Chapter 4 — Pro Forma Financial Information

4.4 Pro Forma Adjustments

4.4.1 General Principles

In a business acquisition, the pro forma balance sheet and pro forma income statements begin with the registrant’s historical financial information, which are followed by the acquiree’s historical financial information. The historical financial information may then be adjusted as follows:

Transaction accounting adjustments — These are limited to adjustments that reflect the accounting for the transaction in accordance with U.S. GAAP or IFRS Accounting Standards, as applicable. They may include, among other items, (1) the recognition of goodwill and intangible assets and adjustments of assets and liabilities to fair value on the balance sheet and (2) the related impacts on the income statement under the assumption that the balance sheet adjustments were made as of the beginning of the fiscal year presented. See Section 4.4.2.1 for guidance on determining appropriate transaction accounting adjustments.

The SEC staff has also indicated that transaction accounting adjustments should generally be shown gross rather than net so that the reader can understand the nature and amount of each adjustment. Alternatively, a more detailed explanation of the components of the adjustments may be presented in the notes to the pro forma financial information. The transaction accounting adjustments should contain references to notes that clearly explain the assumptions involved and other relevant information for each adjustment. See Section 4.4.2.2 for a discussion of the disclosure requirements for transaction accounting adjustments.
Autonomous entity adjustments — These adjustments, which are only required if the registrant was previously part of another entity, include incremental expense or other changes necessary to reflect the registrant’s financial condition and results of operations as if it were a separate stand-alone entity. For example, if a public entity plans to distribute a portion of its business to its shareholders as a separate public company (e.g., a spin-off), the spinnee’s pro forma financial information must include autonomous entity adjustments to reflect the incremental costs expected to be incurred as if the spinnee were a separate stand-alone entity. For more information, see Section 5.4.1.1 of Deloitte’s Roadmap Carve-Out Financial Statements.
Management’s adjustments — In addition to the required adjustments noted above, registrants also have the option to present management’s adjustments within the explanatory notes. As the SEC notes in its final rule on the disclosure requirements for business acquisitions, these types of adjustments “include forward-looking information that depicts the synergies and dis-synergies identified by management in determining to consummate or integrate the transaction for which pro forma effect is being given.” Such adjustments may also give investors insight into the potential effects of the transaction. Further, changes that do not qualify as transaction accounting or autonomous entity adjustments may include, among other things, closing facilities, discontinuing product lines, and terminating employees. When synergies are presented, any related dis-synergies must also be presented. See Section 4.4.3.

At the 2021 AICPA & CIMA Conference on Current SEC and PCAOB Developments, the SEC staff addressed considerations related to distinguishing between autonomous entity adjustments and management’s adjustments. For example, changes to a spinnee’s cost structure that are supported by a contractual arrangement may be considered autonomous entity adjustments (e.g., a new lease agreement or a transition services agreement with the former parent). By contrast, changes in spinnee costs that are not supported by contractual arrangements generally do not represent autonomous entity adjustments. However, such changes may represent synergies or dis-synergies that may be presented as management’s adjustments if they meet the conditions in Rule 11-02(a)(7). The SEC staff also clarified that a registrant that presents synergies must separately present any related dis-synergies; the dis-synergies may not be presented “net” against the synergies. For more information, see Section 5.4.1.1 of Deloitte’s Roadmap Carve-Out Financial Statements. For examples of adjustments to historical financial information and disclosures of pro forma financial information that may be required, see Appendix A.

4.4.1.1 Pro Forma Balance Sheet

Under Rule 11-02(a)(6), transaction accounting adjustments to the pro forma balance sheet should (1) reflect “the accounting for the transaction required by [U.S. GAAP] or, as applicable, [IFRS Accounting Standards as issued by the IASB]” and (2) be calculated by “using the measurement date and method prescribed by the applicable accounting standards.” In the transaction accounting adjustments related to the pro forma balance sheet, it should be assumed that the transaction occurred as of the date of the most recent balance sheet. For a probable transaction, transaction accounting adjustments should be calculated by using the most recent practicable date before the effective or mailing date, and this date should be disclosed.

