4.2 Form and Content of Pro Forma Financial Information
4.2.1 General Presentation Requirements
The basic presentation requirements for pro forma financial information are
outlined in Rule 11-02(a), which
specifies that such information should generally include the following:
- Introductory paragraph.
- Pro forma balance sheet.
- Pro forma income statement(s).
- Accompanying explanatory notes.
Article
11 does not require the presentation of pro forma statements of
cash flows and statements of shareholders’ equity. Pro forma financial
statements should generally be presented in columnar form, with separate columns
for historical financial information, pro forma adjustments, and pro forma
results.
4.2.1.1 Introductory Paragraph
Pro forma financial information should begin with an
introductory paragraph that describes, at a minimum, (1) the transaction(s),
(2) the entities involved, (3) the periods for which the pro forma
information is presented, and (4) what the pro forma presentation shows. The
introductory paragraph should clearly explain the purpose of the pro forma
financial information, including the date on which the transaction was
assumed to occur.
4.2.1.2 Pro Forma Balance Sheet
A pro forma balance sheet may be presented in condensed form
in a manner similar to the presentation of interim financial statements
required in Form 10-Q under Regulation S-X, Article 10.
Captions in the pro forma balance sheet should reflect the major (i.e.,
numbered) captions in Regulation S-X, Rule 5-02. Captions representing any
balance sheet amount that is less than 10 percent of total assets may be
combined with other captions. A pro forma balance sheet is not required if
the transaction is already reflected in the registrant’s most recent
historical balance sheet included in the filing.
4.2.1.3 Pro Forma Income Statements
Throughout this chapter, we refer to the “pro forma
statement of comprehensive income” in Article 11 as the “pro forma income
statement.” As discussed below, the pro forma income statement must reflect
continuing operations attributable to controlling interests, but
presentation of other comprehensive income is not required.
Pro forma income statements may be presented in condensed
form in a manner similar to the presentation of interim financial statements
required in Form 10-Q under Article 10. Captions in the pro forma income
statements should reflect the major (i.e., numbered) captions in
Regulation S-X, Rule
5-03. Rule 11-02(a)(3) states, in part:
When any major statement of comprehensive income
caption is less than 15 percent of average net income attributable
to the registrant for the most recent three fiscal years, the
caption may be combined with others. In calculating average net
income attributable to the registrant, loss years should be excluded
unless losses were incurred in each of the most recent three years,
in which case the average loss must be used for purposes of this
test.
Rule
11-02(a)(5) requires registrants to present, in the pro forma
income statement, income from (1) continuing operations and (2) continuing
operations attributable to controlling interests. Discontinued operations
should not be reflected in the pro forma financial information (i.e., the
“bottom line” in the historical and pro forma columns should be income from
continuing operations). Historical and pro forma earnings per share should
be presented on the basis of income from continuing operations (or net
income if the registrant does not report discontinued operations), and the
number of shares used to compute such amounts should be disclosed.
4.2.1.4 Accompanying Explanatory Notes
The pro forma financial information should be accompanied by notes that
clearly explain each pro forma adjustment, the assumptions used, and other
relevant information.
4.2.1.5 Narrative Presentation in Lieu of Pro Forma Financial Statements
In the limited cases in which only a few adjustments are required and those
adjustments are easily understood, a registrant may include a narrative
presentation of the pro forma effects of a transaction. In such instances, a
registrant could provide narrative disclosures in lieu of full pro forma
financial statements.
4.2.2 Pro Forma Presentation Considerations
4.2.2.1 Presentation of Pro Forma Information When a Transaction Is Structured in Such a Way That Significantly Different Results May Occur
When a transaction is structured in such a way that a range
of significantly different results may occur, a registrant may need to
provide multiple sets of pro forma financial information. Rule 11-02(a)(10) states:
If the transaction is structured in such a manner
that significantly different results may occur, provide additional
pro forma presentations which give effect to the range of possible
results.
