2.9 Individually Insignificant Acquisitions

Under Rule 3-05, the financial statements of acquirees that do not exceed the 20 percent significance level are not required. However, when filing a registration or proxy statement, a registrant must evaluate the aggregate significance of the following categories:

Category 1 — Probable acquisitions that do not exceed 50 percent.
Category 2 — Consummated acquisitions that exceed 20 percent but do not exceed 50 percent and whose financial statements do not yet have to be filed (i.e., within the 75-day grace period; see Section 2.4.2.1.1).
Category 3 — Any acquisitions consummated since the end of the registrant’s most recently completed fiscal year presented that do not exceed 20 percent.

The acquirees in all three categories above are commonly referred to as individually insignificant acquirees, and if their aggregate significance exceeds 50 percent, the registration or proxy statement must include:

The audited preacquisition financial statements for the most recent fiscal year and interim period for any acquirees in categories 1 and 2 above that exceed 20 percent significance and have not yet been filed.
Pro forma financial information to reflect the aggregate effects of all individually insignificant acquisitions (i.e., all three categories).

Connecting the Dots

Although a registrant is only required to provide separate financial statements for certain individually insignificant acquirees, it must still obtain sufficient historical financial information about all such acquirees to prepare the required pro forma financial information when aggregate significance exceeds 50 percent.

The table below illustrates these requirements, which refer to categories 1 through 3 (as defined above) and note that a registrant must combine the categories of acquired or to be acquired businesses. For fields marked “Required,” a registrant must provide separate financial statements in a registration or proxy statement for that acquiree because it is individually significant. Therefore, a registrant is not required to include these acquirees when determining the impact of individually insignificant acquirees. When evaluating acquisitions, if two or more of the acquirees are related businesses, the registrant must apply the guidance in Section 2.7 before applying the guidance in this section.

Significance	Business Acquisition Completed 75 Days or More Before Filing Registration/Proxy Statement	Business Acquisition Completed Less Than 75 Days Before Filing Registration/Proxy Statement	Probable Acquisition
Does not exceed 20 percent	Category 3	Category 3	Category 1
Exceeds 20 percent but not 50 percent	Required	Category 2	Category 1
Exceeds 50 percent	Required	Required	Required

2.9.1 Filings for Which the Financial Statements of Individually Insignificant Acquirees Are Required

The requirement to provide financial statements of individually insignificant acquirees applies only to registration and proxy statements. With respect to delayed or continuous offerings (e.g., an effective shelf registration statement — see Securities Act Rule 415), a registrant should also consider whether any individually insignificant acquisitions occurring after the effective date of the registration statement, when combined with previously aggregated individually insignificant acquirees before the effective date, may be of such significance, in the aggregate, that an amendment is necessary (i.e., the acquisitions represent a fundamental change). See Section 2.4.3 for further discussion.

In a Form S-4, a registrant that has included the financial statements of a target company does not need to include that target company when applying the aggregation guidance in this section since the Form S-4 filing already contains the target company’s financial statements (see Section 2.4.4 for a discussion of the financial statement requirements for a target company in a Form S-4 filing). However, the registrant would still need to comply with Rule 3-05 for any other individually insignificant acquirees (unrelated to the target company).

Financial statements of individually insignificant acquirees are not required in a Form 8-K. However, a registrant may voluntarily provide the financial statements of individually insignificant acquirees in a Form 8-K if it expects to incorporate them by reference into a future registration or proxy statement. In certain acquisitions of related businesses, a Form 8-K may be required. See Section 2.7 for further discussion.

Financial statements of individually insignificant acquirees are not required in an annual or quarterly report filed on a Form 10-K or Form 10-Q.

2.9.2 Period Over Which a Registrant Must Evaluate Individually Insignificant Acquirees

A registrant must aggregate the financial information of any individually insignificant acquirees after the date on which its latest audited annual balance sheet is required to be filed with the SEC through the effective date of the registration statement or mailing date of the proxy statement. As a result, the filing could include consummated and probable acquisitions over more than a 12-month period, as illustrated in the examples below.

Example 2-35

Registrant A consummated the following acquisitions of individually insignificant businesses:

Company B on March 18, 20X3.
Company C on August 12, 20X3.
Company D on December 21, 20X3.
Company E on January 10, 20X4.
Company F on February 4, 20X4.

