9.2 Scope — Entities
9.2.1 SEC Registrants
The SEC’s temporary equity guidance applies to SEC registrants’ financial
statements that are prepared in accordance with Regulation S-X (e.g., in annual
reports on Form 10-K and registration statements on Form S-1). Regulation S-X,
Rules 5-02.27 (reproduced in ASC 210-10-S99-1), 7-03.20 (reproduced in ASC
944-210-S99-1(20)), and 9-03.18 (reproduced in ASC 942-210-S99-1(18)), contain
guidance on balance sheet presentation related to redeemable preferred stocks
for SEC registrants that are subject to those rules.
9.2.2 Nonpublic Entities
While the SEC’s temporary equity guidance is not required to be applied to
financial statements that are not filed with the SEC, an entity that is not
filing financial statements with the SEC may elect to apply it anyway (e.g., if
it contemplates becoming an SEC registrant in the future).
In some circumstances, the SEC’s temporary equity guidance must be applied to
equity instruments issued by entities that are not SEC registrants:
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If a private company were a subsidiary of an SEC registrant, the SEC’s guidance would be applied to redeemable equity instruments issued by the subsidiary in the consolidated financial statements of the SEC registrant. However, the private company would not be required to apply the guidance in its stand-alone financial statements if they are not filed with the SEC.
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A private company or a subsidiary of an SEC registrant may be required to apply SEC guidance in its financial statements that are included, or incorporated by reference, in an SEC registrant’s filing.
A nonpublic entity that becomes an SEC registrant (e.g., an entity that files an
IPO registration statement) is required to comply with the SEC’s guidance.
Often, redeemable convertible preferred stock is fully converted into common
stock upon consummation of an IPO and is no longer outstanding after the IPO.
Nevertheless, an entity must still apply the SEC’s temporary equity guidance, if
applicable, to the redeemable convertible preferred stock in the entity’s
financial statements before the IPO takes effect when the entity files an IPO
registration statement with the SEC.
For a nonpublic entity not previously subject to ASC 480-10-S99-3A, a change to the classification or measurement of an equity instrument as a result of initially adopting ASC 480-10-S99-3A (e.g., in financial statements to be included in a registration statement filed with the SEC) is treated as a change in accounting policy (see ASC 250-10), not as the correction of an error. Accordingly, the nonpublic entity may need to retrospectively revise its prior-period financial statements to meet the SEC’s requirements.