4.4.1.2 Pro Forma Income Statement

Rule 11-02(a)(6) specifies that transaction accounting adjustments related to the pro forma income statement should reflect the income statement impact of the adjustments made to the pro forma balance sheet. Transaction accounting adjustments that did not affect the pro forma balance sheet should reflect the accounting required by U.S. GAAP or IFRS Accounting Standards, as applicable. When applying the transaction accounting adjustments related to the pro forma income statement, a registrant should assume that adjustments made to the pro forma balance sheet were made as of the beginning of the fiscal year presented and should carry them forward to any interim period, if applicable.

There is no requirement that adjustments made to the pro forma income statement will have a continuing (recurring) impact. Accordingly, a pro forma income statement must reflect nonrecurring effects of the transaction, which may include items such as transaction expenses, one-time compensation charges, and adjustments to inventory. In addition, it is not appropriate to include a transaction accounting adjustment to eliminate or omit the effects of nonrecurring items that had already been reflected in the historical financial statements. Rather, a registrant should separately disclose in a note to the pro forma financial information the amounts associated with revenues, expenses, gains and losses, and related tax effects that will not recur in the income of the registrant beyond 12 months after the transaction. See Section 4.4.2.2.1 for further discussion of nonrecurring items.

Because it is assumed in the pro forma balance sheet and pro forma income statement that the transaction occurred on different dates (i.e., most recent balance sheet date vs. beginning of the fiscal year presented for the pro forma income statement), the adjustments reflected in the pro forma balance sheet will not necessarily reconcile with the adjustments in the pro forma income statement. For example, the pro forma income statement will reflect at least one year of depreciation and amortization on newly acquired assets; however, since it is assumed in the balance sheet that the transaction occurred on that date, there is no need to adjust retained earnings for the depreciation and amortization reflected in the pro forma income statement.

Example 4-11

Registrant A, a calendar-year-end company, acquired Company B on November 20, 20X8. On the basis of the significance of this acquisition, A must file an initial Form 8-K within four business days of the acquisition date and amend the Form 8-K within 71 calendar days of initial filing to include B’s separate preacquisition financial statements and pro forma financial information.

Further, A has to include a pro forma balance sheet as of September 30, 20X8, in the amended Form 8-K. The acquisition of B should be reflected in the September 30, 20X8, pro forma balance sheet.

Registrant A must include a pro forma income statement for the year ended December 31, 20X7, and for the nine-month period ended September 30, 20X8, in the amended Form 8-K. In addition, A should depict the effects of the accounting for the acquisition of B that were reflected in the pro forma balance sheet in both pro forma income statements for the year ended December 31, 20X7, and for the interim nine-month period ended September 30, 20X8, assuming those adjustments were made on January 1, 20X7.

4.4.2 Transaction Accounting Adjustments in a Business Acquisition

4.4.2.1 General Principles of Transaction Accounting Adjustments

Since transaction accounting adjustments must reflect the accounting required by U.S. GAAP or IFRS Accounting Standards, as applicable, a registrant must first determine the appropriate accounting treatment for the transaction (e.g., business combination). The appropriate transaction accounting adjustments would then be based on this determination.

4.4.2.1.1 Transaction Accounting Adjustments in Business Combinations

Deloitte’s Roadmap Business Combinations provides guidance on the accounting under U.S. GAAP for these transactions. Since the pro forma financial information begins with the registrant’s and acquiree’s historical financial information, the registrant must first make transaction accounting adjustments to eliminate (1) the equity balances of the acquiree and (2) the assets and liabilities that were not acquired by the registrant. The registrant would then reflect the business combination by including transaction accounting adjustments to:

