On the Radar
This Roadmap does not reflect updates to the FRM made after
May 2025. See Preface for details.
For many companies, M&A transactions are infrequent yet often
substantial events with potentially significant consequences. Given their
complexity, they can also present a number of accounting and financial reporting
challenges and opportunities. SEC registrants planning an acquisition may wish to
consider the key requirements discussed below.
Information to Be Gathered Up Front
Under Regulation S-X, Rule 3-05,
registrants, including entities undertaking an IPO, are required to file the
separate preacquisition financial statements for a significant acquired or to be
acquired business (acquiree). Similarly, Regulation S-X, Rule 3-14, may require
registrants to provide preacquisition financial statements for a significant
acquired or to be acquired real estate operation (real estate acquiree).
Registrants must often use judgment to determine their SEC reporting and
public-company acquisition disclosure requirements for a transaction. Questions
to consider in making this determination include the following, among
others:
The Definition of a Business
Separate financial statements under Rule 3-05 are required
only if the acquiree meets the definition of a business for SEC reporting
purposes. Therefore, a company must carefully determine whether an acquiree
qualifies as such. The definition of a business for SEC reporting purposes
is not the same as the definition under U.S. GAAP, and financial statements
may be required under Rule 3-05 even if the acquisition does not meet the
U.S. GAAP definition of a business.
The SEC definition of a business focuses primarily on
whether the nature of the revenue-producing activity generally remains the
same after the acquisition. The definition of a business under U.S. GAAP (in
ASC 805) focuses first on whether the acquisition passes a “screen” test
(i.e., whether substantially all of the fair value of the gross assets
acquired is concentrated in a single identifiable asset or group of similar
identifiable assets) and, if not, on whether an acquired set of activities
and assets is a business, which is determined by further evaluating a
“framework” to determine whether an input and a substantive process were
acquired.
Significance of the Acquired Business
The financial information,
if any, that must be included in SEC filings is generally based on the size
of the acquiree, which the SEC refers to as the acquiree’s “significance.”
To determine whether financial statements of the acquiree are required, the
registrant must perform the following significance tests:
The financial statement periods of the acquiree that the
registrant must present will be based on the test that results in the
highest significance level, generally as follows:
- Significance does not exceed 20 percent — No financial statements required.
- Significance exceeds 20 percent but not 40 percent — Financial statements for the most recent fiscal year (audited) and the latest year-to-date interim period that precedes the acquisition date (unaudited).
-
Significance exceeds 40 percent — Financial statements for the two most recent fiscal years (audited), the latest year-to-date interim period that precedes the acquisition date (unaudited), and the corresponding interim period of the prior year (unaudited).
In addition, registration statement filings must include
financial statements and pro forma information for any probable or recently
closed acquisitions that are 50 percent or greater in significance.
Registrants must also consider the aggregate significance of the
individually insignificant acquisitions that are probable and consummated
since the end of the registrant’s most recently presented fiscal year. Pro
forma financial information must be provided if the aggregate significance
is 50 percent or greater.
Form of Financial Statements
Preacquisition financial statements of the acquiree are
generally prepared on the same basis as if the acquiree were a registrant.
However, an acquiree that is not a public company does not need to comply
with certain accounting principles or disclosure requirements that apply
only to public companies, such as those related to segments or earnings per
share. In addition, some accounting standards differentiate between
disclosure requirements or adoption dates for public business entities
(PBEs) and those for nonpublic entities. Significant acquirees whose
financial statements are included in a registrant’s filing under Rule 3-05
are considered PBEs under U.S. GAAP. Therefore, such acquirees should use
the adoption dates and disclosure requirements for PBEs when preparing their
financial statements. However, the SEC staff announced that it would not
object to elections by certain PBEs to use the non-PBE effective dates for
the sole purpose of adopting the FASB’s standards on revenue (ASC 606) and
leases (ASC 842).
Generally, the annual financial statements for a significant
acquisition may be audited in accordance with AICPA standards. If an
acquired company is identified as a predecessor, however, the audit may need
to be performed in accordance with PCAOB standards. In addition, while SEC
regulations do not require registrants to audit or review interim financial
statements provided under Rule 3-05, a company’s underwriters will often
require that a review of interim information be performed by an independent
auditor for due diligence or comfort letter purposes.
A company will
want to understand whether the acquiree is able to
make available audited annual and unaudited
interim financial statements as part of
negotiations during the acquisition process
because the preparation and subsequent audit of
financial statements can take a significant amount
of time and effort.
Connecting the Dots
On November 4, 2024, the FASB issued ASU
2024-03, which requires the disaggregation of
income statement expenses (DISE) for PBEs. The ASU does not change
the expense captions an entity presents on the face of the income
statement; rather, it requires disaggregation of certain expense
captions into specified categories in disclosures within the
footnotes to the financial statements.
Companies whose financial statements are included in
another entity’s SEC filing, including those prepared under Rules
3-05 and 3-14, meet the definition of PBE and will be required to
apply the DISE disclosures.
For more information on the incremental disclosure
requirements, see Deloitte’s November 8, 2024 (updated January 21,
2025), Heads
Up.
Pro Forma Financial Information
A pro forma balance sheet
and income statement are generally required under SEC rules if the business
acquisition is deemed to be significant:
In addition to the required transaction accounting
adjustments, a registrant may choose to present management’s adjustments in
the form of a reconciliation in the explanatory notes to the pro forma
financial information. These adjustments reflect synergies and dis-synergies
identified by management when evaluating whether to consummate an
acquisition. Such adjustments, to the extent 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.
When Information Is Required
Registrants need to be aware of the timing requirements related
to their SEC reporting and public-company acquisition disclosures. The following
are considerations related to four key events:
Requirements Related to the Current Report on Form 8-K
A registrant must file an initial Form 8-K within four
business days of the consummation of a significant business acquisition. The
registrant generally has an additional 71 calendar days to file an amended
Form 8-K that contains the financial statements required, including pro
forma financial information.
Financing the Acquisition
A registrant may sometimes complete an offering of
securities before the consummation of the business acquisition to raise the
necessary capital. In doing so, the acquiree’s financial statements and
related pro forma financial information may need to be provided before the
acquisition is consummated.
Registration Statement on Form S-4 and Proxy Statement Requirements
The acquiree’s financial statements and related pro forma
financial information may be required in registration statements on Form S-4
and in proxy statements, depending on which organization’s shareholders must
approve the transaction and the nature of the consideration — that is, cash
only, cash and equity, or equity only. Financial statement requirements for
an acquiree in a registration statement on Form S-4 and in a proxy statement
may differ from the requirements in Rule 3-05. Further, a registrant may
need to provide additional disclosures for the acquiree (e.g., management’s
discussion and analysis).
Updating Requirements for Future Registration Statements
An SEC registrant may be required to update the acquiree’s
financial statements and related pro forma financial information in future
registration statements and amended registration statements.