18.2 Financial Statements and Other Affected Financial Information in Exchange Act Reports, Registration Statements, and Other Nonpublic Offerings
18.2.1 Adoption as of the Beginning of the Year of Adoption by Using the Comparatives Under 840 Option
As discussed in Section
16.1.1, entities that elect to adopt the leasing standard as of
the beginning of the year of adoption by using the Comparatives Under 840 Option
will recognize the effects of applying ASC 842 as a cumulative-effect adjustment
to opening retained earnings but will not adjust prior periods. Thus, in both
quarterly and annual reports after adoption, an entity would not be required to
recast its prior-period financial statements and disclosures to comply with the
leasing standard since an entity applying this transition method is permitted to
report historical comparative periods in accordance with ASC 840.
18.2.1.1 Annual Disclosures Needed in Quarterly Filings for the Year of Adoption
Although ASC 842 may not require entities to provide certain of the prescribed
disclosures discussed in Chapter 15 in interim financial statements, SEC rules and
staff interpretations require registrants that first adopt a new accounting
standard in an interim period to include both annual and interim disclosures
in the first interim period after the adoption of the standard and in each
subsequent quarter in the year of adoption. Specifically, Section 1500 of the
FRM states:
[Regulation] S-X Article 10 requires disclosures
about material matters that were not disclosed in the most recent
annual financial statements. Accordingly, when a registrant adopts a
new accounting standard in an interim period, the registrant is
expected to provide both the annual and the interim period financial
statement disclosures prescribed by the new accounting standard, to
the extent not duplicative. These disclosures should be included in
each quarterly report in the year of adoption.
As a result, a registrant that first adopts the leasing standard in an interim
period will need to comply with ASC 842’s full suite of disclosure
requirements in that quarter and each subsequent quarter in the year of
adoption, to the extent that the disclosures are material and do not
duplicate existing information.
18.2.1.2 Registration Statements and Other Nonpublic Offerings
Because the Comparatives Under 840 Option transition method does not affect
prior-period financial statements, an entity is not required to provide any
additional retrospectively restated financial statement disclosures or
information beyond the transition disclosures discussed above for the
financial statements included or incorporated by reference into a
registration statement filed or other nonpublic offering document prepared
after the quarter of adoption.
18.2.2 Adoption as of the Beginning of the Earliest Comparative Period Presented
As discussed in Chapter
16, entities that elect to adopt the standard as of the beginning
of the earliest comparative period presented will recognize the effects of
applying ASC 842 as a cumulative-effect adjustment to retained earnings as of
the beginning of the earliest period presented in their annual financial
statements and restate the information for the prior years for all years
presented in their annual financial statements for the year of adoption. In its
quarterly reports, if the registrant first adopts the leasing standard in an
interim period, and in its annual report after adoption, an entity would recast
the prior-period financial statements, disclosures, and other information (e.g.,
MD&A3 and summarized financial information related to the statements of
comprehensive income for each affected quarterly period and the fourth quarter
in the affected year4) to comply with ASC 842.
Example 18-1
Form 10-Q That First Reports the Adoption of the Leasing
Standard
Company A adopts the leasing standard on January 1, 2019, and uses the “date of
initial application” method, retrospectively restating
comparative periods to reflect the standard. Provided
that A first adopts the standard in its interim periods,
when A files its Form 10-Q for the quarter ended March
31, 2019, it must retrospectively restate its financial
statements for the adoption of ASC 842 for the
comparative interim period ended March 31, 2018.
Further, A must update MD&A for the interim period
ended March 31, 2018, to reflect the retrospective
adoption of the leasing standard. However, there is no
immediate requirement for A to restate the annual
financial statements presented in its Form 10-K for the
year ended December 31, 2018. When A files its 2019 Form
10-K, it would restate the comparative 2018 and 2017
financial statements and disclosures to comply with ASC
842. The date of initial application is January 1, 2017,
because this is the first day of the comparative
three-year period presented in the 2019 Form 10-K.
Ordinarily, an entity is not required to present the restated annual
prior-period financial information (i.e., for 2018 and 2017) until the
subsequent Form 10-K is filed (i.e., the 2019 Form 10-K). However, Section 18.2.2.2
addresses circumstances in which the affected comparative periods (i.e., 2018
and 2017) may need to be restated before the filing of the subsequent Form
10-K.