Recognize the consideration transferred — This may result in adjustments to (1) decrease cash, (2) increase equity for shares issued as consideration, or (3) increase liabilities for either the recognition of contingent consideration or debt issued to fund the transaction (see Section 4.4.2.1.6). Any additional shares issued must be included in pro forma earnings per share. Further, additional interest expense should be reflected for any new debt issued.
Adjust the assets acquired and liabilities assumed to fair value, and recognize goodwill and intangible assets — A registrant must perform a preliminary allocation of the consideration transferred to the assets acquired and liabilities assumed in the acquisition and reflect transaction accounting adjustments on the pro forma balance sheet to recognize the acquiree’s assets and liabilities on the basis of the measurement requirement in ASC 805, which is mostly at their respective fair values. The registrant would also recognize on the pro forma balance sheet any identifiable intangible assets and goodwill resulting from the transaction. Further, the registrant must consider the impact of each of these transaction accounting adjustments in the pro forma income statement. Examples of such adjustments could include those related to the following:
- Depreciation and amortization — Adjustments should reflect the additional (or reduced) depreciation and amortization necessary as a result of the fair value adjustments to tangible and intangible assets. These amounts are often determined by calculating the required depreciation and amortization on the basis of the newly established fair values of the assets and their useful lives and by deducting the depreciation and amortization reflected in the acquiree’s historical financial information.
- Inventory — Adjustments should reflect the additional (or reduced) cost of revenue resulting from recognizing inventories at fair value. These adjustments would be recognized from the beginning of the fiscal year presented over the expected inventory turnover period. For inventory turnover periods of less than 12 months, the pro forma income statement adjustment to reflect the fair value would generally be considered nonrecurring. In such cases, that fact, along with the amount of the adjustment, should be disclosed in the notes.
- Deferred revenue — Adjustments should reflect the reduced revenue that may result if the fair value of the contract liability for unfulfilled performance obligations is lower than the carrying value of such liability in the acquiree’s historical financial statements. The adjustment for the difference in value would be recognized from the beginning of the fiscal year presented over the expected period to settle the contract liability. For deferred revenue adjustments that are recognized in less than 12 months, the pro forma income statement adjustment to revenue would generally be considered nonrecurring. In such cases, that fact, along with the amount of the adjustment, should be disclosed in the notes.
  
  Changing Lanes
  
  In October 2021, the FASB issued ASU 2021-08, whichrequires entities to recognize contracts with a customer on the acquisition date in accordance with ASC 606 rather than at fair value. Therefore, for transactions that occur after a registrant adopts this guidance, deferred revenue adjustments may not be necessary. For more information about the ASU, see Deloitte’s November 2, 2021, Heads Up.
- Adjustments to outstanding debt — Adjustments should reflect the increase or decrease in interest expense attributable to the recognition of the acquiree’s debt at fair value. The fair value adjustments would be recognized as if they were made as of the beginning of the fiscal year presented and would have to be amortized over the remaining life of the assumed debt.
Eliminate transactions between the registrant and acquiree — A registrant must identify transactions between the registrant and acquiree and eliminate them from the pro forma income statement and balance sheet.
Recognize transaction expenses — In a business combination, transaction expenses are expensed as incurred, and the pro forma financial information must reflect this accounting. At the 2022 AICPA & CIMA Conference on Current SEC and PCAOB Developments, the SEC staff addressed the treatment of transaction costs in pro forma financial information for a business combination. The staff noted that the accounting for such costs depends on (1) which entity incurred them (i.e., the registrant or acquiree), (2) whether they were reflected in the historical financial statement periods presented, and (3) whether they were incurred in periods after the historical financial statement periods presented.
For transaction costs applicable to the acquiree, the staff noted the following:
- Transaction expenses reflected in the historical period — Any costs that were reflected in the historical income statement periods presented should remain as presented (i.e., pro forma adjustments should not eliminate or move such costs to another period).
- Transaction costs incurred in periods after the historical financial statement periods presented — No pro forma adjustments are needed for transaction costs incurred by the acquiree in periods after the historical financial statement periods presented. This is because the pro forma financial information is intended to present the registrant’s accounting for the transaction, which does not include the acquiree’s transaction costs.
For transaction costs applicable to the registrant, the staff indicated the following:
- Transaction expenses reflected in the historical period — Any costs that were reflected in the historical income statement periods presented should remain as presented (i.e., pro forma adjustments should not eliminate or move such costs to another period).
- Transaction costs incurred in periods after the historical financial statement periods presented — These costs should be included as a pro forma adjustment to transaction expenses in the pro forma income statement as if the transaction occurred at the beginning of the fiscal year presented (i.e., in the annual financial statement period presented).
Connecting the Dots

While the SEC staff did not directly address expected transaction costs not yet incurred by the registrant, we believe that such costs should be estimated and included as pro forma adjustments to transaction expenses in the pro forma income statement as if the transaction occurred at the beginning of the fiscal year presented (i.e., in the annual financial statement period presented).

