Chapter 8 — Reporting Considerations for SEC Registrants
Chapter 8 — Reporting Considerations for SEC Registrants
8.1 Overview
As noted in Chapter 5, in the
period in which a component meets the criteria in ASC 205-20 for presentation as a
discontinued operation, a registrant must present the component as a discontinued
operation retrospectively for all prior periods presented. Accordingly, SEC
registrants must consider the impact of the retrospective change on the historical
financial statements included in their Exchange Act reports (e.g., Forms 10-K and
10-Q), registration statements under the Securities Act (e.g., registration
statements on Form S-3), and other nonpublic offerings. Registrants may also be
required to report a disposition, including certain disposals that do not qualify as
discontinued operations,1 on a Form 8-K and provide pro forma financial
information that gives effect to the disposition. Further, registrants must consider
the impact the revised financial statements may have on other SEC requirements
(e.g., SEC Regulation S-X, Rules 3-05, 3-09, 4-08(g), and 3-10). In addition,
registrants undertaking an initial public offering may be able to consider using a
“to-be-issued” accountant’s report in certain specific circumstances.
Footnotes
1
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 Section F.4 of Deloitte’s Roadmap
Consolidation —
Identifying a Controlling Financial Interest.
8.2 Financial Statements and Other Affected Financial Information in Exchange Act Reports
When a component meets the criteria in ASC 205-20 for presentation as a
discontinued operation, the component’s results of operations must be
retrospectively reclassified to discontinued operations in the current period and
all prior periods presented when it first reports the discontinued operation.
MD&A and other affected financial information for prior periods should also be
updated to reflect the retrospective adjustment.
Registrants that present three years of financial statements may omit discussion of
the earliest year of changes in financial condition and results of operations if
such discussion was already included in any of the registrants’ prior EDGAR filings
that required such information. Registrants electing to omit such discussion must
disclose, in the current filing, the location of such discussion in the prior
filing. Registrants should consider the total mix of available information,
including the impact of any recastable events (e.g., a retrospective accounting
change such as a discontinued operation) on the prior-period MD&A, when
determining whether to omit discussion of the earliest year and the most appropriate
form of presentation. If a registrant concludes that it is necessary to discuss
operations related to the earliest period presented, it may limit the discussion to
the information that has changed or has been determined to be significant to its
operations or financial condition.
If a discontinued operation is first reported in interim financial statements in
a Form 10-Q, a registrant is not immediately required to retrospectively adjust the
annual financial statements presented in the most recent Form 10-K (annual pre-event
financial statements) to reflect the discontinued operation. A registrant is
generally not required to adjust the annual pre-event financial statements to
reflect the discontinued operation until they are comparatively presented with the
annual financial statements that report the discontinued operation (generally in the
registrant’s next Form 10-K). However, see Section
8.3
for circumstances in which this requirement may be accelerated.
In addition, SEC Regulation S-K, Item 302(a), requires that if a registrant reports a
material retrospective change (or changes), such as discontinued operations, for any
of the quarters within the two most recent fiscal years, 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, 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 material discontinued operation, a
registrant would be required to include such disclosure in its next Form 10-K or
retrospectively revised financial statements filed in conjunction with certain
registration statements, as discussed below.
Example 8-1
Form 10-Q That First Reports a Component as a Discontinued Operation
Company A, an SEC registrant, determines that it has met the requirements for presenting Component B as a discontinued operation on March 1, 20X6. When A files its Form 10-Q for the quarter ended March 31, 20X6, it must retrospectively reclassify B’s results as a discontinued operation for the comparative interim period ended March 31, 20X5. Company A must also update MD&A for the interim period ended March 31, 20X5, to reflect the retrospective adjustments. However, there is no immediate requirement for A to retrospectively reclassify B’s results as a discontinued operation for the annual financial statements presented in its Form 10-K for the year ended December 31, 20X5.
Further, Question 2 of SAB Topic 5.Z.5 provides interpretive
guidance on disclosures that the staff would expect “regarding discontinued
operations prior to the disposal date and with respect to risks retained subsequent
to the disposal date.” Question 2 further states:
MD&A
[footnote omitted] should include disclosure of known trends, events, and
uncertainties involving discontinued operations that may materially affect the
Company’s liquidity, financial condition, and results of operations (including
net income) between the date when a component of an entity is classified as
discontinued and the date when the risks of those operations will be transferred
or otherwise terminated. Disclosure should include discussion of the impact on
the Company’s liquidity, financial condition, and results of operations of
changes in the plan of disposal or changes in circumstances related to the plan.
Material contingent liabilities . . . [footnote omitted] that may remain with
the Company notwithstanding disposal of the underlying business should be
identified in notes to the financial statements and any reasonably likely range
of possible loss should be disclosed pursuant to FASB ASC Topic 450,
Contingencies. MD&A should include discussion of the reasonably likely
effects of these contingencies on reported results and liquidity. If the Company
retains a financial interest in the discontinued component or in the buyer of
that component that is material to the Company, MD&A should include
discussion of known trends, events, and uncertainties, such as the financial
condition and operating results of the issuer of the security, that may be
reasonably expected to affect the amounts ultimately realized on the
investments.