In addition, under SEC Regulation S-K, Item 302(a), if a
registrant reports a material retrospective change (or changes), such as the
adoption of the leasing standard, for any of the quarters within the two most
recent fiscal years or any subsequent interim periods, the registrant must
disclose (1) an explanation for the material change(s) and (2) summarized
financial information reflecting such change(s) for the affected quarterly
periods, including the fourth quarter. Summarized financial information, which
is required in a Form 10-K and certain registration statements when a material
retrospective change occurs, should include, at a minimum:
- Net sales or gross revenues.
- Gross profit (or costs and expenses related to net sales or gross revenues).
- Income (loss) from continuing operations.
- Net income (loss).
- Net income (loss) attributable to the entity.
- Earnings (loss) per share.
Since this requirement only applies when there is a material
retrospective change, a registrant may not have provided such information in its
most recent Form 10-K. However, upon reporting a change in accounting policy
that represents a material retrospective change, a registrant would be required
to include such disclosures in its next Form 10-K or retrospectively restated
financial statements filed in conjunction with a registration statement, as
discussed below.
18.2.2.1 Annual Disclosures Needed in Quarterly Filings for the Year of Adoption
As discussed in more detail in Section 18.2.1.1, SEC rules and staff interpretations
require registrants that first adopt a new accounting standard in an interim
period to provide both annual and interim disclosures in the first interim
period after the adoption of a new accounting standard and in each
subsequent quarter in the year of adoption.
18.2.2.2 Registration Statements and Other Nonpublic Offerings
For registrants that adopt the leasing standard as of the beginning of the
earliest comparative period presented and first adopt a new standard in an
interim period, the requirement to retrospectively restate the annual
preadoption financial statements and other affected financial information
may be accelerated when the preadoption financial statements are reissued,
as discussed in ASC 855-10-25-4 (see also Form S-3, Item 11(b)(ii)). Such
reissuance may occur when a registrant (1) files a new or amended
registration statement, (2) files a Form S-8, (3) files a prospectus
supplement to a currently effective registration statement (e.g., an
existing Form S-3 that already is effective but upon which the registrant
wishes to draw down or issue securities), or (4) prepares an offering
document in connection with an issuance of securities in a nonpublic
offering. The discussion below addresses these requirements in the context
of the adoption of ASC 842. A registrant may need to similarly consider
other retrospective changes, such as changes in segment presentation under
ASC 280 and presentation of discontinued operations under ASC 205-20. These
considerations would not apply to an emerging growth company (EGC) that
elects to adopt the leasing standard for the first time in its annual report
rather than in its quarterly reports as permitted. See Section 18.7 for more
information.
18.2.2.2.1 New or Amended Registration Statements (Other Than Form S-8)
If a registrant files a new or amended registration statement (including
post-effective amendments)5
before it files the Form 10-Q that first reports
the adoption of the leasing standard (i.e., before the filing of the
first-quarter 2019 Form 10-Q), the registrant is not required (or
permitted6) to file updated financial statements for prior periods to reflect
the adoption of the leasing standard. However, the registrant should
consult with its legal counsel and independent accountants regarding the
appropriate disclosure to provide in the registration statement.
If a registrant files a new or amended registration statement after it files the Form 10-Q that first reports
the adoption of the leasing standard and chooses to adopt the standard
as of the earliest comparative period presented, the registrant
generally must file updated financial statements that reflect the
standard for the relevant comparative periods. Thus, a calendar-year-end
registrant would update the financial statements included in the 2018
Form 10-K (i.e., for 2018 and 2017) to reflect the leasing standard for
the applicable periods. Because the leasing standard refers to the
“earliest comparative period presented,” the SEC staff has clarified
that the reissuance of the financial statements in the 2018 Form 10-K
accelerates the requirement to retrospectively restate the financial
statements for 2018 and 2017; however, it does not change the date of
initial application (i.e., January 1, 2017, for a calendar-year-end
registrant). Accordingly, the financial statements for 2016 that are
included or incorporated by reference in the new or amended registration
statement would not be retrospectively restated for the leasing
standard. The financial statements for 2016, the earliest year
presented, will reflect the legacy ASC 840 accounting requirements. See
paragraph
11210.1 of the FRM for further discussion.