If only one variable may change in the transaction, a registrant may consider
disclosing just a sensitivity analysis rather than multiple sets of pro
forma financial information. The sensitivity analysis presented should give
an indication of the potential impact on the pro forma financial information
for an appropriate incremental fluctuation in the variable that may change.
For example, in a business acquisition, the final consideration may not be
known at the time the pro forma information is prepared. However, the
ultimate resolution of the consideration may only affect cash and goodwill,
in which case the sensitivity analysis could be disclosed in narrative form
in lieu of separate pro forma presentations.
If a transaction is structured in such a way that
significantly different outcomes could occur, a registrant should carefully
analyze the facts and circumstances when determining how to present pro
forma financial information and whether additional pro forma presentations
are necessary.
At the 2022 AICPA & CIMA Conference on Current SEC and
PCAOB Developments, the SEC staff noted that Rule 11-02(a)(10) is commonly
applied to merger transactions that involve a SPAC but that it may be
broadly applicable to other types of transactions. The staff also indicated
that if there is a range of possible results for which pro forma information
must be presented, the introductory paragraph required under Rule 11-02(a)(2) should be consistent and
include the relevant facts and circumstances for each possible outcome as
well as highlight the purpose of the presentations for investors.
4.2.2.2 Combining Entities With Different Fiscal Year-Ends
When entities with different fiscal year-ends are combined
in pro forma financial statements to reflect the acquisition, the historical
financial information that should be presented will depend on the difference
between their respective fiscal year-ends. Entities with fiscal year-ends
that differ by one quarter or less may combine their historical financial
information in pro forma financial statements without any recasting of
periods. If the fiscal year-ends differ by more than one quarter, the
acquiree’s historical information in the pro forma income statement must be
adjusted and brought to within one quarter of the registrant’s most recent
fiscal year-end in accordance with Rule
11-02(c)(3).
This adjustment is generally accomplished by adding
subsequent interim-period results to the acquiree’s most recent
fiscal-year-end information and deducting the comparable preceding year
interim-period results to create a 12-month period ending within one quarter
of the registrant’s most recent fiscal year-end. The number of months
included for the acquiree’s historical operations should generally match the
number of months included for the registrant’s historical operations. It is
usually not appropriate, for example, to include 11 months of historical
preacquisition operations for the acquiree if 12 months of the registrant’s
preacquisition operations are included in the pro forma income statement.
Since the acquiree’s historical income statements will typically include the
same number of months as the registrant’s income statements, there may be an
overlapping period in the acquiree’s historical income statement for both
the fiscal year and interim period, or an omitted period will be excluded
from both. For example, the historical financial information of the acquiree
for a specific quarter might be included in both the annual and interim pro
forma information, or excluded from both. See Example 4-1.
Under Rule 11-02(c)(3), the notes to the pro forma financial information
should disclose (1) the periods combined and (2) the sales or revenues and
income for any periods that were excluded or included more than once (e.g.,
an interim period that is included both as part of the fiscal year
information and the subsequent interim period). Note that in circumstances
in which different fiscal year-ends exist and the acquiree is a foreign
businesses, a domestic registrant may be required to include a historical
period for the foreign business acquiree that would be more current than the
periods included in the required historical financial statements of the
foreign business.
Example 4-1
Registrant R, a calendar-year-end company, acquired
Company B on August 1, 20X4. Company B is an SEC
registrant with an August 31 year-end. Both R and B
are nonaccelerated filers.
Registrant R determines that the
acquisition of B is significant and files a Form 8-K
on August 5, 20X4. In addition, R must amend the
Form 8-K within 71 calendar days and file B’s
separate financial statements and pro forma
financial information for the business
acquisition.
On the basis of its fiscal year-end,
R determines that the pro forma financial
information must include (1) a pro forma balance
sheet as of March 31, 20X4, and (2) pro forma income
statements for the year ended December 31, 20X3, and
the three-month period ended March 31, 20X4. These
periods are consistent with the requirements for pro
forma financial information included in the amended
Form 8-K (see Section 4.3).
