7.9 Supplemental Information for Public Entities

ASC 805-10

50-2 To meet the objective in the preceding paragraph [ASC 805-10-50-1], the acquirer shall disclose the following information for each business combination that occurs during the reporting period: . . .

h. If the acquirer is a public entity, all of the following:

1. The amounts of revenue and earnings of the acquiree since the acquisition date included in the consolidated income statement for the reporting period.

2. If comparative financial statements are not presented, the revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period (supplemental pro forma information).

3. If comparative financial statements are presented, the revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period (supplemental pro forma information). For example, for a calendar year-end entity, disclosures would be provided for a business combination that occurs in 20X2, as if it occurred on January 1, 20X1. Such disclosures would not be revised if 20X2 is presented for comparative purposes with the 20X3 financial statements (even if 20X2 is the earliest period presented).

4. The nature and amount of any material, nonrecurring pro forma adjustments directly attributable to the business combination(s) included in the reported pro forma revenue and earnings (supplemental pro forma information).

If disclosure of any of the information required by (h) is impracticable, the acquirer shall disclose that fact and explain why the disclosure is impracticable. In this context, the term impracticable has the same meaning as in paragraph 250-10-45-9.

According to ASC 805-10-50-2(h)(1), an acquirer that meets the definition of a public entity is required to disclose “[t]he amounts of revenue and earnings of the acquiree since the acquisition date included in the consolidated income statement for the reporting period.” The FASB limited the period for this disclosure to the year of acquisition (i.e., the end of the annual reporting period that includes the acquisition date) because the Board believed that it might become impracticable for entities to obtain this information after the acquiree becomes more integrated into the acquirer’s operations.

In addition, ASC 805-10-50-2(h) requires public entities to disclose “supplemental pro forma information.” The requirements for this disclosure differ depending on whether comparative financial statements are presented:

If an acquirer presents comparative financial statements, it is required to disclose “the revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period” (emphasis added).
If an acquirer does not present comparative financial statements, it is required to disclose “the revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period” (emphasis added).

In addition, in accordance with ASC 805-10-50-2(h)(4), acquirers must disclose “[t]he nature and amount of any material, nonrecurring pro forma adjustments directly attributable to the business combination(s) included in the reported pro forma revenue and earnings.”

Entities must provide pro forma information for business combinations that occur (1) during the reporting period or (2) after the reporting date but before the financial statements are issued unless the initial accounting for the business combination is incomplete at the time the financial statements are issued or are available to be issued. In addition, if multiple immaterial business combinations occur that are material collectively, pro forma information should be disclosed in the aggregate for those business combinations.

The supplemental pro forma information required by ASC 805-10-50-2(h) (i.e., the revenue and earnings of the acquiree for the periods before the acquisition) does not need to be audited. Auditors, however, should perform the procedures required by PCAOB AU Section 558.

SEC Considerations

The SEC rules on pro forma financial information disclosures differ from the guidance in U.S. GAAP:

ASC 805-10-50-2(h) requires pro forma financial information to be disclosed in the notes to the historical financial statements.
SEC Regulation S-X, Article 11, requires pro forma financial information to be presented in certain SEC filings (e.g., Form 8-K, registration statements, and proxy statements).

The pro forma financial information disclosures required by ASC 805 are not sufficient to satisfy the more extensive presentation requirements of Article 11. We believe that since that the FASB does not provide detailed guidance on preparing the pro forma financial information, registrants preparing such information under ASC 805 may apply the same concepts they apply when preparing their pro forma information under Article 11 in the absence of guidance under ASC 805.

See Chapter 4 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions for more information.

7.9.1 Definition of a Public Entity

The disclosures in ASC 805-10-50-2(h) apply to an acquirer that meets the following definition of a public entity in the ASC master glossary:

A business entity or a not-for-profit entity that meets any of the following conditions:

It has issued debt or equity securities or is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets).
It is required to file financial statements with the Securities and Exchange Commission (SEC).
It provides financial statements for the purpose of issuing any class of securities in a public market.

The ASC master glossary includes multiple definitions of a public entity, so entities should ensure that they are applying the correct one when determining whether ASC 805 pro forma disclosures are required. The definition of public entity in ASC 805-10-20 is the same as that in ASC 280-10-20 for segment reporting, but it is different from those in ASC 718-10-20 for share-based payment awards and ASC 740-10-20 for income taxes. In addition, the definition of a public entity is different from the definition of a PBE, which is used to determine whether an entity qualifies for the private-company accounting alternatives as discussed in Chapter 8.

7.9.2 Periods to Be Presented

The objective of the disclosure requirements in ASC 805-10-50-2(h) is to give financial statement users a sense of what the acquirer’s revenues and earnings would have been if the acquiree had been part of the acquirer’s operations in the periods before the acquisition. However, ASC 805-10-50-2(h) requires disclosure of the supplemental pro forma information only for (1) the year of the acquisition and (2) the previous year if comparative financial statements are presented, even if the acquirer presents more than two years of income statements. For example, if an acquirer with a calendar year-end had a material business combination on July 1, 20X8, it would disclose the following in its December 31, 20X8, annual comparative financial statements:

The revenue and earnings of the acquiree from July 1, 20X8, through December 31, 20X8.
The revenue and earnings of the combined entity from:
- January 1, 20X8, through December 31, 20X8.
- January 1, 20X7, through December 31, 20X7.