In addition, other affected financial information (e.g., MD&A7 and summarized financial information8) also should be updated to reflect the retrospectively restated
financial statements.
Connecting the Dots
Additional Disclosure
Requirements
As discussed above, a registrant that reports a
material retrospective change must disclose summarized financial
information. Since this requirement only applies when
there is a material retrospective change, a registrant’s
previous Form 10-K may not include such disclosures.
Nonetheless, when retrospectively restating the financial
statements and other affected financial information in advance
of filing a new or amended registration statement, a registrant
must include summarized financial information for the quarters
within the two most recent fiscal years to reflect the adoption
of the leasing standard or other material retrospective
changes.
For new or amended registration statement that normally
incorporate the financial statements by reference (e.g., Form S-3), the
registrant may file updated financial statements as well as other
affected financial information that reflects the retrospectively
restated financial statements on Form 8-K; alternatively, the registrant
can include the retrospectively restated financial statements and
related information in its registration statement. If the
retrospectively restated financial statements are filed on Form 8-K, the
Form 8-K will be incorporated by reference into the registration
statement and will update the affected sections of the registrant’s
previously filed Exchange Act reports (e.g., Form 10-K). Because they
were not incorrect when filed, prior Exchange Act reports should not be
amended (i.e., the registrant should not file a Form 10-K/A). For more
information, see Topic
13 of the FRM.
To prepare itself for a potential filing of a new or amended registration
statement, a registrant is permitted to file updated financial
statements and other affected financial information that reflect the
retrospectively restated financial statements in a Form 8-K once the
adoption of the leasing standard has been reported in the first-quarter
Form 10-Q. However, the registrant is not required to do so until
immediately before a registration statement is filed. If the registrant
expects to file a new or amended registration statement, it may file the
Form 8-K simultaneously with or any time after the filing of the Form
10-Q that reports the adoption of the leasing standard but before or
simultaneously with the filing of the new or amended registration
statement.
Example 18-2
Registration Statement Filed After Adoption of the Leasing
Standard
Facts
On February 28, 2019, Company A, an SEC registrant, files its Form 10-K for the
year ended December 31, 2018. ASC 842 is adopted
by A on January 1, 2019, and applied as of the
earliest comparative period presented. On April
28, 2019, A files its Form 10-Q for the quarter
ended March 31, 2019, and reflects the adoption of
the leasing standard for the periods presented.
Example 1
Company A files a new registration statement on May 15, 2019, and A must either
(1) include financial statements and other
affected financial information that reflect the
adoption of the leasing standard for the annual
periods ended December 31, 2018, and December 31,
2017, or (2) incorporate by reference a
previously filed Form 8-K that contains financial
statements and other affected financial
information that reflect the adoption of the
leasing standard for the annual periods ended
December 31, 2018, and December 31, 2017. In both
cases, the financial statements for December 31,
2016, included or incorporated by reference in
such filings would reflect the application of ASC
840.
Example 2
Company A files a new registration statement on April 10, 2019, before it files
the Form 10-Q reflecting the adoption of the
leasing standard. Company A is not required (or
permitted) to (1) include in its registration
statement updated financial statements that
reflect the adoption of the leasing standard or
(2) incorporate by reference a Form 8-K containing
updated financial statements and other affected
financial information that reflected the leasing
standard. However, A should consult with its legal
counsel and independent accountants regarding the
appropriate disclosure to provide in the new
registration statement.
18.2.2.2.2 Form S-8
The requirements for a Form S-8 are addressed in
Question 126.40 of the SEC
staff’s C&DIs on Securities Act forms:
C&DI — Securities Act Forms
Question 126.40
Question: After its Form 10-K is filed, a registrant has a change in accounting principles (or changes in
segment presentation or discontinued operations), which will cause the financial presentation in its subsequent
Form 10-Qs to differ from that in its most recent Form 10-K. In this situation, Item 11(b)(ii) of Form S-3 would
require the annual audited financial statements filed in the Form 10-K to be restated to reflect the change
in accounting principles (or changes in segment presentation or discontinued operations). Would General
Instruction G.2 of Form S-8, which requires that “material changes in the registrant’s affairs” be disclosed in the
registration statement, also require such restatement?
