall not apply. For this purpose (General Instruction A.2), a plan is considered "not to have been in existence for 90 days" if it is either a new plan or for the first time is offering employer securities as an investment option.
- If financial statements of the plan are required to be filed, they should be prepared in accordance with Article 6A of Regulation S-X and for the periods specified in Rules 3-01 and 3-02 of Regulation S-X. However, if employer securities are added as an investment option to an existing plan that previously had not been required to report to the Commission and a "new plan" is deemed to have come into existence for purposes of Rule A.2, such financial statements need only be presented from the date that the new plan is deemed to have come into existence.
II. Exchange Act Age of Financial Statements Requirements
A. GENERAL REQUIREMENT
Form 11-K is required to be filed within 90 days after the end of the fiscal year of the Plan [General Instruction A to Form 11-K]. If the issuer of the securities offered by the Plan files annual reports on Forms 10-K or 10-KSB, the Plan may file its financial statements in the issuer’s Form 10-K or 10-KSB. [Rule 15d-21 of the Exchange Act] If this procedure is followed, the Plan’s financial statements (as required by Form 11-K) should be filed within 120 days after the end of the Plan’s fiscal year (either as a part of the Form 10-K or as an amendment to the Form 10-K). However, if the Plan’s fiscal year ends within 62 days prior to the end of the fiscal year of the issuer, such information may be furnished as a part of the issuer’s next annual report.
B. PLANS SUBJECT TO ERISA
Form 11-K for a plan subject to ERISA is due within 180 days after the Plan’s fiscal year end [General Instruction A to Form 11-K]. If the Plan subject to ERISA elects the option permitted by Rule 15d-21 (see II.A above), the financial statements required by Form 11-K should be filed within 180 days after the Plan’s fiscal year end.
C. FORM 8-K REQUIREMENTS
Since the Plan is a separate registrant with Section 15(d) reporting requirements, it is also subject to Form 8-K reporting requirements.
Appendix F: Multi-Jurisdictional Disclosure System
Effective July 1, 1991, the Commission adopted a multijurisdictional disclosure system ("MDJS") for Canadian issuers. The MJDS adopted by the Commission allows eligible Canadian issuers to register securities under the Securities Act and to register securities and report under the Exchange Act by use of documents prepared largely in accordance with Canadian requirements.
I. MJDS Offerings — Eligibility Requirements
A. Rights Offers
1. To encourage Canadian issuers to extend rights offers to their U.S. shareholders (rather than cash them out in order to avoid U.S. registration), MJDS Form F-7 is available for Securities Act registration in connection with such offers. Form F-7 acts as a wraparound for the relevant Canadian offering documents. No reconciliation to U.S. GAAP is required for financial statements included under cover of that Form.
2. To be eligible, an issuer must:
- be incorporated or organized in Canada and be a foreign private issuer;
- have been reporting for the preceding 36 months to Canadian securities regulatory authorities;
- have been listed for the preceding 12 months on the Montreal or Toronto Stock Exchange or the Senior Board of the Vancouver Stock Exchange; and
- be currently in compliance with its reporting and listing obligations.
In addition:
- The rights may not be transferable other than in accordance with Regulation S, and
- The rights must be granted to U.S. holders on terms no less favorable than those extended to any other holder of the same class of securities.
B. EXCHANGE OFFERS
1. To encourage Canadian issuers to extend exchange offers to U.S. shareholders, MJDS Forms F-8 and F-80 are available in specified circumstances for Securities Act registration in connection with such offers. In the case of an exchange offer, those Forms consist primarily of the relevant Canadian offering documents. No reconciliation to U.S. GAAP is required for financial statements included under cover of those Forms.
2. To be eligible, an issuer must:
- be incorporated or organized in Canada and be a foreign private issuer;
- have been reporting for the preceding 36 months to Canadian securities regulatory authorities;
- have been listed for the preceding 12 months on the Montreal or Toronto Stock Exchange or the Senior Board of the Vancouver Stock Exchange;
- be currently in compliance with its reporting and listing obligations; and
- have a public float (an aggregate market value held by non-affiliates) of at least (CN) $75 million, unless the issuer is making an exchange offer for its own securities.
In addition:
- the issuer of the securities that are the subject to the exchange offer must be incorporated or organized in Canada and be a foreign private issuer;
- less than 25% (in the case of Form F-8) or 40% (in the case of Form F-80) of the securities that are the subject of the exchange offer are held by U.S. holders;
- the securities must be offered to U.S. holders on terms no less favorable than those offered to any other holder of the same class of securities; and
- derivative securities may not be registered on Form F-8 or F-80 except:
- warrants, options and rights, if they and the underlying securities to which they relate are issued by the registrant, its parent or an affiliate of either, and
- convertible securities, if they are convertible into only securities of the registrant, its parent or an affiliate of either.