Registrants should also include on the pro forma balance sheet transaction costs that are not reflected in the historical financial statements presented (i.e., costs incurred after the periods presented and expected costs that have not yet been incurred) as pro forma adjustments to accrued expenses and retained earnings. Since transaction costs are generally nonrecurring, registrants should disclose that fact in the notes.

4.4.2.1.2 Tax Effect of Pro Forma Adjustments

Generally, the statutory rate should be applied to transaction accounting adjustments, and the tax effect of such adjustments should be reflected as a separate adjustment. If taxes are not calculated on that basis, or if unusual effects of loss carryforwards or other aspects of tax accounting are depicted, an explanation should be provided in a note to the pro forma financial information. Further, if the registrant’s historical financial statements do not reflect a tax provision on a separate-return basis, pro forma adjustments should be included that do so.

If the registrant or acquiree has recognized valuation allowances, further considerations may be necessary. For example, the registrant must assess whether it would be required to release such valuation allowances as a result of (1) the acquiree’s sources of income or (2) deferred tax liabilities recognized in purchase accounting that could become a source of future taxable income. Such a release would be reflected in the pro forma income statement at the beginning of the fiscal year presented.

4.4.2.1.3 Research and Development Expenses of an Acquiree

ASC 805 requires a registrant to capitalize acquired in-process research and development (IPR&D) and does not permit the immediate write-off of such amounts. An acquiree may have historically incurred R&D expenses associated with projects for which the registrant has capitalized IPR&D as part of the purchase price allocation. No adjustment should be made to eliminate any preacquisition R&D expenses historically incurred by the acquiree.

4.4.2.1.4 Presenting Expected Costs Associated With Exit or Disposal Activities (Restructuring Costs)

A registrant may be permitted to present expected restructuring costs as transaction accounting adjustments if they reflect the accounting for the relevant transaction depicted by the pro forma financial information, in accordance with U.S. GAAP or IFRS Accounting Standards, as applicable.

ASC 805 prohibits an acquirer from recognizing restructuring costs as liabilities assumed in an acquisition unless the acquirer meets the recognition criteria in ASC 420-10-25-1 as of the acquisition date. In most business combinations, the acquirer will not be able to meet such criteria as of the acquisition date and will therefore not be able to recognize a liability assumed for restructuring costs in the business combination accounting.

As part of a business combination, a registrant may commit to a plan to dispose of a revenue-producing activity. In such a case, the registrant may include transaction accounting adjustments to depict the effects of exiting revenue-producing activities if they reflect the accounting for the relevant transaction. The SEC staff has indicated that only revenues and costs specifically identifiable with a particular revenue-producing activity may be included in the pro forma adjustments. Allocations of corporate costs already reflected in the historical financial statements should not be adjusted for the disposition of a revenue-producing activity.

Adjusting pro forma results to depict the effects of exiting revenue-producing activities is consistent with the requirement to provide pro forma information depicting material dispositions. If a disposition (or probable disposition) is significant, the presentation of pro forma information may be required unless the disposition is already recognized in the historical financial statements.

For example, if either the registrant or its acquiree expects to dispose of certain operations as part of being granted regulatory approval, the disposal should be reflected in the pro forma financial information if the operations are identifiable. If operations to be disposed of are not presently identifiable with any reasonable certainty, the contingency and reasonably possible impact on the pro forma financial information should be disclosed in the footnotes to the pro forma financial information.

