8.5 Pro Forma Financial Information Under Article 11
The objective of providing pro forma financial information is to enable
investors to understand and evaluate the impact of a transaction by showing how that
specific transaction (or group of transactions) might have affected the registrant’s
historical financial position and results of operations had the transaction occurred
at an earlier date. SEC Regulation S-X, Article 11, which establishes the
requirements for pro forma information, lists several circumstances in which a
registrant may be required to provide pro forma financial information, including
when the disposition of a significant portion of a business has occurred or is
probable or when other events have occurred for which pro forma information would be
material to investors. Pro forma financial information for a significant disposition
may be required in a registration statement, proxy statement, or Form 8-K.
8.5.1 Pro Forma Financial Information for a Consummated or Probable Disposition
Pro forma financial information for a significant disposition may be required in
a registration statement or proxy statement when a disposition has been
consummated or is probable and the historical financial
statements do not yet reflect the transaction. Further, when a significant
disposition has been consummated and is not yet reflected in the historical
financial statements, pro forma information is required to be provided in Form
8-K, Item 2.01. If a disposal is presented as a discontinued operation in the
historical financial statements before the disposition is consummated (i.e., the
held-for-sale and discontinued-operations criteria are met), certain pro forma
financial information may not be required. Further, pro forma financial
information for the disposition may be required even if the disposed-of
operations do not meet the discontinued-operations criteria.
Example 8-3
Pro Forma Financial Information for a Disposal That Has Occurred
Example 1
Company A, an SEC registrant, announced on April 30, 20X5, that it intends to spin off Component B to its shareholders. Company A determines that B will meet the criteria for presentation as a discontinued operation when the spin-off occurs. The spin-off is completed on November 30, 20X5, and A must file a Form 8-K to report the significant business disposition within four business days. Pro forma financial information reflecting B as a discontinued operation must be provided since A’s historical financial statements do not yet reflect the disposal of B (i.e., B is not presented as a discontinued operation in A’s historical financial statements at the time the Form 8-K must be filed).
Example 2
On December 15, 20X5, Company A, an SEC registrant, enters into an agreement to
sell Component B and determines that B will meet the
criteria for presentation as a discontinued operation in
A’s December 31, 20X5, financial statements. Company A
files its 20X5 Form 10-K on February 25, 20X6, and
adjusts its financial statements to reflect the
discontinued operation for all periods presented. The
disposal of B is completed on May 1, 20X6, and A must
file a Form 8-K to report the significant business
disposition within four business days. However, because
A’s historical financial statements already present B’s
operations as a discontinued operation in its Form 10-K,
A is not required to provide pro forma income statements
in the Form 8-K.
8.5.2 Form and Content of Pro Forma Financial Information
For the disposition of a significant business, a pro forma balance
sheet should be presented for only the most recent balance sheet required by SEC
Regulation S-X, Rule 3-01 (i.e., one pro forma balance sheet as of the end of the
fiscal year or the subsequent interim period, whichever is later). In cases in which
there are only a few pro forma adjustments and such adjustments are easily
understood, a registrant may also consider including a narrative discussion in lieu
of the pro forma balance sheet reflecting the effects of the disposition. Pro forma
income statements generally should be presented for only the most recent fiscal year
and interim period that must be presented. However, SEC Regulation S-X, Rule
11-02(c)(2)(ii), states, “For transactions required to be accounted for under U.S.
GAAP or, as applicable, IFRS-IASB by retrospectively revising the historical
statements of comprehensive income (e.g., combination of entities under common
control and discontinued operations), pro forma statements
of comprehensive income must be filed for all periods for which historical financial
statements of the registrant are required” (emphasis added). Accordingly, if a
disposal meets the discontinued-operations criteria in ASC 205-20, three years of pro forma income statements must be
presented. However, if the disposition does not meet these criteria, only one year
of pro forma income statement is required. The appropriate subsequent interim
periods in the current year are required in both scenarios.
The pro forma balance sheet should be prepared as if the disposal
took place on the balance sheet date. In preparing the pro forma income
statement(s), an entity should assume that the disposal took place at the beginning
of the earliest period presented. The pro forma adjustments for the disposal are
limited to adjustments that reflect the accounting for the transaction in accordance
with U.S. GAAP or IFRS® Accounting Standards, as applicable. For
dispositions, the adjustments may reflect the disposal of assets and related
impacts. Pro forma information for the income statement should only be presented
through continuing operations.
In addition to the required adjustments noted above, registrants may
present, in the explanatory notes to the pro forma financial information,
management’s adjustments, which reflect synergies and dis-synergies identified by
management when evaluating whether to undertake a disposition. Management’s
adjustments may also provide insight into the potential effects of the disposition
and the plans that management expects to execute after the disposition (which may
include forward-looking information). To enable investors to separate the accounting
impact of the transaction from the impact of management’s plans after the
transaction, an entity can only present management’s adjustments in “the explanatory
notes . . . in the form of reconciliations of pro forma net income . . . and the
related pro forma earnings per share data . . . to such amounts after giving effect
to Management’s Adjustments.”
For a significant asset disposition in which such information would
be material to investors, the registrant may consider including limited pro forma
balance sheet information reflecting the effects of the disposition (or, for
example, a narrative discussion if adjustments are easily understood).
As noted in Section
8.4, registrants should be mindful of the requirement to provide pro
forma information for a significant disposition in the Form 8-K that must be filed
four business days after the disposition has occurred.
Complying with this requirement can be particularly challenging when the registrant
must provide three years of pro forma financial information reflecting the
discontinued operation. As a reminder, the automatic 71-day extension in Form 8-K,
Item 9.01, is not available for a significant disposition.