The pro forma balance sheet as of March 31, 20X4,
should include B’s historical balance sheet as of
May 31, 20X4, since this is B’s most recent balance
sheet filed with the SEC. A pro forma income
statement is required for the year ended December
31, 20X3, and may combine the following:
- Registrant R’s historical income statement information for the year ended December 31, 20X3.
- Company B’s historical income statement information for the 12-month period ended November 30, 20X3.
Company B’s results for its 12-month period are
derived by adding the results of the three-month
period ended November 30, 20X3, to its income
statement for the year ended August 31, 20X3, and
subtracting the results of the three-month period
ended November 30, 20X2.
A pro forma income statement is also required for the
subsequent interim period ended March 31, 20X4, and
may combine the following:
- Registrant R’s historical income statement information for the three-month period ended March 31, 20X4.
- Company B’s historical income statement information for the three-month period ended May 31, 20X4.
Given the different fiscal year-ends of the entities
involved, the notes to the pro forma financial
information should disclose the periods that were
combined. In addition, the notes should disclose B’s
sales or revenues and income for December 1, 20X3,
to February 28, 20X4, because this period is
excluded from B’s historical information in both the
annual and interim pro forma income statements.
Another 12-month period of B’s that ends within one
quarter of R’s year-end may be presented instead.
For example, B’s historical income statement
information for the 12-month period ended February
28, 20X4, would similarly be within one quarter of
R’s year-end. Company B’s results for this 12-month
period could be derived by adding the results of the
six-month period ended February 28, 20X4, to its
income statement for the year ended August 31, 20X3,
and subtracting the results of the six-month period
ended February 28, 20X3. In this case, no period
would be omitted or duplicated and thus additional
narrative disclosure regarding such omitted or
duplicated period would not be required.
4.2.2.3 Pro Forma Financial Statement Presentation When the Registrant’s Fiscal Year Is Less Than 12 Months
In certain circumstances, such as when there is a change in the registrant’s
fiscal year-end, a registrant’s most recent fiscal year may be for a period
that is less than 12 months. The periods for which a registrant should
prepare pro forma financial information for a significant consummated or
probable business acquisition in these circumstances will depend on the
transition period.
4.2.2.3.1 Transition Period Is Nine Months or More
Article 11 generally requires registrants to present pro
forma income statements for the latest fiscal year and subsequent
interim period (see Section 4.3). Rule 3-06 indicates that “the
filing of [historical] financial statements covering a period of 9 to 12
months shall be deemed to satisfy a requirement for filing financial
statements for a period of 1 year” in certain circumstances. Such
circumstances include, but are not limited to, those in which a
registrant changes its fiscal year-end. Accordingly, if a registrant
changes its fiscal year-end and the transition period is nine months or
more, the registrant may apply the guidance in Rule 3-06 when preparing
a pro forma income statement for the latest year. In addition, a
registrant that prepares the pro forma income statement for the most
recent fiscal year may combine its historical operations for the
transition period with the historical financial operations of the
acquiree for the same number of months as the registrant’s transition
period.
Example 4-2
Registrant R, a large accelerated filer, changes
its fiscal year-end from March 31, 20X3, to
December 31, 20X3. It files a transition report on
Form 10-K on February 28, 20X4, which includes
audited financial statements for the nine-month
transition period ended December 31, 20X3, along
with the other required financial statements.
On March 15, 20X4, R acquires
Company B, a calendar-year-end large accelerated
filer. Since the business acquisition is
significant to R, R must file a Form 8-K to
announce the acquisition within four business days
and amend the Form 8-K within 71 calendar days to
include the required separate financial statements
of B and pro forma financial information. The pro
forma financial information requirements would be
satisfied as follows:
Pro Forma Balance Sheet
Registrant R would satisfy the pro forma balance
sheet requirement by combining its historical
balance sheet as of December 31, 20X3, with B’s
historical balance sheet as of December 31,
20X3.