C. BUSINESS COMBINATIONS
1. Registration of securities is allowed on MJDS Forms F-8 and F-80 in connection with Canadian statutory amalgamations, mergers, arrangements and other reorganizations requiring the vote of shareholders of the participating companies ("business combinations"). In the case of a business combination, those Forms consist of primarily the information prepared for distribution under Canadian proxy requirements. No reconciliation to U.S. GAAP is required for financial statements included under cover of those Forms.
2. Registration in connection with a business combination is allowed on those Forms if:
- each participant is organized or incorporated in Canada and is a foreign private issuer;
- the predecessor participants have been reporting for the preceding 36 months to Canadian securities regulatory authorities;
- the predecessor participants have been listed for the preceding 12 months on the Montreal or Toronto exchange or the Senior Board of the Vancouver Stock Exchange;
- each predecessor participant has a public float of (CN) $75 million;
- U.S. holders would hold less than 25% (in the case of Form F-8) or 40% (in the case of Form F-80) of the class of securities being registered by the successor upon completion of the business combination; and
- the securities must be offered to U.S. holders on terms no less favorable than those offered to any other holder of the same class of securities.
D. OFFERINGS OF INVESTMENT GRADE NON-CONVERTIBLE DEBT OR PREFERRED SECURITIES
1. Offerings by issuers of investment grade debt and preferred stock may be registered under the Securities Act on Form F-9. The debt or preferred stock must be rated investment grade (typically, the four highest ratings) by a nationally recognized statistical rating organization or by a securities rating organization recognized by Canadian securities regulators as an "Approved Rating Organization" in order to qualify. Securities registered on the Form must either be non-convertible or convertible only after one year from the date of issuance. Like the other MJDS forms, Form F-9 is primarily a wraparound form for the Canadian disclosure documents. No reconciliation of financial statements to U.S. GAAP is required.
2. To be eligible, an issuer must:
- be incorporated or organized in Canada and be a foreign private issuer or a crown corporation;
- have been reporting for the preceding 12 months to Canadian securities regulatory authorities;
- be currently in compliance with its reporting obligations; and
- have a public float of at least $75 million, unless the securities being registered are not convertible.
E. OFFERINGS OF OTHER SECURITIES
1. Securities Act registration of other securities, including equity securities, is permitted on Form F-10. Form F-10 is primarily a wraparound form for the Canadian disclosure documents, but reconciliation of included financial statements to U.S. GAAP, as specified in Item 18 of Form 20-F, is required. As originally adopted, the requirement for reconciliation would have been subject to a sunset provision effective July 1, 1993. As of July 1, 1993, however, the Commission rescinded the sunset provision, which had the effect of continuing the requirements for reconciliation. [Securities Act Release No. 7004 (June 28, 1993)]
2. To be eligible, an issuer must:
- be incorporated or organized in Canada and be a foreign private issuer;
- have been reporting for the preceding 12 months to Canadian securities regulatory authorities;
- be currently in compliance with its reporting obligations; and
- have a public float of at least $75 million.
3. In addition, derivative securities may not be registered on Form F-10 except (i) warrants, options and rights, provided that such securities and the underlying securities to which they relate are issued by the registrant, its parent or an affiliate of either, or (ii) convertible securities, provided that such securities are convertible only into securities of the registrant, its parent or an affiliate of either.
4. The registration of securities by eligible issuers in connection with exchange offers is specifically accommodated in Forms F-9 and F-10, and registration in connection with business combinations is accommodated in Form F-10.
II. Registration and Periodic Reporting Under the Exchange Act
A. FORMS 40-F AND 6-K
These forms are available for use by certain Canadian issuers to register securities under Section 12(b) or 12(g) or report under Section 15(d) of the Exchange Act. Information to be filed on Form 40-F includes the issuer’s annual information form and audited annual financial statements with accompanying management’s discussion and analysis, all as prepared in accordance with Canadian requirements. Reconciliation as specified in Item 17 of Form 20-F is required in connection with any Form 40-F filed unless the obligation to file arises because of registration on Form F-7, F-8, F-9, or F-80 or the Form 40-F is filed with respect to securities that could have been registered under the Securities Act on Form F-9. Form 6-K information is that which the issuer has made public in its home jurisdiction, filed with a stock exchange where its securities are traded, or distributed to its shareholders.