4.4.2.1.5 New Contractual or Compensation Arrangements, Including Share-Based Compensation

A registrant should generally adjust the pro forma financial information for new contractual arrangements (e.g., compensation or management agreements) entered into as part of a business acquisition. When such arrangements are entered into in conjunction or concurrently with the acquisition agreement, the registrant should include pro forma adjustments. For adjustments pertaining to consummated transactions, the terms of the agreements should be finalized before pro forma adjustments are made. For adjustments pertaining to probable transactions, written agreements should be finalized by the time of effectiveness of the registration statement containing the pro forma information.

In a business acquisition, the acquiree’s employees may be offered new or replacement share-based compensation awards or cash retention awards (e.g., stay bonuses). A registrant should first assess whether any of the awards should be considered part of consideration transferred in the acquisition under ASC 805. The registrant must analyze the terms of both the preexisting and the replacement awards to determine what portion of the replacement awards is related to precombination vesting (i.e., past goods or services) and therefore part of the consideration transferred in the business combination. The portion of replacement awards that is related to postcombination vesting (i.e., future goods or services) should be recognized as compensation cost in the postcombination period. Any incremental postcombination expense should be recognized as an adjustment to the pro forma income statement. The adjustment would be recognized from the beginning of the fiscal year presented over the remaining vesting period. Similarly, any cash retention awards would be recognized as additional expense over the required vesting period.

4.4.2.1.6 Effects of Additional Financing Arrangements

Any debt financing necessary to complete the acquisition should be recognized in the pro forma financial information, including additional interest expense as necessary. The SEC staff has indicated that adjustments reflecting the debt financing generally should be based on either the current interest rate or the interest rate to which the registrant has committed. The registrant should perform and disclose a sensitivity analysis on the basis of an eighth of a percent increase or decrease if the actual interest rate used in the pro forma financial information could vary, such as with variable-rate debt.

Similarly, a registrant may refinance existing credit facilities or repay any debt of the acquiree upon consummation of the transaction. Transaction accounting adjustments to remove the historical balance sheet and income statement effects of any debt structures and to recognize any significant changes to interest expense and deferred debt offering costs should also be considered in the preparation of pro forma financial information.

4.4.2.1.7 Other Material Transactions

In some cases, Rule 11-01(a)(8) may require a registrant to give pro forma effect to other transactions that have occurred or are probable if such pro forma financial information would be material to investors. For example, a registrant may issue new debt or equity in advance of the transaction. While this is not part of the business acquisition, it may be considered a material transaction that should be recognized as a transaction accounting adjustment in the pro forma financial information on the basis of Rule 11-01(a)(8).

Example 4-12

Registrant A enters into an agreement to acquire Company B, a significant business. Registrant A expects to finance the acquisition by using cash already on hand and cash proceeds obtained from the issuance of new debt in the private-placement market. Because B is significant, A must present pro forma financial information for the business acquisition upon the close of the transaction. While the issuance of debt is not part of the business combination accounting, it is considered material information for investors. Registrant A therefore must present transaction accounting adjustments for the financing transactions in the pro forma financial information in addition to the transaction accounting adjustments reflecting the acquisition of B.

4.4.2.1.8 Conforming Accounting Principles of the Acquiree to Those of the Registrant

A registrant generally should conform an acquiree’s accounting principles to its own and make corresponding pro forma adjustments. The SEC staff has indicated that when conforming changes are made to accounting principles adopted by a registrant, such principles should be applied consistently in the pro forma financial information for all periods presented.

Example 4-13

Registrant A acquires Company B. On the basis of the significance of this acquisition, A determines that B’s separate preacquisition financial statements and pro forma financial information must be included in the filing.

Whereas A accounts for taxes collected on behalf of governmental authorities for revenue-producing activities with customers on a gross basis, B reports similar taxes on a net basis. As a result of the acquisition, A will conform B’s method of accounting to the gross basis to be consistent with A’s historical financial statement presentation. Accordingly, A will need to adjust the pro forma income statement to reflect the conformed accounting method.