Answer: Not necessarily. Form S-8 does not contain express language similar to Item 11(b)(ii) of Form S-3,
requiring the restatement of financial statements to reflect specified events. The fact that financial statements
eventually will be retroactively restated does not necessarily mean that there are “material changes in the
registrant’s affairs,” thereby requiring the financial statements to be restated for inclusion, or incorporation
by reference, in a Form S-8. In other words, financial statements for which Item 11(b)(ii) of Form S-3 would
require restatement may not necessarily need to be restated for incorporation by reference in a Form S-8. The
registrant is responsible for determining if there has been a material change and, if so, the related information
that is required to be disclosed in a Form S-8. Correspondingly, it is the auditor’s responsibility to determine if it
will issue a consent to use of its report in a Form S-8 if there has been a change in the financial statements in a
subsequent Form 10-Q and the financial statements in the Form 10-K have not been retroactively restated.
Accordingly, if a registrant adopted ASC 842 as of the beginning of the earliest
comparative period presented, it is generally not required to update its
previously issued financial statements to reflect the adoption of the
leasing standard when these financial statements are incorporated by
reference into Form S-8, unless the adoption of ASC 842 constitutes a
“material change in the registrant’s affairs.”
18.2.2.2.3 Prospectus Supplements to Registration Statements That Currently Are Effective
For currently effective registration statements (e.g., an existing Form S-3) upon which a registrant wishes
to draw down or issue securities, the registrant may use a prospectus supplement. Paragraph 13110.2
of the FRM indicates that “a prospectus supplement used to update a delayed or continuous offering
registered on Form S-3 (e.g., a shelf takedown) is not subject to the Item 11(b)(ii) updating requirements.”
Rather, the prospectus must be updated “in accordance with S-K 512(a) with respect to any fundamental
change.”
The filing of a prospectus supplement does not constitute a reissuance of the
financial statements included or incorporated in the currently effective
registration statement. Management of a registrant that adopts the
leasing standard as of the beginning of the earliest comparative period
presented, in consultation with legal counsel, should determine whether
the retrospective presentation of leases under ASC 842 constitutes a
fundamental change. (For more information, see SEC Regulation S-K, Item
512(a).) If the registrant and its legal counsel determine that the
retrospective adjustment to present the adoption of the leasing standard
is a fundamental change, updated financial statements and other affected
financial information should be filed on Form 8-K or included in the
registration statement, as described above. However, if the registrant
and its legal counsel determine that the retrospective adjustment for
the adoption of the leasing standard is not a fundamental change, the
financial statements do not need to be updated but the registrant should
consult with its legal counsel and independent accountants regarding the
appropriate disclosure to provide in the prospectus supplement.
18.2.2.2.4 Nonpublic Offerings
Financial statements subject to retrospective changes may also be included in
(i.e., reproduced) or incorporated by reference into a nonpublic
offering document, such as a private placement memorandum in accordance
with SEC Regulation D or Rule 144A of the Securities Act:
-
Financial statements included in a nonpublic offering document — We believe that, under U.S. GAAP, entities are generally required to update the financial statements for prior periods to reflect the adoption of the leasing standard if it is adopted as of the earliest comparative period presented. Accordingly, the considerations related to updating the financial statements for the adoption of the leasing standard would be similar to those discussed in Section 18.2.2.2.1.
-
Financial statements incorporated by reference into a nonpublic offering document — We believe that the considerations related to restating the financial statements for the leasing standard would be the same as those discussed in Section 18.2.2.2.3.
Footnotes
3
See Section 9830 of the FRM for guidance on MD&A in
registration statements.
4
See SEC Regulation S-K, Item 302(a).
5
Registrants that file a proxy statement with the
SEC should also consult this guidance. For information about
Schedule TO (used to file tender offers), see paragraph
14310.3 of the FRM.
6
See the highlights of the June 23,
2009, CAQ SEC Regulations Committee joint meeting with the SEC
staff.
7
See footnote 3.
8
See footnote 4.