1. Canadian issues that lists securities on a U.S. stock exchange or whose securities are authorized for quotation on NASDAQ or that exceeds the Section 12(g) threshold of equity securities held of record by U.S. residents is eligible to use Forms 40-F and 6-K to satisfy such registration or continuous reporting obligations under the Exchange Act if;
- the issuer is eligible to use Form F-10, or
- the issuer is eligible to use F-9 and the securities to which the reporting obligation relates were registered or could have been registered on Form F-9.
2. Canadian issuers that otherwise would incur an obligation to report under Section 15(d) by registering securities on Form F-7, F8 or F-80 are exempt therefrom if the issuer is exempt from the obligation of Section 12(g) by virtue of Rule 12g3-2(b). As noted above, Rule 12g3-2(b) contemplates the submission of home jurisdiction disclosure documents to the Commission by the issuer. Reporting obligations otherwise arising under Section 15(d) solely as a result of an issuer having filed a registration statement on Form F-7, F-8, F-9, F-10 or F-80 may be satisfied by filing on Forms 40-F and 6-K.
3. The exemption from reporting provide by Rule 12g3-2(b) has been broadened to encompass a Canadian issuer that has I the past eighteen months registered securities under the Securities Act on Form F-7, F-8, F-9, F-10, and F-80.
III. Tender Offers
To encourage such offers to be made to U.S. investors, tender offers that are primarily Canadian in character are able to comply with the provisions of the Williams Act by complying with applicable Canadian tender regulations. New Schedules 13E-4F (issuer tender offer), 14D-1F (third-party or affiliate tender offer), and 14D-9F (recommendation by an issuer, or director or officer of the issuer with respect to a tender offer filed on Schedule 14D-1F) may be used in connection with offers made in both jurisdictions for a class of securities of a Canadian issuer.
A. ELIIGIBILITY REQUIREMENTS
- Offers must be extended to all holders of the class of securities in the United States and Canada upon terms and conditions no less favorable than those offered to any other holder of the same class of securities.
- The transaction must be covered by and not be exempt from substantive provisions of Canadian law governing the terms and conditions of the offer.
- Holders must hold less than 40 percent of the subject securities.
B. U.S. OWNERSHIP CEILING
1. The percentage ceiling on U.S. ownership for cash and exchange offers made pursuant to the MJDS is calculated by reference to securities held by persons with U.S. addresses in the record of the issuer and other specified records. U.S. affiliates of the Canadian company are not excluded from the calculation of the U.S. ownership ceiling.
2. The date used for calculating U.S. ownership is the end of the subject company’s last quarter or, if such quarter terminated within 60 days of the filing date, as of the end of the subject company’s preceding quarter. In addition, the date of the initial bid, in the case of competing bids, will be used for determining MJDS eligibility for all subsequent competing bids. Subsequent competing bids are permitted to look back to the initial commencement date, so long as the initial offer was eligible to use the MJDS, regardless of whether the initial offer took advantage of the MJDS.
3. Third-party bidders, whether solicited or unsolicited, are permitted to rely upon a conclusive presumption that less than the threshold percentage of securities is held by U.S. holders and that the target is a foreign private issuer, absent published trading volume data, disclosure in public filings or actual knowledge to the contrary.
IV. Canadian Regulation
A condition to the use of MJDS to effect cross-border tender and exchange offers is that the offer be subject to a Canadian regulatory scheme governing the conduct of tender offers. Consequently, transactions that are not subject to Canadian tender offer regulation, such as offers for non-convertible debt securities and non-convertible, non-voting preferred stock, would not be eligible for the MJDS. Also, offers exempted from Canadian tender offer regulation likewise would not qualify.
