2.2 Identifying a Probable Business Acquisition

As discussed in Sections 2.4 and 3.4, for registration statements and in certain proxy statements, Rules 3-05 and 3-14, respectively, may require (1) presentation of financial statements and (2) pro forma financial information for a business that has not yet been acquired but whose acquisition is probable. While the term “probable” is not defined in Rule 3-05 or Rule 3-14, the SEC offers the following guidance in Codified Financial Reporting Release Section 506.02(c)(ii):

Guidance as to when consummation of a transaction is probable cannot be given because such a determination is dependent upon the facts and circumstances. In essence, however, consummation of a transaction is considered to be probable whenever the registrants’ financial statements alone would not provide investors with adequate financial information with which to make an investment decision.

Note that the SEC’s guidance on the term “probable” is not necessarily the same as that in ASC 450 under U.S. GAAP (i.e., ASC 450-20 explains that a future event or events are probable if “[t]he future event or events are likely to occur”).

The presence of the following factors may be relevant in the determination of whether an acquisition is probable for SEC reporting purposes:

A signed definitive agreement or letter of intent.
Approval from the board of directors or shareholders of the companies.
Submission of the terms of the proposed transaction to appropriate regulatory agencies for approval.
Negotiations that are substantially complete.
An arrangement that financial penalties will be imposed if the acquisition is not consummated.
A public announcement of a business acquisition.

Other factors may be present, and an acquisition may still be considered probable when none of the above factors exist if the registrant’s financial statements alone would be inadequate for investment decision-making purposes. Similar considerations apply in the assessment of whether a business acquisition is probable as a result of events other than a purchase transaction (e.g., veto rights of noncontrolling interest lapse such that a registrant obtains control over an entity).

It is the responsibility of the registrant to assess probability. When performing this assessment, a registrant should carefully evaluate all facts and circumstances and consider seeking advice from SEC legal counsel.

Example 2-1

As indicated in a letter of intent, Registrant A is expected to acquire Company B. The significance of the acquisition to A was estimated to exceed the 50 percent level. The letter of intent was not a definitive merger agreement, and both companies made public announcements regarding the acquisition. On the basis of an evaluation of these facts and circumstances, A’s management determined that the acquisition of B by A was probable.

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This SEC Reporting Interpretations manual provides comprehensive guidance; however, the manual does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.