The above guidance would also apply to circumstances in which a registrant has adopted a new accounting principle (voluntarily or to reflect a new standard) that has not yet been adopted by an acquiree or adopted as of a different date. In such circumstances, pro forma financial information should be adjusted to conform the accounting policies of the acquiree as if it had adopted the accounting principle at the same time and under the same transition method as the registrant. The SEC staff has indicated that if a registrant adopts a new accounting standard as of a different date or under a different transition method than that of a significant acquiree, the registrant must conform the acquiree’s date or method of adoption (or both) to its own in its pro forma financial information. The SEC staff may consider requests for relief from this requirement. For more information, see Section 1.5.

Example 4-14

Registrant A acquired Company B, a nonreporting entity, on August 30, 20X4. Both A and B have calendar fiscal year-ends. On January 1, 20X3, A prospectively adopted a new accounting principle that B adopted on January 1, 20X4.

As a result of the acquisition, A must file an initial Form 8-K within four business days of the acquisition date and amend the Form 8-K within 71 calendar days of the initial filing to include a pro forma balance sheet and income statement as of and for the interim six-month period ended June 30, 20X4, and a pro forma income statement for the year ended December 31, 20X3.

To be consistent with A’s accounting principles, the pro forma information should be adjusted to reflect B’s adoption on January 1, 20X3, of the new accounting principle.

Certain new accounting standards must be applied retrospectively. When a registrant adopts such standards in an interim period, it is generally required to retrospectively revise previous annual periods when they are reissued. However, Rule 11-02(c)(2)(ii) states that “[r]etrospective revisions stemming from the registrant’s adoption of a new accounting principle must not be reflected in pro forma statements of comprehensive income until they are depicted in the registrant's historical financial statements.”

Example 4-15

Registrant A acquired Company B, a nonreporting entity, on August 30, 20X4. Both A and B have calendar fiscal year-ends. On January 1, 20X4, A retrospectively adopted a new accounting principle that B has not adopted. As a result of the acquisition, A must file an initial Form 8-K within four business days of the acquisition date and amend the Form 8-K within 71 calendar days of the initial filing to include a pro forma balance sheet and income statement as of and for the interim six-month period ended June 30, 20X4, and a pro forma income statement for the year ended December 31, 20X3.

To be consistent with A’s accounting principles, the pro forma information should be adjusted to reflect B’s adoption of the new accounting principle on January 1, 20X4. However, A is not required to reflect the adoption of the new accounting principle in the pro forma financial information for the year ended December 31, 20X3, since A has not yet been required to revise the historical financial statements for that period to reflect the new accounting principle (i.e., the pro forma requirement does not accelerate the requirement to retrospectively revise the financial statements). However, if A subsequently files a registration statement before filing its Form 10-K for the year ending December 31, 20X4, it would need to consider retrospectively revising its prior annual financial statements for the retrospective adoption. If A reflects the adoption retrospectively to December 31, 20X3, in its historical financial statements, the pro forma financial information would similarly reflect the retrospective adoption.

4.4.2.2 Disclosure Requirements for Transaction Accounting Adjustments

4.4.2.2.1 Nonrecurring Items and Unusual Results

Any revenues, expenses, gains and losses, and related tax effects that will not recur in the income of the registrant beyond 12 months after the transaction should be disclosed.

Further, unusual results reflected in the registrant’s or acquiree’s most recent fiscal year should be disclosed in the notes to the pro forma financial information. See Rule 11-02(a)(11)(i). Registrants may also consider providing a pro forma income statement for the most recent 12-month period, in addition to the periods required, if this disclosure would better reflect normal operations.

4.4.2.2.2 Consideration Transferred or Received

The notes to pro forma financial information should include a table showing the total consideration transferred or received, including the components of such consideration and how it was measured. For example, it would not be sufficient to merely disclose the number of shares to be issued to consummate the acquisition without disclosing the value assigned to those shares.

Example 4-16

Registrant A acquired Company B on February 1, 20X4. On the basis of the significance of this acquisition, A determines that B’s separate preacquisition financial statements and pro forma financial information must be included in the filing.

Registrant A should disclose that it acquired B by paying cash of $800 and issuing 200 shares of common stock with a fair value of $1 per share on February 1, 20X4, for total consideration transferred of $1,000.