All six entities have a December 31 fiscal year-end, and B, C, D, E, and F are not related businesses. In addition, the acquisitions of B, C, D, E, and F did not exceed 20 percent significance on an individual basis.

Registrant A plans to file a registration statement on February 10, 20X4. The most recent audited annual financial statements filed with the SEC for A as of February 10, 20X4, are for the year ended December 31, 20X2.

Given these facts, A must aggregate the financial information of B, C, D, E, and F when performing the income, asset, and investment tests.

Example 2-36

Assume the same facts as in the previous example, except Registrant A plans to file a registration statement on April 23, 20X4.

The most recent audited annual financial statements filed with the SEC for A as of April 23, 20X4, are for the year ended December 31, 20X3.

Given the facts in this example, A must aggregate the financial information of only Companies E and F when performing the income, asset, and investment tests.

Note that in both examples, A must also include in the significance tests any additional individually insignificant businesses acquired or to be acquired after the date the registration statement is initially filed through the effective date or mailing date of the registration or proxy statement, respectively.

2.9.3 Financial Statements Used to Measure Significance for Individually Insignificant Acquirees

A registrant must perform the aggregate significance tests for individually insignificant acquirees when it files a registration or proxy statement and must use the most recent preacquisition annual financial statements required as of the filing date.

Note that these financial statements may not be the same as those used in the calculation of individual significance performed as of the date of each acquisition. That is, at the time the registration or proxy statement is filed with the SEC, the registrant must use the more recent financial statements when recalculating significance if (1) the registrant or individually insignificant acquirees have filed more recent annual financial statements than those used to determine individual significance or (2) the registrant’s financial statements for the same fiscal year have been retrospectively adjusted (e.g., a change in accounting principle or a discontinued operation). Such a recalculation could result in a higher or lower level of significance than the amount calculated when the acquisition was consummated. This recalculation does not change a registrant’s initial reporting obligation under the Exchange Act. That is, if the significance of an individual acquiree subsequently exceeds 20 percent as a result of the recalculation, the registrant is not required to file financial statements of the individual acquiree on a Form 8-K, Item 2.01(f), since it did not have to do so as a result of the initial calculation of individual significance. However, such recalculated significance would be considered in the aggregate with other acquired or to be acquired businesses for the purpose of a registration statement filing and would need to be filed separately if the aggregated significance exceeds 50 percent.

The same concept applies as of the date of effectiveness of a registration statement or the mailing of a proxy statement. That is, at the time the registration statement is declared effective or the proxy statement is mailed, if the registrant or the individually insignificant acquirees have filed more recent annual financial statements than those required to be filed as of the filing date of the registration or proxy statement, the registrant must use the more recent financial statements when recalculating significance.

Example 2-37

Registrant A consummated the acquisitions of Companies B and C, which are not related businesses, during 20X4 on the dates shown in the table below. The fiscal year-end of the three entities is December 31.

Registrant A is a large accelerated filer that filed its December 31, 20X3, Form 10-K when due (March 1, 20X4). Further, the acquisitions of B and C were not individually significant, and A intends to file a registration statement on December 1, 20X4.

The acquisition dates and the level of significance determined when each acquiree was tested for significance individually, as well as the financial statements used to calculate the individual significance, are as follows:

To calculate the aggregate significance of B and C when preparing the December 1, 20X4, registration statement, A must use B’s and C’s preacquisition financial statements for the same fiscal year as A’s (i.e., the most recent preacquisition annual financial statements required to be filed with the SEC as of December 1, 20X4). That is, A must use the December 31, 20X3, financial statements for A, B, and C when calculating the aggregate significance of B and C.

The financial statements used in the calculation of the aggregate significance for the December 1, 20X4, registration statement are different from those used to calculate the individual significance of B as of the acquisition date. Accordingly, the level of significance may be higher or lower than the amount calculated as of the acquisition date. Registrant A must comply with the above guidance through the effective date of the registration statement.

