Chapter 8 — Reporting Considerations for SEC Registrants

8.4 Form 8-K Reporting Obligations

SEC registrants are required to periodically file current reports on Form 8-K to inform investors of certain events. Form 8-K, Item 2.01, requires a registrant to file a Form 8-K within four business days after a consummated5 disposition of (1) a significant amount of assets or (2) a business that is significant. In accordance with Instruction 2 of Item 2.01 of Form 8-K, “[t]he term disposition includes every sale, disposition by lease, exchange, merger, consolidation, mortgage, assignment or hypothecation of assets, whether for the benefit of creditors or otherwise, abandonment, destruction, or other disposition.” In addition, a registrant must also consider the Form 8-K reporting obligations when it contributes assets or a business in exchange for an equity interest in a joint venture. (For more information, see Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions.) Further, when either a subsidiary is deconsolidated or a group of assets is derecognized, SEC registrants may be required to report the deconsolidation or derecognition on a Form 8-K and provide pro forma financial information that gives effect to the deconsolidation or derecognition. (For more information, see paragraph 2110.1 of the FRM and Section F.4 of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest.)

The nature of the registrant’s disclosures depends on whether the disposed-of operations (1) represent a business for SEC reporting purposes or (2) are significant. The definition of a business in SEC Regulation S-X, Rule 11-01(d), for SEC reporting purposes differs from the definition of a business in ASC 805-10 for U.S. GAAP accounting purposes. Accordingly, the registrant must first perform an evaluation under Rule 11-01(d), to determine its SEC reporting requirement. For more information about the definition of a business for SEC reporting purposes, see Section 2.1 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions.

Form 8-K, Item 2.01, Instruction 4, states, in part:

An acquisition or disposition shall be deemed to involve a significant amount of assets:

(i) if the registrant’s and its other subsidiaries’ equity in the net book value of such assets or the amount paid or received for the assets upon such acquisition or disposition exceeded 10% of the total assets of the registrant and its consolidated subsidiaries; or

(ii) if it involved a business (see 17 CFR 210.11-01(d)) that is significant (see 17 CFR 210.11-01(b)).

If the disposed-of operations do not meet the definition of a business for SEC reporting purposes, the disposal should be regarded as an asset disposition and reported under Form 8-K, Item 2.01, if it exceeds the 10 percent threshold specified in the two significance tests in Instruction 4.

If the disposed-of operations meet the definition of a business for SEC reporting purposes, the disposal should be regarded as a business disposition, if significant. With respect to condition (ii) in Instruction 4 of Form 8-K, Item 2.01, the disposition of a business is significant if any of the results of the three significance tests in Rule 1-02(w) (i.e., the asset, income [both the income component and the revenue component], or investment test), exceed 20 percent.6 The following is a more detailed description of the three tests:

Asset test — The total assets of the disposed-of business are compared with the registrant’s total assets on the basis of the most recent predisposal annual financial statements.
Income test — The income test consists of an income component and a revenue component:
- Income component — The pretax income of the disposed-of business is compared with the registrant’s pretax income from continuing operations on the basis of the most recent predisposal annual financial statements.
- Revenue component — If both the disposed-of business and the registrant acquiree have material revenue in each of the two most recently completed fiscal years, the revenue component is calculated by comparing the revenue of the disposed-of business with the registrant’s revenue on the basis of the most recent predisposal annual financial statements. If either the registrant or the disposed-of business does not have material revenue for each of the two most recently completed fiscal years, only the income component should be used.
Investment test — The fair value of consideration received, including contingent consideration,7 is compared with the aggregate worldwide market value (AWMV) of the registrant’s common equity. The aggregate worldwide market value is based on the average of the last five trading days of the registrant’s most recently completed month-end before the earlier of (1) the registrant’s announcement date or (2) the agreement date of the disposition. The share price used to determine the AWMV must be obtained from a public market, which may be a foreign market if that is the principal market in which the equity is traded. AWMV should exclude equity that is not traded, such as preferred stock or nontraded common stock, even if it can be converted into a class of common stock that is traded. If the registrant has no aggregate worldwide market value (e.g., when common equity is not publicly traded, including in an IPO), total assets should be used. In the case of a spin-off or split-off, when no consideration is received, the carrying value of the disposed-of business should be used to determine significance in accordance with the investment test.