The acquirer would also need to consider what disclosures to include in its interim financial statements. For example, it would disclose the following in its September 30, 20X8, comparative quarterly financial statements:

The revenue and earnings of the acquiree from July 1, 20X8, through September 30, 20X8.
The revenue and earnings of the combined entity for:
- The nine-month period from January 1, 20X8, through September 30, 20X8.
- The nine-month period from January 1, 20X7, through September 30, 20X7.
- The three-month period from July 1, 20X8, through September 30, 20X8.
- The three-month period from July 1, 20X7, through September 30, 20X7.

In its December 31, 20X9, annual comparative financial statements, the acquirer would carry forward the disclosures from the prior year without revising them. It would not have to include additional pro forma information for 20X9 because the acquiree’s results would be included in the consolidated financial statements for the entire period.

For quarterly comparative financial statements for 20X9, the acquirer would need to provide additional pro forma information about the revenue and earnings of the combined entity for each of the respective comparative quarterly periods pertaining to 20X8.

Example 7-1

Company A acquires Company B in a business combination on April 30, 20X8. Company A has a calendar year-end, and the acquisition of B is material to A’s financial statements. We believe that in its June 30, 20X8, interim financial statements, A should present supplemental pro forma financial information for the three months ended June 30, 20X7 and 20X8; the six months ended June 30, 20X7 and 20X8; and the period from the date of the acquisition through June 30, 20X8. Even though the business combination did not occur in the first quarter of 20X8, we believe that A should present supplemental pro forma financial information for the three months ended March 31, 20X8, in its March 31, 20X9, financial statements because the comparative interim period does not include B’s results.

7.9.3 Preparing Pro Forma Financial Information

ASC 805 does not provide specific guidance on the preparation of pro forma information. The objective of the ASC 805 pro forma disclosure requirements is to give the acquirer’s financial statement users a sense of what the acquirer’s revenues and earnings would have been if the business combination had occurred at the beginning of the current year (or previous year if comparative financial statements are presented). Typically, the acquiree’s revenues and earnings are added to those of the acquirer for the period of the year in which the acquiree was not owned by the acquirer. If the acquirer presents comparative financial statements, the acquiree’s revenues and earnings are added to those of the acquirer for the previous year. Pro forma information should be adjusted for the following:

Acquisition-related costs — Costs related to the acquisition are included in earnings as of the beginning of the earliest period (i.e., the beginning of either the current year or the previous year if comparative financial statements are presented).
Fair value adjustments — Income statement effects of fair value adjustments (e.g., depreciation or amortization) are shown as if those adjustments were recognized at the beginning of either the current year or the previous year if comparative financial statements are presented.
Income taxes — Tax effects of the business combination are shown as if the acquiree had been part of the entity since the beginning of either the current year or the previous year if comparative financial statements are presented.
Financing — Adjustments related to obtaining financing, such as new debt and additional interest expense, are presented as if the new debt had been obtained as of the beginning of either the current year or the previous year if comparative financial statements are presented.
Accounting policies — An acquiree’s pro forma revenues and earnings are adjusted to reflect the accounting policies that will be applied by the acquiree after the business combination. See Section 4.16 for more information about conforming accounting policies.

In accordance with ASC 805-10-50-2(h)(4), acquirers must also disclose “[t]he nature and amount of any material, nonrecurring pro forma adjustments directly attributable to the business combination(s) included in the reported pro forma revenue and earnings.” However, acquirers should not include adjustments that are not objectively determinable, such as adjustments for costs savings or synergies resulting from the business combination.

7.9.4 Impracticability Exception

ASC 805-10-50-2 states that “[i]f disclosure of any of the information required by (h) [ASC 805-10-50-2(h)] is impracticable, the acquirer shall disclose that fact and explain why the disclosure is impracticable.”

ASC 250-10-45-9 clarifies the meaning of impracticability as follows:

It shall be deemed impracticable to apply the effects of a change in accounting principle retrospectively only if any of the following conditions exist:

After making every reasonable effort to do so, the entity is unable to apply the requirement.
Retrospective application requires assumptions about management’s intent in a prior period that cannot be independently substantiated.
Retrospective application requires significant estimates of amounts, and it is impossible to distinguish objectively information about those estimates that both:
1. Provides evidence of circumstances that existed on the date(s) at which those amounts would be recognized, measured, or disclosed under retrospective application
2. Would have been available when the financial statements for that prior period were issued.

Impracticability is viewed as a high hurdle. Because the ASC 805 pro forma disclosures do not typically need to include significant estimates or assumptions about management’s intent, it is unusual for entities to determine that it is impracticable to provide them.

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This publication provides comprehensive guidance; however, it 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.