2.6 Form and Content of Acquiree Financial Statements

A registrant generally prepares preacquisition financial statements of the acquiree on the same basis as if the acquiree were a registrant, except that it uses the acquiree’s level of significance to determine the number of years of audited financial statements to present. Although the determination of such periods is based on significance, the form and content of the acquiree’s financial statements must adhere to the relevant requirements of Regulation S-X and SAB topics (e.g., classification of equity that is subject to mandatory redemption requirements or whose redemption is outside the control of the registrant under Regulation S-X, Rule 5-02.27) as well as the guidance in U.S. GAAP (or, if the acquiree is a foreign entity, IFRS Accounting Standards; see Section 2.11). Supplemental schedules under Regulation S-X, Articles 5 and 12, are not required.

2.6.1 Accounting Standards, Disclosures, and Adoption Dates

If the acquiree is not a public entity, the disclosures under U.S. GAAP that apply only to public companies do not have to be provided. For example, disclosures about the following would not be required in such a case:

Segment information if the acquiree does not meet the definition of a public entity under ASC 280-10-20.
Certain information about employers’ pensions and other postretirement benefits (see ASC 715-20-50-5) if the acquiree meets the definition of a nonpublic entity under ASC 715-20-20.
Earnings per share if the acquiree does not have “publicly held common stock or potential common stock” in accordance with ASC 260-10-05-1 and as further described in ASC 260-10-15-2.

Acquiree financial statements that are included in a filing under Rule 3-05 meet the definition of a public business entity (PBE) in U.S. GAAP.2 As stated in the ASC master glossary, a business entity is a PBE if it is required by the SEC “to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing)” (emphasis added). Accordingly, such acquiree financial statements must adhere to the PBE requirements in U.S. GAAP.

In accordance with U.S. GAAP, entities that meet the definition of a PBE are not eligible to elect certain accounting and reporting alternatives in U.S. GAAP, including those developed by the Private Company Council and subsequently endorsed by the FASB. Therefore, the effects of any previously elected private-company accounting alternatives cannot be applied in the acquiree financial statements under Rule 3-05 and would have to be eliminated from them.

In addition, companies that are not PBEs are permitted to use certain practical expedients. For example, a non-PBE may use the risk-free rate as its discount rate when applying ASC 842. At the October 2020 CAQ SEC Regulations Committee joint meeting with the SEC staff, the SEC staff discussed a situation in which (1) an acquired company has adopted ASC 842 by using the risk-free-rate practical expedient and (2) a registrant must evaluate the acquired company for significance and, in some cases, provide this company’s separate financial statements. The SEC staff indicated that it would not object if a registrant uses financial statements that reflect the risk-free-rate practical expedient to measure significance, since doing so would result in greater ROU assets and, thus, would yield a higher measure of significance when the asset test is performed. The staff noted that the risk-free-rate practical expedient should be “the only difference between those financial statements and a PBE set of financial statements” but clarified that financial statements provided in accordance with Rule 3-05 are PBE financial statements and thus may not reflect this expedient. Therefore, before providing such financial statements in accordance with Rule 3-05, a registrant would need to assess whether an adjustment to the PBE rate is material and must be revised.

Further, in certain accounting standards, the adoption dates and disclosure requirements for PBEs differ from those for non-PBEs. If a standard defines a public entity as a PBE with respect to the application of that standard’s transition requirements, the acquiree’s financial statements that must be provided under Rule 3-05 are required to conform to the PBE adoption dates and disclosure requirements. Therefore, an acquiree that does not otherwise meet the definition of a PBE (except for its requirement to include its financial statements or financial information in another entity’s filings with the SEC) may have to adopt certain accounting standards earlier than planned and provide the incremental disclosures required for PBEs. However, in November 2019, the FASB issued ASU 2019-10, which introduced a “two-bucket” framework for staggering the effective dates of certain major ASUs. Under this framework, the application of adoption dates is grouped as follows:

Bucket 1 — PBEs that are SEC filers (as defined in U.S. GAAP), excluding SRCs (as defined by the SEC).
Bucket 2 — All other entities, including SRCs, other PBEs that are not SEC filers, private companies, not-for-profit organizations, and employee benefit plans.

Entities that include or are required to include financial statements or financial information in other entities’ filings (e.g., financial statements or financial information that must be provided under Rule 3-05) are examples of “PBEs that are not SEC filers.” Therefore, the Bucket 2 adoption dates would be used for the financial statements of an acquiree. See Deloitte’s November 19, 2019, Heads Up for more information about ASU 2019-10 and the two-bucket framework.

Management should be mindful of other accounting standards in which the adoption dates for PBEs and non-PBEs differ. While EGCs may not be required to adopt certain accounting standards by using the PBE effective dates,3 this accommodation does not apply to acquiree financial statements under Rule 3-05.

Changing Lanes

In December 2023, the FASB issued ASU 2023-09, which establishes new income tax disclosure requirements in addition to modifying and eliminating certain existing requirements. The ASU replaces the term “public entity” throughout ASC 740 with the term “public business entity” as defined in the ASC master glossary. Thus, the enhanced disclosure requirements set forth by the ASU are applicable for acquiree financial statements provided under Rule 3-05. The ASU’s amendments are effective for PBEs for fiscal years beginning after December 15, 2024. See Deloitte’s May 20, 2025, Heads Up for more information about the disclosure requirements established by ASU 2023-09.

Also, when preparing pro forma financial statements under Article 11, a registrant must conform the acquiree’s date and method of adoption of new accounting standards to those of its own. See Chapter 4 for additional information regarding the pro forma requirements.