Pro Forma Income Statement
Registrant R may satisfy the pro forma income
statement requirement by combining its income
statement for the nine months ended December 31,
20X3, with B’s income statement for the nine
months ended December 31, 20X3 (which could be
derived by subtracting the results for the
three-month period ended March 31, 20X3, from
those for the fiscal year ended December 31,
20X3). Since the transition period is nine months
or more, the registrant can apply the guidance in
Rule 3-06 when presenting a pro forma income
statement for the most recent fiscal year.
Note that a pro forma income statement is not
required for any interim period because the
acquisition was consummated during the first
quarter.
4.2.2.3.2 Transition Period Is Less Than Nine Months
At the April 2004 AICPA SEC
Regulations Committee joint meeting with the SEC staff, the SEC staff
indicated that when a registrant changes its fiscal year-end and the
transition period is less than nine months, the registrant can satisfy
the requirement to include a pro forma income statement for the most
recent fiscal year by including either of the following:
- A “pro forma income statement for the most recent fiscal year . . . based on the transition period of the registrant, supplemented as necessary by earlier periods sufficient to provide 9 to 12 months of historical financial information for the registrant.”
- A pro forma income statement for the transition period in addition to a pro forma income statement for the registrant’s most recently completed full fiscal year (i.e., the period immediately preceding the transition period).
In either case, if the registrant and the acquiree have
different fiscal year-ends, the financial information for the acquiree
included in the pro forma financial statements should be for a period
that ends within one quarter of the registrant’s period. In addition,
the acquiree’s operating results must be for the same number of months
presented for the registrant. See Section
4.2.2.2 for further information.
Example 4-3
Registrant R, a large
accelerated filer, changed its fiscal year-end
from June 30, 20X3, to December 31, 20X3. It filed
a transition report on Form 10-K on February 28,
20X4, that included financial statements for the
six-month transition period ended December 31,
20X3, and the three years ended June 30, 20X3.
On March 15, 20X4, R acquired
Company B, a calendar-year-end large accelerated
filer. Since the business acquisition is
significant to R, R must file a Form 8-K to
announce the acquisition within four business days
and amend the Form 8-K within 71 calendar days to
include the required separate financial statements
of B and pro forma financial information. The pro
forma financial information requirements would be
satisfied as follows:
Pro Forma
Balance Sheet
Registrant R would satisfy the
pro forma balance sheet requirement by combining
its historical balance sheet as of December 31,
20X3, with B’s historical balance sheet as of
December 31, 20X3.
Pro Forma
Income Statement
Registrant R may satisfy the pro
forma income statement requirement for the most
recent fiscal year by combining either of the
following:
- Its income statement for the 12 months ended December 31, 20X3 (derived by adding the six-month transition period ended December 31, 20X3, to R’s three-month periods ended March 31 and June 30, 20X3), with B’s income statement for its fiscal year ended December 31, 20X3.
- Its transition-period income statement for the six months ended December 31, 20X3, with B’s income statement for the six months ended December 31, 20X3. In addition, since the six-month transition period would not satisfy the requirements for a period of one year in accordance with Rule 3-06, R would also be required to file a pro forma income statement that combines R’s income statement for its previous fiscal year ended June 30, 20X3, with B’s income statement for the 12 months ended June 30, 20X3 (derived by adding the results for the six-month period ended June 30, 20X3, to B’s income statement for the year ended December 31, 20X2, and subtracting the results of the six-month period ended June 30, 20X2).
Note that a pro forma income
statement is not required in the amended Form 8-K
for any interim period after December 31, 20X3,
because the acquisition was consummated during the
first quarter.
4.2.2.4 Reflecting Multiple Transactions in Pro Forma Financial Information
To inform investors about all material transactions or events, a
registrant may sometimes need to provide pro forma financial information
that reflects the occurrence (or probable occurrence) of multiple
transactions during a period.
Examples of scenarios in which multiple transactions may need to be
presented in pro forma financial information include the following:
- A registrant consummates, or it is probable that it will consummate, one or more additional significant acquisitions after it previously reported a significant acquisition during the most recent fiscal year or interim period. As noted in the highlights of the July 2017 CAQ SEC Regulations Committee joint meeting with the SEC staff, pro forma information in a Securities Act registration statement should reflect all relevant transactions. The SEC staff encourages registrants to show such transactions in the subsequent pro forma presentation provided in a Form 8-K since such disclosure is more comprehensive.
