2.6 Form and Content of Acquiree Financial Statements

In evaluating the “operating segment” condition above, a registrant should consider the definition of that term in ASC 280 or IFRS 8, as applicable. The operating segment condition for abbreviated financial statements applies to all acquired businesses, whether public or private. Accordingly, a company may have to evaluate whether the acquired entity would qualify as an operating segment under ASC 280, if relevant.

There may be circumstances in which it is challenging for a registrant to make the relevant allocations needed to provide carve-out financial statements. If the qualifying conditions for abbreviated financial statements have not been met but a registrant nevertheless believes that such statements would provide sufficient disclosure for investors, the registrant may request a waiver from the SEC staff under Rule 3-13.

Note also that while a registrant generally may not use abbreviated financial statements for an acquiree that has been identified as its predecessor, the SEC staff may consider requests under Rule 3-13 to provide such statements (e.g., when full successor financial statements have been presented in the initial registration statement for some periods). For additional guidance on Rule 3-13 waivers and prefiling letter requests, see Section 2.5 of Deloitte’s Roadmap Initial Public Offerings.

The title of the statement of revenues and expenses must be appropriately modified to indicate that it omits certain expenses. Further, paragraph 2935.9 of the FRM notes that the statement of revenues and expenses must include all revenues and direct expenses associated with the revenue-producing activities of the assets acquired and liabilities assumed. Typically, the only costs excluded are those not directly connected to the revenue producing activity. For example, all related costs incurred by or on behalf of the acquiree for the periods required to be presented must include costs of sales or services, selling, distribution, and marketing as well as general and administrative expenses, depreciation and amortization, and R&D expenses. As noted in the response to Question 2 of SAB Topic 1.B, if the abbreviated financial statements include a reasonable allocation of costs directly related to the revenue producing activity incurred by the seller on behalf of the business sold, the footnotes should contain management’s assertion that the method used to allocate those costs is reasonable. However, the registrant may exclude allocated corporate overhead expenses, certain interest expense (i.e., interest expense for debt that will not be assumed by the registrant), and income tax expense (collectively, “omitted expenses”). The auditor’s report on these financial statements would include an emphasis-of-matter paragraph indicating the special purpose and incomplete nature of the presentation of the results of operations, as discussed in AICPA SAS 122 (AU-C Section 805.24).

In accordance with Rule 3-05(e)(2)(iii), the footnotes to the abbreviated financial statements should include the following disclosures: (1) the nature of the omitted expenses and why they were omitted, (2) an explanation of why it is impracticable to prepare financial statements that include the omitted expenses, and (3) a statement that the financial statements do not indicate the acquiree’s future financial condition or operations because the omitted expenses have been excluded.

If a registrant presents abbreviated financial statements, it is not required to provide a statement of cash flows. However, information (if available) about the acquiree’s operating, investing, and financing cash flows must be included in the footnotes to the financial statements.

As discussed in paragraph 2935.11 of the FRM and in a manner consistent with Rule 3-05(f), a registrant may present abbreviated financial statements if the oil and gas acquiree generates substantially all of its revenues from oil- and gas-producing activities as defined in Regulation S-X, Rule 4-10(a)(16), and meets the qualifying conditions described in Section 2.6.4.1. Further, as noted in paragraph 2935.12 of the FRM, such statements must also include footnote disclosures (see Section 2.6.4.2) as well as the industry-specific disclosures required by ASC 932-235-50-3 through 50-11 and ASC 932-235-50-29 through 50-36. A registrant may provide the industry-specific disclosures as unaudited supplemental information for each annual period it presents for the oil and gas acquiree.

Note that the registrant does not have to provide an abbreviated statement of assets acquired and liabilities assumed.

 

Connecting the Dots

Before issuance of the SEC’s May 2020 final rule, an oil and gas acquiree that met certain conditions outlined in paragraph 2935.11 of the FRM was not required to obtain preclearance from the SEC to present abbreviated financial statements. However, the qualifying conditions under Rule 3-05(e) (see Section 2.6.4.1 above) differ from the conditions in the FRM and may be more difficult to satisfy (e.g., assets and revenue of the oil and gas acquiree must represent 20 percent or less of the seller’s assets and revenue). Therefore, preclearance from the SEC under Rule 3-13 to present abbreviated financial statements for certain oil and gas acquirees may now be necessary in accordance with Rule 3-05(f). For additional guidance on Rule 3-13 waivers and prefiling letter requests, see Section 2.5 of Deloitte’s Roadmap Initial Public Offerings.