Similarly, for dispositions that do not qualify as discontinued
operations, certain disclosures within the Exchange Act reports must be provided
outside the financial statements. SEC Regulation S-K, Item 303, and paragraph 9220.2 of the
SEC’s Financial Reporting Manual (FRM) require registrants to describe in MD&A
any unusual or infrequent events or transactions that materially affected the amount
of reported income from continuing operations and, in each case, indicate the extent
to which income was affected. Such a description would include any material disposal
transactions for the periods covered, even if those transactions did not meet the
discontinued-operations criteria in ASC 205-20.
8.3 Registration Statements and Other Nonpublic Offerings
The requirement to retrospectively revise the annual pre-event financial
statements and other affected financial information may be accelerated when the
pre-event financial statements are reissued, as discussed in ASC 855-10-25-4 (see
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) issues 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) issues securities in a nonpublic offering. The discussion
below addresses these requirements in the context of a discontinued operation. A
registrant may need to similarly consider other retrospective changes, such as stock
splits, changes in segment presentation under ASC 280, and certain accounting
changes resulting from the adoption of a newly issued standard.
For dispositions that do not qualify as discontinued operations,
reporting considerations highlighted in Section 8.2 that apply to MD&A will also
generally apply to registration statements.
8.3.1 New Registration Statements (Other Than Form S-8)
If a registrant files a new or amended registration statement2
before it files the Form 10-Q that first reports a
discontinued operation, the registrant is not required (or permitted3) to file updated financial statements for prior periods to reflect the
discontinued operation. However, the registrant should consult with its legal
counsel and independent accountants regarding the appropriate disclosure to
provide in the registration statement, including the pro forma considerations
discussed in Section
8.5.
If a registrant files a new or amended registration statement after it files the Form 10-Q that first reports a
discontinued operation, the registration statement instructions (e.g., Item
11(b)(ii) of Form S-3) generally require a registrant to file updated financial
statements that reflect the discontinued operation for all periods presented. In
addition, other affected financial information (e.g., MD&A and selected
quarterly financial data) also generally should be updated to reflect the
retrospective adjustments.
Connecting the Dots
As discussed above, a registrant that reports a material retrospective
change must disclose selected quarterly financial data for the quarters
within the two most recent fiscal years. 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 revising the financial statements and
other affected financial information before filing a new or amended
registration statement, a registrant may be required to include
summarized financial information for the quarters within the two most
recent fiscal years to reflect a new discontinued operation reported in
a recent Form 10-Q.
For example, when filing a new Form S-3, a registrant
must retrospectively revise its financial statements for a material
retrospective change before filing the Form S-3. However, the Form S-3
is not required to include Item 302(a) selected quarterly financial data
for the new retrospective change (i.e., a discontinued operation
reported in a recent Form 10-Q). Therefore, a registrant that did not
previously provide such quarterly disclosures in its Form 10-K would not
be required to do so as a result of the new Form S-3. On the other hand,
when a registrant previously provided such quarterly disclosures in its
Form 10-K (whether required or voluntary), it must consider whether such
quarterly disclosures continue to be appropriate in light of the new
retrospective change. A registrant would generally revise such quarterly
information for the new retrospective change to the extent that the
revision is material. If a registrant is not eligible to use Form S-3
and the requirements related to the new registration statement include
those in Item 302(a) (e.g., Form S-1), a registrant would need to
provide the appropriate quarterly disclosures under Item 302(a) in
connection with that new registration statement.
For new or amended registration statements 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 retrospective adjustments on Form 8-K; alternatively, the
registrant can include the retrospectively adjusted financial statements and
related information in the registration statement being filed. If the recasted
information is 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 or Form
10-Q). 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 or
Form 10-Q/A). For more information, see Topic 13 of the FRM.
To prepare itself for a potential registration statement, a registrant is
permitted to file updated financial statements and other affected financial
information that reflect the retrospective adjustments in a Form 8-K once the
discontinued operation has been reported in a 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 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 discontinued operation but before or simultaneously with
the filing of the new registration statement.
Example 8-2
Registration Statement After Presentation of a Component as a Discontinued Operation
Facts
Company A, an SEC registrant, files its Form 10-K for the year ended December
31, 20X5, on February 28, 20X6. On June 1, 20X6, A
determines that it has met the requirements for
presenting Component B as a discontinued operation.
Company A files its Form 10-Q for the quarter ended June
30, 20X6, on July 28, 20X6, and presents B as a
discontinued operation for the interim periods
presented.
Example 1
Company A files a new registration statement on September 15, 20X6. Company A
must either (1) include
financial statements and other affected financial
information that present B as a discontinued operation
for all periods presented in A’s December 31, 20X5, Form
10-K or (2) incorporate by
reference a previously filed Form 8-K that
contains financial statements and other affected
financial information that present B as a discontinued
operation for all periods presented in A’s December 31,
20X5, Form 10-K.