For probable transactions, registrants should use the stock price as of the most recent practicable date before filing. In addition, the notes to the pro forma balance sheet should disclose the date on which the stock price was determined and a sensitivity analysis for the range of possible outcomes based on percentage increases and decreases in the stock price. The percentages should be reasonable relative to the recent volatility in the registrant's stock price.

4.4.2.2.3 Contingent Consideration

An acquisition agreement may include contingent consideration, which is the obligation to transfer additional assets or equity interests to the former owners of an acquiree if specified future events occur or conditions are met. Occasionally, however, contingent consideration may also represent the right to the return of previously transferred consideration upon the satisfaction of certain conditions.

ASC 805 requires an acquirer to recognize the fair value of contingent consideration as of the acquisition date as part of the consideration transferred; thus, it will be included in the total purchase price. Rule 11-02(a)(11)(ii)(A) indicates that if total consideration transferred includes contingent consideration, the notes to the pro forma financial information should disclose the terms of the contingent consideration arrangements, the basis for determining the amount of payments or receipts, and an estimate of the range of outcomes (undiscounted). If a range cannot be estimated, that fact, and the reasons why, should be disclosed.

4.4.2.2.4 Fair Value of Assets Acquired and Liabilities Assumed

A registrant should allocate the purchase price to specifically identifiable tangible and intangible assets (e.g., customer lists, contracts acquired, trademarks, patents, IPR&D, inventory) and liabilities. The purchase price should generally not, for example, be allocated solely to goodwill. The purchase price allocation can be presented in either a tabular or narrative format, although a tabular presentation is generally easier to follow.

The expected useful lives or amortization periods of significant assets acquired in a business acquisition, including identified intangibles, should be disclosed in a note to the pro forma financial information. In addition, any uncertainties regarding the effects of amortization periods assigned to the acquired assets should be highlighted. When something other than the straight-line method is used to amortize purchase price adjustments of acquired assets, the effect on operating results for the five years after the acquisition should be disclosed in a note, if material.

Below is an example of a footnote disclosure within the pro forma financial information that specifies the consideration transferred and the acquisition-date fair value of assets acquired and liabilities assumed.

Example 4-17

Registrant A acquired Company B by paying cash of $800 and issuing 200 shares of A’s common stock with a fair value of $200 (based on the closing price of such shares on February 1, 20X4, the acquisition date).

The pro forma financial information reflects the following acquisition-date fair value of tangible assets acquired and of liabilities assumed:

Purchased PP&E is being depreciated on a straight-line basis over its weighted-average remaining useful life of approximately five years.

4.4.2.2.5 When the Consideration Transferred or Determination of Fair Value Is Incomplete

A registrant’s estimate of the fair value of assets acquired and liabilities assumed in a business acquisition (or probable acquisition), or the amount of consideration transferred, may not be final when the pro forma financial information is prepared. In such a case, the registrant should disclose this preliminary status and the areas that are subject to change. Rule 11-02(a)(11)(ii)(B) explicitly requires disclosure of the following:

A statement that the accounting is incomplete.
The specific “items for which the accounting . . . is incomplete.”
A “description of the information that the registrant requires, including, if material, the uncertainties affecting the pro forma financial information and the possible consequences of their resolution.”
An “indication of when the accounting is expected to be finalized.”
Any “other available information that will enable a reader to understand the magnitude of any potential adjustments to the measurements depicted.”

The SEC staff has suggested that a registrant may need to provide a sensitivity analysis for a change in a variable that may produce different results. For example, this may be the case when reflecting a probable transaction for which the actual consideration is not yet known. A registrant would disclose the possible outcomes and how this would affect the assets and liabilities recognized (e.g., an increase in consideration would be recognized as additional goodwill).

4.4.3 Management’s Adjustments and Related Disclosures

4.4.3.1 General Principles of Management’s Adjustments

In addition to the required transaction accounting adjustments and autonomous-entity adjustments discussed in the previous sections, registrants have the option to present, in the explanatory notes to the pro forma financial information, adjustments that reflect synergies and dis-synergies identified by management as part of evaluating whether to consummate a transaction. In accordance with Rule 11-02(a)(7), such adjustments can be presented if, in management’s opinion, they “would enhance an understanding of the pro forma effects of the transaction.”

