2.2 Identifying a Probable Business Acquisition
This Roadmap does not reflect updates to the FRM made
after May 2025. See Preface for details.
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 presentation of (1) 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.