Index
Accountants
See Consents
See Reverse Acquisitions
Basic requirements, 4-1
Change of accountants, 4-8, 6-21, B-2, B-3
Development stage company, 1-7
Foreign auditors, 6-20
Illegal acts, 4-12
Indemnification, 4-2
Independence, 4-1
Preferability letters, 4-5
Principal Auditor, 4-2
Pro forma financial information, 3-8
Qualifications, 4-1
Quarterly financial data, 4-7
Reports:
Accounting principles qualifications 4-4
Changes in accounting principles 4-4, 4-5
Compilation, 4-7
Disclaimer, 4-3
Emphasis of a matter, 4-4
Going concern, 4-4
To be issued report, 4-9
Review reports, 4-6
Schedules, 4-3
Scope limitations, 4-4
Selected financial data, 4-12
Signatures 4-12
U.S. GAAS, 4-1, 4-3, 6-21
Withdrawal, 4-11
Accounting Changes
Audit report, 4-5
General, A-28, A-30
IPO, 4-5
Materiality, 1-21
Restatement, A-26
SAB 11-M [SAB 74], A-28
Accounts Payable, A-8
Accounts Receivable, A-2
Acquired Business
See Business Combination
See Carve-out Financial Statements
See Form 8-K
See Form S-4
See Oil & Gas
See Pro Forma Information
See Real Estate
See Related Party Matters
See Reverse Acquisitions
See Staff Accounting Bulletins — SAB 1-J
See Schedules
Acquisitions by target, 2-2
Age of financial statements, 2-20, 6-5
Carve-out, 2-2
Definition of a business, 2-9
Equity method investments, 2-3
Financial statements previously filed, 2-4, 2-22
Financial statement requirements, 2-1
Foreign target, 2-5, 6-5, 6-9
Form S-4 requirements, 2-7
Hostile tenders, 2-5
Individually insignificant acquirees, 2-18
Probability assessment, 2-4
Pro forma financial information, 2-8, 2-13, 2-19
Proxy materials, 1-3, 2-22
Related businesses, 2-11
Significance tests
Basic tests, 2-10
Contingent consideration, 2-10
Exchange transaction, 2-14
Income averaging, 2-11
Initial public offering, 2-15
Using pro forma information, 2-13
Substantially the same, 2-22
Troubled financial institution, 2-5
Waivers 2-6
Acquisition, Development and Construction Arrangement
See Real Estate Entities
Affiliate
See Related Party Matters
Age of Financial Statements
- day rule, 1-8
Acquiree’s financial statements, 2-20, 6-5
Continuous and shelf offerings, 1-10, 6-6
General partner, 2-35
Employee benefit plans, E-3
Foreign private issuers, 6-3
Holiday or weekend, 1-11
Post-effective amendments, 1-11
Proxy materials, 1-10
Recently organized company, 1-9
Registrant’s financial statements
in a ’33 Act filing 1-8
in a ’34 Act filing, 199
AICPA SEC Practice Section, 4-2, 6-21
Allocation
Of common expenses, 7-2, 7-4
Allowance for Doubtful Accounts, A-3
Annual Report to Shareholders
Age of financial statements, 1-8
Audit report, 4-3
Proxy materials, 1-2
Regulation S-X exemption, 1-17
Asset Disposals
See Dispositions
Assets Sold Under Repurchase Agreements, A-9
Assets Subject to Repurchase Agreements, A-4
Auditor
See Accountants
Balance Sheet
Annual, 1-1
Balance sheet format, A-1
Interim, A-28
Pro forma, 3-4, 3-7, 3-15
Bankruptcy
Accountant, 4-13
Registrant
Post-emergence balance sheet, A-27
SEC reporting, 1-13
Beneficial Conversion Features
Debt, A-8
Preferred stock A-15
Business Combinations
See Acquired Business
See Carve-out Financial Statements
See Form 8-K
See Oil & Gas
See Pro Forma Information
See Real Estate
See Related Party matters
See Reverse Acquisitions
See Staff Accounting bulletins — SAB 1-J
See Schedules
Intangible Assets, A-6
Pooling of Interests, 1-7, 1-18, 2-4, 2-10, C-1
Preacquisition contingencies, 3-10
Carve-Out Financial Statements
See Business Combinations
Statement of cash flows, 2-3
Financial statement requirements, 3-2
Pro forma information, 3-12
Cash and Cash Equivalents, A-2, A-25, A-29
Cash Flow Statement
See Interim Financial Statements
See Statement of Cash Flows
Change in Accounting
See Accounting Changes
Changes in Capitalization — IPO
See Stock Split / Dividend
Distribution to promoter/owner, 7-3
Convertible securities,
Change in Fiscal Year
Fiscal year nine to twelve months, 1-15
Reverse acquisitions, B-3
Transition period defined, 1-15
Transition reports
Domestic registrant, 1-2, 1-15
Foreign registrant, 6-7
Cheap Stock
Disclosures, 7-6
General, 7-6
Pro forma, 3-5