- An acquiree previously acquired a significant entity of its own during the most recent fiscal year and that information would be material to an understanding of the registrant or a vote on the transaction.
Article 11 requires registrants to use, at a minimum,
separate columns for each transaction for which pro forma financial
information is required. In addition, each transaction must be disclosed
separately from other unrelated transactions, such as those in which
shareholders are being asked to vote on a particular transaction. A
registrant should consider the most appropriate presentation for pro
forma information when multiple transactions have occurred (or their
occurrence is probable) during the periods presented and such
transactions are not already reflected in the historical financial
statements.
Depending on the facts and circumstances, a registrant may present pro
forma financial information for multiple transactions in either of the
following ways:
- On a disaggregated basis (i.e., in multiple columns) in a single set of pro forma financial statements.
- In multiple sets of pro forma financial statements.
Also, transaction accounting adjustments must be shown in a column that
is separate from autonomous entity adjustments (see Section 4.4), even for the same
transaction.
The SEC staff has indicated that a registrant should
present pro forma financial information separately for multiple
transactions in instances such as those in which (1) the proceeds of an
offering will be used to fund that acquisition, (2) shareholders are
being asked to vote on that acquisition or other transactions, or (3) a
Form 8-K must be filed for that acquisition or transaction.
As noted above, when shareholder approval or other
action is required, a registrant should present the pro forma effects of
the transaction to be voted or acted on separately from other
transactions that are not contingent on the transaction to be voted on.
For example, a significant business acquisition that occurred before the
transaction being voted on could be presented in a separate column or in
a separate set of pro forma financial statements, both of which would
adjust the historical financial statements. The pro forma “as adjusted”
amounts would then carry forward into the pro forma financial statements
presented, reflecting the transaction to be voted on by the
shareholders. Also, as a best practice, a registrant would present any
consummated acquisitions in a separate column with a subtotal before
presenting a probable acquisition, even in circumstances in which
shareholder approval or other action is not required.
The example below
illustrates some of the options available to a registrant that is
presenting multiple transactions in pro forma financial information.
Example 4-4
On May 1, 20X4, Registrant R, a calendar-year-end
company, files a proxy statement to solicit
shareholder approval for the acquisition of
Company B. In separate transactions before May 1,
20X4, R consummates two significant business
acquisitions and appropriately files a Form 8-K
for the transactions that includes the separate
financial statements of each entity and the
required pro forma financial information.
Registrant R acquires Company C on January 31,
20X4, and Company D on February 10, 20X4.
In the proxy statement, pro forma financial
information as of and for the year ended December
31, 20X3, will reflect the consummated
acquisitions of C and D as well as the proposed
acquisition of B that requires shareholder
approval.
Because shareholders must vote on the acquisition
of B, the registrant must present pro forma
financial information for this transaction
separately from that for the two consummated
business acquisitions. Registrant R may present a
single set of pro forma financial statements as of
and for the year ended December 31, 20X3, on a
disaggregated basis, with separate columns for the following:
- Historical financial information of R.
- Historical financial information of C.
- Pro forma transaction accounting adjustments for the acquisition of C.
- A pro forma “as adjusted” column reflecting the pro forma results for the acquisition of C.
- Historical financial information of D.
- Pro forma transaction accounting adjustments for the acquisition of D.
- A pro forma “as adjusted” column reflecting the pro forma results before the proposed business acquisition requiring shareholder approval.
- Historical financial information of B.
- Pro forma transaction accounting adjustments for the proposed acquisition of B.
- Pro forma combined results.
Registrant R could also include a separate set of
pro forma financial statements for the acquisition
of C and D and then carry forward those pro forma
results as the starting point for the pro forma
financial statements presented that reflects the
acquisition of B to be voted on by
shareholders.