Connecting the Dots

Future events may trigger a requirement to provide audited financial statements for an acquiree that was initially determined to be individually insignificant when it was acquired (i.e., acquiree financial statements were not required). Therefore, when evaluating the requirements for an acquiree, a registrant should also consider its strategic plans for any potential future acquisitions. This is particularly important when a new registration statement is filed and the registrant or the individually insignificant acquiree are required to use more recent annual financial statements than those used to determine individual significance. Planning for such events will help avoid a circumstance in which a registrant is unable to secure the required acquiree financial statements long after the acquisition is consummated.

2.9.4 Performing the Tests of Significance for Individually Insignificant Acquirees

To determine the significance of individually insignificant acquirees, a registrant must perform the investment, income, and asset tests in the aggregate (see Section 2.3 for a discussion of the significance tests). When performing the asset test in the aggregate, the registrant uses the total (combined) assets of the individually insignificant acquirees. Additional considerations apply to the aggregate investment and income tests, as discussed in the sections below.

2.9.4.1 Investment Test for Individually Insignificant Acquirees

The investment test should be performed for each acquiree, and the sum of each test should be used to evaluate significance of the individually insignificant acquirees. If the acquisitions have different announcement or agreement dates, a different AWMV may need to be used for each of them. In addition, the registrant must include the aggregate impact of real estate acquirees (see Section 3.3) when determining the significance of individually insignificant acquirees. See Example 2-38.

2.9.4.2 Income Test for Individually Insignificant Acquirees

For both the income and revenue components of the income test, a registrant should treat individually insignificant acquirees as a single business acquisition and use the aggregate pretax income or loss from continuing operations and aggregate revenue for all such acquirees (see Example 2-38). If the registrant reported either (1) a pretax loss and the individually insignificant acquirees all reported pretax income or (2) pretax income and the individually insignificant acquirees all reported a pretax loss, the registrant should use the absolute value of this loss when performing the income test.

In addition, there may be situations in which one or more, but not all, individually insignificant acquirees have a loss in the most recent fiscal year used in the test. Rule 3-05(b)(2)(iv) indicates that in such situations, acquirees “reporting losses must be aggregated separately from those reporting income.” When performing the income test, a registrant must separate the acquirees into two groups: those that have pretax income (income group) and those that have pretax losses (loss group). Absolute values of the pretax loss of the loss group should not be aggregated with the pretax income of the income group in the significance determination. Rather, a registrant must use the (1) aggregated pretax income and aggregated revenue for the income group when performing the income test for the income group and (2) the aggregated absolute value of the pretax loss and aggregated revenue for the loss group when performing the income test for the loss group. See Examples 2-39 and 2-40.

The revenue component does not apply if either the registrant or the acquirees did not have material revenue for the two most recently completed fiscal years. In making this determination, a registrant should consider the income and loss groups separately (i.e., assess materiality of revenues for the income group relative to the income group and separately assess the materiality of revenues for the loss group relative to the loss group). Accordingly, the revenue component may apply to (1) both the income and loss groups, (2) neither the income group nor the loss group, or (3) the income group only and not the loss group or vice versa. If the revenue component does not apply to either group, a registrant may be able to use its own five-year average of pretax income rather than the amount for the most recently completed fiscal year to perform the evaluation. See Section 2.3.4 for further discussion. If the revenue component applies to either group, a registrant must consider both the income and revenue components and would apply the disclosure requirements discussed in this chapter only if it finds that the results of both components for a single group (i.e., the income group or the loss group) exceed 50 percent significance. If either the income group or the loss group exceeds 50 percent significance, the disclosure requirements discussed in this chapter apply to all acquirees (i.e., both the income group and the loss group). See Example 2-41.

In certain situations, it may be appropriate for the registrant to use pro forma financial information filed for a previous significant acquisition when performing the significance tests for the individually insignificant acquirees. See Section 2.3.1.2 for additional information.

Example 2-38

Registrant A consummated the acquisitions of Companies B, C, and D during 20X4 on the dates shown in the table below. In addition, A has determined that its acquisition of Company E is probable (see Section 2.2) as of September 5, 20X4, and it intends to file a registration statement on that date. All five entities have a December 31 fiscal year-end. The most recent preacquisition audited annual financial statements required to be filed with the SEC for A as of September 5, 20X4, are for the year ended December 31, 20X3.

The acquisitions of B, C, and D were not individually significant; however, the probable acquisition of E is individually significant as of September 5, 20X4 (i.e., it is between 20 and 50 percent significant). Registrant A has not yet filed any preacquisition financial statements or pro forma information.

