2.1 Acquisition of a Business

Rule 11-01(d) also provides several attributes that a registrant should consider in determining whether an acquired entity is a business, including:

• Whether the nature of the revenue-producing activity will generally remain the same after the acquisition.
• Whether any of the following attributes will remain after the acquisition: the physical facilities, employee base, market distribution system, sales force, customer base, operating rights, production techniques, or trade names.

The SEC staff’s analysis of whether an acquisition meets the definition of a business focuses primarily on whether the nature of the revenue-producing activity generally remains the same after the acquisition. If the revenue-producing activity continues after the acquisition, it is presumed that a business was acquired and that prior financial information would be relevant to the understanding of future operations. However, it is possible for an acquiree that does not have revenue to still meet the definition of a business under Rule 11-01(d). At the 2019 AICPA Conference on Current SEC and PCAOB Developments, the SEC staff observed that the underlying principle in the definition of a business for SEC reporting purposes is the determination of whether there is sufficient continuity of the acquired entity’s operations before and after the transactions, noting that revenue is just one factor for a registrant to consider. The staff emphasized that an acquired business that does not have revenue may still meet the definition of a business under Article 11.

As indicated above, under Rule 11-01(d) there is a presumption that a “separate entity, a subsidiary, or a division is a business.” However, registrants should be mindful that an acquisition can take many forms and that such forms typically will not affect the determination of whether the acquisition is a business. For example, the transaction may involve acquiring an entity’s stock or acquiring and assuming certain of its assets and liabilities. Either form can constitute the acquisition of a business.

We understand that the following types of acquisitions may also meet the definition of a business:

• An investment accounted for under the equity method — According to Rule 3-05(a)(2)(ii), the definition of a business acquisition includes the purchase “of an interest in a business accounted for by the registrant under the equity method or, in lieu of the equity method, the fair value option.” This also includes the acquisition of a joint venture investment that is accounted for under the equity method.
• A working interest in an oil and gas property — The acquisition of a working interest in an oil and gas property is considered to be a business for SEC reporting purposes. However, we understand that the acquisition of nonproducing oil or gas properties is generally not considered to be the acquisition of a business under Rule 11-01(d). In addition, registrants should consider Rule 3-05(f) when evaluating the form and content of financial statements of a business that includes oil and gas producing activities. See Section 2.6 for further discussion of abbreviated financial information.
• Customer deposits at bank branches — The acquisition of customer deposits at bank branches may meet the definition of a business if the revenue-producing activity generally remains the same after the acquisition (e.g., if the historical revenue-producing activity can be reasonably traced to management or to the customer and deposit base of the acquired branches).
• Blocks of insurance policies acquired by an insurance company and liabilities assumed in reinsurance transactions — The acquisition of blocks of insurance policies or the assumption of policy liabilities assumed in reinsurance transactions may meet the definition of a business if the right to premiums associated with such assets and liabilities continues after the acquisition (e.g., the right to future premiums may indicate continuity of historical revenues). In addition, the continuity between historical investment income and the related assets acquired may suggest that there is continuity of operations.

Further, a cost center (i.e., part of a company that incurs internal expenses but does not generate revenues) or an entity that has not commenced planned principal operations, or has commenced planned principal operations but has not generated significant revenue, may also meet the definition of a business.

Because the definition of a business for SEC reporting purposes is not the same as that for U.S. GAAP accounting purposes, it is possible for the determination of what constitutes a business under Rule 11-01(d) to differ from that under ASC 805-10. See Section 2.1.2 for more information.

In circumstances in which it may not be clear whether an acquisition meets the definition of a business under Rule 11-01(d), a registrant may consider discussing its facts and circumstances with the SEC staff or preclearing its conclusion with the SEC’s Office of the Chief Accountant of the Division of Corporation Finance (CF-OCA). As part of such preclearance, it may also be useful for the registrant to consider whether the information provided in financial statements of the acquiree, if required, would be material or relevant to investors.

A registrant is not required to provide financial statements for an acquisition of assets or an assumption of liabilities that does not meet the definition of a business. However, certain disclosures about significant asset acquisitions may be required in a Form 8-K. See Section 2.1.3 for further discussion.

To determine whether to account for an acquisition as a business combination or an asset acquisition, an entity applies the U.S. GAAP accounting guidance in ASC 805 on the definition of a business. The guidance in ASC 805-10 requires the entity to perform an initial “screen” and focuses on whether inputs, processes, and outputs have been acquired. In performing the screen, entities assess whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the group of acquired assets or assumed liabilities (i.e., the set) is not a business. If not, the entity determines whether the set is a business by further evaluating a “framework” to determine whether an input and a substantive process were acquired.

By contrast, a registrant applies Rule 11-01(d) on the definition of a business to determine whether the financial statements of an acquired or to be acquired business must be filed with the SEC. Rule 11-01(d) does not include a “screen” requirement but instead focuses on whether the nature of the revenue-producing activities or other attributes will remain the same after the acquisition. It also indicates that “sufficient continuity of the acquired entity’s operations” after the acquisition is a key factor in the determination of whether the acquisition is a business for SEC reporting. If such continuity exists, presentation of historical financial statements is presumed to be material to an understanding of future operations.

As discussed in Section 2.1.1, it is possible for a registrant’s determination of what constitutes a business to differ under the SEC’s and FASB’s requirements. Accordingly, a registrant must perform a separate evaluation under Rule 11-01(d) to determine its SEC reporting requirements. At the 2019 AICPA Conference on Current SEC and PCAOB Developments, the SEC staff acknowledged that in light of the recent changes in the definition of a business under ASC 805, there may be more instances in which an acquisition does not meet the definition of a business for accounting purposes but qualifies as a business for SEC reporting purposes. The staff stated that the SEC does not intend to change the definition of a business to align with the U.S. GAAP definition, explaining that from an SEC reporting perspective, the objective is to evaluate whether financial statements of the acquired business would be useful for investment decision-making purposes.

For example, if the acquisition of assets is significant (as determined by applying the significance tests or thresholds discussed below), a registrant may need to clearly describe in a Form 8-K the assets acquired and the anticipated effects on the registrant’s financial condition as well as indicate that the transaction did not constitute the acquisition of a business. If disclosing that information would be material to investors, the registrant should consider including limited pro forma balance sheet information reflecting the effects of the asset acquisition (or include a narrative discussion, for example, for adjustments that are easily understood).

In addition, the significance tests and thresholds that trigger the filing requirements for a Form 8-K for an asset acquisition differ from those under Rule 3-05. For example, in accordance with Instruction 4 of Item 2.01, an asset acquisition is deemed significant if:

Further, as discussed in Section 2.4.1, the initial Form 8-K must be filed within four business days after consummation of the acquisition. If material, the pro forma balance sheet information must be included in the initial Form 8-K. The 71-calendar-day extension under Form 8-K, Item 9.01, that is available for a business acquisition is not available for an asset acquisition.