In the evaluation of adoption dates of new standards for a nonpublic target that is an accounting acquirer in a reverse merger with a public operating company, the use of non-PBE adoption dates for premerger financial statements of the target included in a related Form S-4, proxy statement, or Form 8-K will vary depending on the facts and circumstances. If the registrant, target, and combined entity after the merger all qualify as EGCs and the legal acquirer elected to defer adoption, the target may continue with non-PBE adoption dates in the related filings. If the target would not qualify as an EGC, if the postmerger entity would not qualify as an EGC, or if both scenarios apply, non-PBE adoption dates would also be permitted in the Form S-4 or proxy. However, PBE adoption dates would have to be used in the target’s financial statements that must be filed in the amended Form 8-K that is due 71 calendar days after the initial Form 8-K has to be filed. This is because the financial statements of the target become those of the registrant (predecessor financial statements) upon consummation of the merger.

Connecting the Dots

Registrants that apply the non-PBE adoption dates for the financial statements included in the Form S-4 but would be required to apply PBE adoption dates in the amended Form 8-K must ensure that they have provided robust and comprehensive transition disclosures under SAB Topic 11.M (SAB 74) in the footnotes to their financial statements and MD&A to disclose the expected effects of the new standard on their financial statements in the period of adoption.

See the highlights of the March 2021 and March 2022 CAQ SEC Regulations Committee joint meetings with the SEC staff. Also see Sections 2.4.4.2 and 2.4.5.2 for a discussion of audit requirements in this circumstance.

2.6.2 Audit Requirements

When audited financial statements of an acquiree are provided under Rule 3-05, the audit may be performed in accordance with AICPA standards (the public accounting firm does not need to be registered with the PCAOB). However, compliance with PCAOB standards is required when an acquired company is identified as a predecessor (e.g., an accounting acquirer in a reverse acquisition [see Sections 2.4.4.2 and 2.4.5.2] or a target in a SPAC transaction [see Section 2.4.6]).

2.6.3 Interim Financial Statements

A registrant that must provide an acquiree’s interim financial statements under Rule 3-05 should ensure that the statements adhere to the form and content requirements in Article 10. While under SEC regulations, a registrant does not have to audit or review such interim financial statements, the registrant should consider whether there are other reasons to do so, such as in circumstances in which an underwriter requires an independent auditor to review the interim information for due-diligence or comfort-letter purposes.

2.6.4 Acquisition of a Portion of an Entity

A registrant sometimes acquires only certain parts of an entity. If those parts represent substantially all of the entity, the registrant generally must provide full audited financial statements of the entire entity because there is a presumption that such statements convey the acquired business’s complete financial history. In these circumstances, any of the assets, liabilities, and operations not acquired by the registrant would be eliminated in the pro forma financial statements.

If the acquired parts of an entity do not represent substantially all of the entity, financial statements of the entire entity may not be useful. In this case, the audited financial statements should represent only the acquired parts of the entity and should exclude the operations retained by the seller. Such financial statements — often referred to as carve-out financial statements — include (1) balance sheets; (2) statements of operations, comprehensive income, and cash flows and an analysis of changes in stockholders’ equity (which may be in a note or separate statement) for the relevant periods; and (3) related financial statement disclosures.

There may be circumstances in which full financial statements or carve-out financial statements may not be practicable to prepare, such as when the acquiree is a small portion or a product line of a much larger business and separate financial records were not maintained. In such cases, the SEC staff allows registrants to file abbreviated financial statements to comply with Rule 3-05 provided that certain qualifying conditions (see Section 2.6.4.1) and presentation and disclosure requirements (see Section 2.6.4.2) are met. In addition, as further discussed in Section 2.6.4.3, Rule 3-05(f) allows a registrant to provide a form of abbreviated financial statements for an acquired or to be acquired business that includes significant oil- and gas-producing activities.

See Deloitte’s Roadmap Carve-Out Financial Statements for more information. For a discussion of the performance of the significance tests when only abbreviated financial statements are available, see Section 2.3.5.3.

2.6.4.1 Qualifying Conditions for Use of Abbreviated Financial Statements

Under Rule 3-05(e), registrants may file abbreviated financial statements for an acquiree when all of the following conditions are met:

As of and for the most recently completed fiscal year, the assets and revenue (after intercompany eliminations) of the acquiree represent 20 percent or less of the assets and revenue of the seller.
The acquiree financial statements have not been previously prepared.
The acquiree was not a separate entity, subsidiary, operating segment, or division during the periods for which acquiree financial statements would be required.
The seller did not maintain the “distinct and separate accounts” that would be necessary for the registrant to present financial statements that include the omitted expenses, and the preparation of such financial statements would be impracticable.

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.

2.6.4.2 Presentation and Disclosure Requirements for Abbreviated Financial Statements

Abbreviated financial statements typically consist of a statement of (1) revenues and expenses (in lieu of a full statement of operations), (2) assets acquired and liabilities assumed (in lieu of a full balance sheet), and (3) footnotes to the abbreviated financial statements.

The title of the statement of revenues and expenses must be appropriately modified to indicate that it omits certain expenses. Further, the statement of revenues and expenses must include all direct 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.

2.6.4.3 Abbreviated Financial Statements for an Oil and Gas Acquiree

Rule 3-05(f) permits the financial statements of an acquired or to be acquired business that includes significant oil- and gas-producing activities (an “oil and gas acquiree”) to consist only of abbreviated statements of revenues and expenses and to omit costs that are not comparable to the proposed future operations. Such statements may therefore exclude the omitted expenses described in Section 2.6.4.2 as well as depreciation, depletion, and amortization.

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. 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 Section 2065.11 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.

Footnotes

Also see Section 8.1 of Deloitte’s Roadmap Business Combinations and Section 3.2 of Deloitte’s Roadmap Initial Public Offerings.

EGCs should refer to Section 10230 of the FRM for more information.

Confidential and Proprietary — for Use Solely by Authorized Personnel

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.