3.5 Form and Content of Separate Statements of Revenues and Expenses and Abbreviated Income Statements of Real Estate Operations
Rule
3-14 permits a registrant and its predecessor to provide only
abbreviated income statements for significant acquired or to be acquired real estate
operations (real estate acquirees). That is, Rule 3-14 does not require a registrant
and its predecessor to present balance sheets, statements of changes in equity, or
cash flow statements for the registrant’s significant real estate acquirees.
Consequently, a registrant must provide (1) audited statements of revenues and
expenses (not including earnings per unit) prepared in accordance with Regulation
S-X (except the related schedules specified in Rule 3-12) for significant real estate
operations and (2) the supplemental information (see discussion below). As specified
in Rule 3-14(c)(1), the
abbreviated income statements may exclude “expenses not comparable to the proposed
future operations such as mortgage interest, leasehold rental, depreciation,
amortization, corporate overhead and income taxes.”
Rule 3-14 does not require a
registrant to present balance sheets, statements of changes in equity, or cash flow
statements. The audited statements of revenues and expenses described above are
presented in the form of revenues and direct expenses. Real estate acquirees that
prepare abbreviated income statements meet the FASB’s definition of PBEs and thus
are required to apply PBE adoption dates for accounting standards. In a manner
similar to the audits of financial statements filed under Rule 3-05, audits of
abbreviated financial statements filed under Rule 3-14 do not need to be performed
in accordance with PCAOB standards. (For a discussion of the audit requirements for
these financial statements, see Section 2.6.) In addition, since these income statements are
abbreviated and subject to the specific requirements of Rule 3-14, they are
considered special-purpose financial statements. The auditor’s report on these
financial statements would include an explanatory paragraph indicating the special
purpose and the incomplete nature of the presentation of the results of operations,
as discussed in AICPA SAS 122 (AU-C Section 805.24). Further, Rule 3-14(c)(2) states:
The notes to the financial statements must include the following disclosures:
(i) The type of omitted expenses and the reason(s) why they are
excluded from the financial statements;
(ii) A description of how the financial statements presented are not
indicative of the results of operations of the acquired real estate
operation going forward because of the omitted expenses; and
(iii) Information about the real estate operation’s operating,
investing and financing cash flows, to the extent available.
In addition, for each real estate operation for which financial
statements are required, the registrant must provide certain supplemental
information. Material factors the registrant considered when assessing the real
estate operation must be described with specificity in the filing, along with
sources of revenue (including, but not limited to, competition in the rental market,
comparative rents, and occupancy rates) and expenses (including, but not limited to,
utility rates, property tax rates, maintenance expenses, and capital improvements
anticipated). The registrant must also assert that it is not aware of any other
material factors related to the specific real estate operation that would cause the
reported financial statements not to be indicative of future operating results. For
additional discussion of the form and content requirements, including adoption dates
of new standards, see Section 2.6.
3.5.1 Periods to Be Presented
In accordance with Rule 3-14(b), if the
registrant is registering an offering of securities to the security holders of
the real estate operation to be acquired, the statements of revenues and
expenses must be filed for such operation for the periods specified in Rules 3-01 and 3-02, except as provided
otherwise for filings for a merger transaction on Form S-4 (or F-4 for foreign
private issuers). In all other cases, statements of revenues and expenses must
be filed for at least the most recent fiscal year and the most recent interim
period or, if shorter, the period the real estate operation has been in
existence.
It is not appropriate to provide audited financial statements
for a rolling 12-month period before the acquisition in lieu of audited
financial statements for the latest fiscal year-end of the operation. Also, the
periods before and after acquisition should not be combined to produce financial
statements for 12 months. Only preacquisition financial statements satisfy
Rule 3-14. However, Rule 3-06
permits a registrant to provide audited financial statements for an acquired or
to be acquired real estate operation for a period of nine to twelve months to
satisfy the one-year requirement under Rule 3-14.
3.5.2 Pro Forma Financial Information
Pro forma financial information prepared in accordance with Article 11 is required for acquisitions or
probable acquisitions of significant real estate operations. See
Chapter 4 for a discussion of the requirements related
to pro forma financial information.
3.5.3 Age of Financial Statements
The same rules for updating financial statements prepared in
accordance with Rule
3-05 apply to abbreviated income statements for acquired or to be
acquired real estate operations prepared under Rule
3-14. For additional information, see Section 2.5.