Collateralizations, 2-33
Commitments and Contingencies
See Guarantees
General, A-11, A-29, D-3
Pro forma, 3-10
Recently organized registrant, 105
Common Stock
See Changes in Capitalization — IPO
Disclosure, A-14
Subject to put option by holder, A-13
Compensation Issues
Related party disclosures, 7-1
Cheap stock, 7-6
Contributed services, 7-2
Comprehensive Income
See Statement of Comprehensive Income
Compilation Reports
See Accountants
Consents
Hostile tender offer, 2-5, 4-10
Pooling, 4-11
Use of audit reports, 4-9
Waivers, 4-10
Consolidated Financial Statements
See Unconsolidated Companies
Majority owned subsidiaries, 1-17
Change of method in investment accounting, 1-18
Different fiscal year, 1-18
Dividend restrictions, A-15
Partnerships, 1-19
Pro rata, 6-16
Contingent Consideration
Significant test, 2-10
Pro forma, 3-10
Contingent Stock Purchase Warrants, A-16
Convertible Debt
See Beneficial Conversion Features
See Changes in Capitalization - IPO
Credit Enhancements
Disclosures, 2-34
General, 2-33
Properties subject to net lease, 2-30
Currency
See Foreign Currency
Debt
See Beneficial Conversion Features
See Changes in Capitalization — IPO
Classification, A-3
Covenants, A-8
Defaults, A-8
Disclosure, A-8
Extinguishment, A-9, A-23
Forgiveness of Debt, 7-2
Issue costs, A-7
Pro forma, 3-11
Deferred Costs
Debt issue costs, A-7
General, A-7
Offering costs, A-7
Deferred Credits, A-12
Deferred Taxes
P&L disclosures, A-22
Deposits
See Financial Institutions
Depreciation and Amortization, A-19
Derivatives
See Market Risk Disclosure
Disclosures, A-8, A-23 A-27
Development Stage Companies
See Accountants
See Interim Financial Information
Auditor’s report, A-7
Cumulative data, 1-7
Definition, 1-6
Financial statements, 1-7, 6-13
Discontinued Operations
Presentation issues, A-21
Pro forma income statements, 3-4
Restated financial statements, C-3
Dispositions
See Discontinued Operations
Asset, A-20
Gains/losses, A-19
Measuring significance, 2-14
Proxy materials, 2-36
Pro forma requirements, 3-1, 3-4, 3-11
Distributions to Promoters/Owners at or Prior to Closing of an IPO
See Changes in Capitalization — IPO
See Earnings Per Share
Dividends
See Changes in Capitalization — IPO
See Sub-Chapter S Companies
Declared after balance sheet date, A-14, 3-3, 7-3
Disclosure, A-14
Income/loss applicable to common stock, A-14
Per share disclosure, A-15
Restrictions on, A-15
Earning Before Income Taxes, Depreciation and Amortization (EBITDA)
See Non-GAAP Measures of Financial Performance
Earnings Per Share
Change in accounting, A-26
Changes in capitalization — IPO, 3-15
Disclosure, A-24
Distribution to promoters/owners — IPO, 3-15, 7-4
Exhibit 11, A-24
Pro Forma, 3-6, 3-11 3-14 A-24, A-26, D-6
Redemption of preferred stock, A-14
Shareholder distributions, 7-4
Equity Method Investees
Financial statements:
Combined, 2-32
Requirement for, 2-3, 2-31, 2-33, 5-4
Foreign issuers, 6-6
SB files, 5-6
Summarized financial information, 2-32
Equity Method of Accounting
Changes to/from, 1-18
Disclosures, A-5
Small business issuers, 5-6
Escrow Share Arrangements, 7-6
Extraordinary Items, A-23
Financial Institutions
See Assets Sold Under Repurchase/Agreements
See Assets Subject to Repurchase Agreements
See Form S-4, One bank holdings companies
See Industry Guide 3
See Loans
See SAB 2-A(3)
Balance sheet, A-1
Branch acquisitions, 2-10
Commitments to loan, A-12
Deposits, A-11
Intangible assets, A-6
Interest expense, A-18
Interest income, A-18
Other income and expense, A-21, A-29
Small business issues, 5-1
Financial Instruments
See Investments
Disclosure, A-27
Indexed to, potentially settled in company’s stock, A-13
Put Options and warrants, A-13
Financial Statements
See Acquired Business
See Age of Financial Statements
See Pro Forma Information
See Tender Offers
Foreign, 6-2
Periodic reporting, 1-12
Registration statements/proxies, 1-1
Fiscal Year
See Change in Fiscal Year
Differing, 1-18, 2-32, 3-14
General, 1-20
Length 1-15
Forecast, 3-1, 3-13, 3-17
Foreign Acquired Business, 2-5, 6-5, 6-9
Foreign Currency
Canadian, 6-2
Change in reporting currency, 6-17
Currency of measurement, 6-16