While the SEC has not defined “synergies” or “dis-synergies,” we believe that they refer to the benefits (i.e., increased revenue or decreased expenses) or costs (i.e., decreased revenue or increased expenses), respectively, that may result from a transaction. Management’s adjustments also may give investors insight into the potential effects of a transaction and the subsequent plans that management expects to take (which may include forward-looking information). Such adjustments, to the extent that they do not qualify as transaction accounting adjustments, may include, among other things, closing facilities, discontinuing product lines, and terminating employees. When synergies are presented, any related dis-synergies must also be presented.

A registrant must meet certain conditions to ensure that it presents management’s adjustments consistently and in a manner that would enhance an investor’s understanding of the transaction. Rule 11-02(a)(7)(i) specifies that management’s adjustments may only be presented if:

“There is a reasonable basis for each such adjustment.”
“The adjustments are limited to the effect of such synergies and dis-synergies” for the periods presented.
Reductions in an expense “must not exceed the amount of the related expense [reflected in] the pro forma period presented.”
All such adjustments “that are, in the opinion of management, necessary to a fair statement of the pro forma financial information” are reflected.
Dis-synergies are presented when related synergies are presented.

Under Rule 11-02(a)(7)(ii)(A), “If presented, Management’s Adjustments must be presented in the explanatory notes . . . in the form of reconciliations of pro forma net income . . . and the related pro forma earnings per share data . . . to such amounts after giving effect to Management’s Adjustments.” If pro forma amounts reflecting management’s adjustments are disclosed elsewhere in a filing (e.g., MD&A), pro forma amounts excluding management’s adjustments must also be presented with equal or greater prominence, along with a reference to the reconciliation provided in the explanatory notes.

Rule 11-02(a)(7)(ii)(C) specifies that “[i]f Management’s Adjustments will change the number of shares or potential common shares,” the change must be reflected within such adjustments in accordance with U.S. GAAP or IFRS Accounting Standards, “as applicable, as if the common stock or potential common stock were outstanding as of the beginning of the period presented.”

4.4.3.2 General Disclosure Requirement for Management’s Adjustments

Management’s adjustments are prohibited from the face of the pro forma financial information. They must be presented in the form of a reconciliation of pro forma net income from continuing operations attributable to the controlling interest and the related pro forma earnings per share data in the explanatory notes. Under Rule 11-02(a)(7), certain disclosures, such as the following, must also be provided to help investors evaluate management’s adjustments:

A statement that, in the opinion of management, all management’s adjustments “necessary to a fair statement of the pro forma financial information” are reflected.
The “basis for and material limitations of each [adjustment], including any material assumptions or uncertainties.”
An “explanation of the method of the calculation of the adjustment, if material.”
The “estimated time frame for achieving the synergies and dis-synergies.”

Since these adjustments must reflect the most current assumptions available as of the effective date of a registration statement or filing date, changes to previously issued pro forma financial information may be required when such information is provided in later filings.

Further, in accordance with the SEC’s final rule on the disclosure requirements for business acquisitions, management’s adjustments that are included or incorporated by reference into a registration or proxy statement should be “as of the most recent practicable date prior to the effective date, mail date, qualified date, or filing date as applicable, which may require that they be updated if previously provided in a Form 8-K that is appropriately incorporated by reference.” Therefore, when registrants present management’s adjustments, they must be prepared to update them in each registration statement or amendment.

If pro forma amounts reflecting management’s adjustments are disclosed elsewhere in a filing (e.g., MD&A), pro forma amounts excluding such adjustments must also be presented with equal or greater prominence, along with a reference to the reconciliation provided in the explanatory notes.

The presentation requirements for management’s adjustments are consistent with a few of the primary requirements for non-GAAP measures (see Deloitte’s Roadmap Non-GAAP Financial Measures and Metrics for more information). The adjustments must be presented in a reconciliation format, and when such measures are presented outside pro forma financial information, pro forma amounts, excluding management’s adjustments, must also be presented with equal or greater prominence.

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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.