Registrant A’s total assets as of December 31, 20X3, were $100 million, and its pretax income from continuing operations and revenue was $15 million and $36 million, respectively, for the year ended December 31, 20X3.

The following table summarizes the acquisition dates and financial information of B, C, D, and E as of and for the year ended December 31, 20X3, as well as the calculation of the aggregate significance of B, C, D, and E:

To perform the significance tests, A must aggregate the financial information of B, C, D, and E.

The results of the significance tests indicate that the highest aggregate significance is 58 percent under the investment test. Because the highest aggregate significance exceeds 50 percent, A must provide financial statements for acquirees whose results on any significance test exceed 20 percent and for which separate financial statements are not yet required to be filed. Company E’s individual significance under the investment test is greater than 20 percent but less than 50 percent. Since the transaction is probable and does not exceed 50 percent significance, A would not yet be required to present the financial statements of E on the basis of its individual significance (unless they have been previously filed). However, as described above, A has to include separate financial statements of E in this registration statement because it must provide the financial statements for acquirees whose results on any significance test exceed 20 percent and for which separate financial statements are not yet required to be filed. In addition, A must provide pro forma information reflecting all of the acquisitions described above.

Example 2-39

Registrant A consummated the acquisitions of Companies B, C, D, E, F, and G, which are not related businesses, during 20X4. The acquisitions were not individually significant, all seven entities have a December 31 year-end, and A plans to file a registration statement on December 20, 20X4.

The most recent audited annual financial statements required to be filed with the SEC for A as of December 20, 20X4, are for the year ended December 31, 20X3. Registrant A’s pretax income from continuing operations and revenue was $10 million and $40 million for the year ended December 31, 20X3, respectively.

The significances calculated in the aggregate investment test and aggregate asset test were less than 50 percent. (Those calculations are not included in this example.)

The following table summarizes the pretax income (loss) from continuing operations and revenue of all seven entities for the year ended December 31, 20X3, as well as the aggregate income test calculation for B, C, D, E, F, and G:

To perform the income test, A must (1) separately combine the aggregate income from continuing operations and revenue of the income group (C, D, and F) and the pretax loss from continuing operations and revenue of the loss group (B, E, and G) and (2) use the absolute value of the combined loss of B, E, and G.

As discussed above, a registrant must consider both the income and revenue components. Since both the income component (52 percent) and the revenue component (68 percent) of the loss group exceed 50 percent, pro forma financial information must be provided for all individually insignificant acquirees, including both acquirees with pretax loss and those with pretax income (even though only the loss group exceeded 50 percent significance). Since none of the acquirees exceed 20 percent significance for any of the significance tests, no separate preacquisition financial statements are required.

Example 2-40

Assume the same facts as in the previous example, except that Company E’s pretax loss from continuing operations is $1.5 million. This will reduce the aggregate significance of the loss group to 49 percent on the basis of the income component. While the revenue component of the loss group exceeds 50 percent, the income component does not. As a result, neither the income group nor the loss group exceeds 50 percent significance for both the revenue and income component. Therefore, the requirements for individually insignificant acquirees discussed in this section would not apply.

Example 2-41

Assume the same facts as in Example 2-39, except that Registrant A has no revenue in 20X3. Since A did not have material revenue for the two most recently completed fiscal years, the revenue component does not apply. In this case, the registrant would only need to consider the results from the income component calculations. Assume that A’s pretax income from continuing operations for the most recent fiscal year is not at least 10 percent less than the five-year average of such measure.

To perform the income component of the income test, A must separately combine the pretax income from continuing operations of the income group (Companies C, D, and F) and the pretax loss from continuing operations of the loss group (Companies B, E, and G). Registrant A must use the absolute value of the combined loss of B, E, and G in the income component of the income test.

As discussed above, a registrant must consider the income component of each group. Since the income component (52 percent) of the loss group exceeds 50 percent, pro forma financial information must be provided for all individually insignificant acquirees, including both acquirees with pretax loss and those with pretax income (even though only the loss group exceeded 50 percent significance). Since none of the acquirees exceed 20 percent significance for any of the significance tests, no separate preacquisition financial statements are required.

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