In addition to the requirement to disclose — under Form 8-K, Item 2.01 — the date of completion of the transaction, a brief description of the assets involved, and the identification and nature of the relationship of the person(s) to whom the assets were sold, Form 8-K, Item 9.01, requires registrants to provide, in accordance with SEC Regulation S-X, Article 11, pro forma financial information that reflects a material asset disposition or significant business disposition (see Section 8.5). The Form 8-K, including the pro forma financial information, must be filed within four business days after the consummation8 of the disposition. The 71-day extension in Item 9.01 that is available for acquisitions is not available for a disposition, as indicated in Question 129.01 of the SEC staff’s C&DIs on Exchange Act Form 8-K:

Question: Is the automatic 71-day extension of time in Item 9.01 of Form 8-K available with respect to dispositions?

Answer: No. The automatic 71-day extension of time in Item 9.01 of Form 8-K is available only with respect to acquisitions, not dispositions. The Division’s Office of the Chief Accountant will continue to address questions regarding dispositions on a case-by-case basis.

8.4.1 Flowchart Illustrating the Form 8-K Reporting Obligations for a Significant Disposition

The flowchart below outlines considerations related to the reporting obligations a registrant could have under Form 8-K, Item 2.01, when it completes a disposition. In the flowchart, it is assumed that an entity is required to file a Form 8-K to report the disposition. If the requirements for filing under Form 8-K, Item 2.01, are met, pro forma financial information prepared under Form 8-K, Item 9.01, must be filed within four business days of the consummation of the disposition.

The definition of a business for SEC purposes is outlined in SEC Regulation S-X, Rule 11-01(d). This definition can differ from the definition in accounting literature, including that in ASC 805-10.

Under Rule 11-01(b), a disposed-of business is significant if the business to be disposed of exceeds the 20 percent level of significance for any of the significance tests in Regulation S-X, Rule 1-02(w).

Instruction 4(i) of Item 2.01 indicates that if either of the following exceeds 10 percent of the registrant’s consolidated assets, the disposition of assets would be considered significant: (1) the equity in the net book value of the assets or (2) the amount received for the assets upon disposition.

Footnotes

A Form 8-K may also be required by Item 1.01 when a registrant has entered into a material definitive agreement for a disposition (e.g., when it executes a contract to dispose of the assets or business). An Item 1.01 Form 8-K is generally filed earlier than an Item 2.01 Form 8-K, which a registrant is not required to file until the disposition is consummated. Since Item 2.01 triggers a requirement to provide financial statements in accordance with Item 9.01 (typically pro forma financial statements for a disposition), such financial statements are not required in an Item 1.01 Form 8-K. Registrants should consult with their legal advisers regarding these requirements.

This Roadmap takes into account the guidance in the SEC’s May 2020 final rule that amends the disclosure requirements related to acquired and disposed-of businesses. As of the date of publication of this Roadmap, FRM Section 2100 has not been updated to reflect updates related to this final rule.

Consideration transferred should include the acquisition-date fair value of all contingent consideration when such contingent consideration must be recognized by the acquirer at fair value on the acquisition date under U.S. GAAP or IFRS® Accounting Standards, as applicable. However, if recognition of the contingent consideration at fair value is not required under U.S. GAAP or IFRS Accounting Standards, as applicable, the consideration transferred must include the maximum amount of contingent consideration, except amounts for which the likelihood of payment is remote.

See footnote 5.

The definition of a business for SEC purposes is outlined in SEC Regulation S-X, Rule 11-01(d). This definition can differ from the definition in accounting literature, including that in ASC 805-10.

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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.