Example 2
Company A files a new registration statement on July 10, 20X6, instead of
September 15, 20X6, before it files the Form 10-Q
reporting B as a discontinued operation. Company A is
not required (or permitted4) to (1) include in its registration statement
updated financial statements that present B as a
discontinued operation or (2) incorporate by reference a
Form 8-K containing updated financial statements and
other affected financial information that present B as a
discontinued operation. However, A should consult with
its legal counsel and independent accountants regarding
the appropriate disclosure to provide in the new
registration statement, including the pro forma
considerations discussed in Section 8.5.
8.3.2 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&DIs — Securities Act Forms
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, with respect to a Form S-8, a registrant is generally not required
to update its previously issued financial statements to reflect a discontinued
operation unless it constitutes a “material change in the registrant’s
affairs.”
8.3.3 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 issuance of a prospectus supplement does not constitute a reissuance of the
financial statements included in or incorporated into the effective registration
statement. Management, in consultation with legal counsel, should determine
whether the retrospective presentation of a discontinued operation 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 a discontinued operation 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. If the
registrant and its legal counsel determine that the retrospective adjustment for
a discontinued operation 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. In addition, all post-effective amendments
are considered “new filings” and are subject to the guidance discussed in Section 8.3.1.
8.3.4 Nonpublic Offerings
Financial statements subject to retrospective changes may also be included in or
incorporated into a nonpublic offering, such as a private placement pursuant to SEC
Regulation D or Rule 144A of the Securities Act. We believe that the inclusion of
the financial statements in the nonpublic offering constitutes a reissuance (as
discussed in ASC 855-10-25-4) and that entities are therefore typically required
under U.S. GAAP to update the financial statements for prior periods to reflect the
discontinued operation. Accordingly, the considerations related to updating the
financial statements for a discontinued operation would be similar to those
discussed in Section 8.3.1. We
believe that when the financial statements are incorporated by reference into a
nonpublic offering, the considerations related to updating the financial statements
for the retrospective change would be the same as those for prospectus supplements
to registration statements that are currently effective, which are discussed in
Section 8.3.3.
Footnotes
2
SEC registrants that file a proxy statement with the SEC
should also refer to this guidance. For a Schedule TO (used to file
tender offers), see paragraph 14310.3 of the
FRM.
3
See the highlights of the June 23,
2009, CAQ SEC Regulations Committee joint meeting with the SEC
staff.
4
See footnote 3.
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. 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, is compared with the aggregate worldwide market value 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. 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 significant asset disposition or 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 consummation6 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.
7
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.
8
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).
9
Instruction 4 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
5
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 the 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.
6
See footnote 5.
7
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.
8
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).
9
Instruction 4 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.
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 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.
8.6 Impact of Reporting a Discontinued Operation on Financial Information About Other Entities
When a component meets the discontinued-operations criteria in ASC 205-20, a registrant must consider the impact this may have on its requirement to provide financial statements or financial information about other entities (e.g., acquired businesses, equity method investees, guarantors, and issuers of guaranteed securities).
8.6.1 SEC Regulation S-X, Rule 3-05: Financial Statements of Businesses Acquired or to Be Acquired
Under SEC Regulation S-X, Rule 3-05, SEC registrants are required to evaluate
the significance of an acquired or to be acquired business (acquiree) in
accordance with the tests in SEC Regulation S-X, Rule 1-02(w) (i.e., the asset,
income, or investment test), to determine whether the acquiree’s financial
statements are required. Because the income test is based on a measure of income
and revenue (after intercompany eliminations) from continuing operations, the
reporting of a discontinued operation could affect the results of the
significance test.
As discussed in Section
8.3, a company may be required, or may elect, to file its audited annual
financial statements that give retrospective effect to a discontinued operation.
For businesses acquired after the date on which the retrospectively adjusted
financial statements are filed, registrants must use those retrospectively
revised financial statements when performing the significance tests.
Paragraph
2025.1 of the FRM further indicates that registrants must
also use these adjusted financial statements to evaluate (1) probable
acquisitions and (2) the “[a]ggregate impact of all individually insignificant
businesses that have occurred since the end of the most recently completed
fiscal year.”
Note 1 to paragraph 2025.1 of the FRM indicates that for businesses acquired on or before the date on which the retrospectively adjusted financial statements are filed, significance may be measured on the basis of “either (A) the registrant’s audited financial statements for its most recently completed fiscal year that were filed prior to the retrospectively adjusted financial statements giving effect to the discontinued operation or (B) the registrant’s filed financial statements for the most recently completed fiscal year that reflect retrospective application of the discontinued operation.” This paragraph goes on to state that a “registrant must consistently use [either option A or B] to measure significance of all individual acquisitions completed on or before the date the retrospectively adjusted financial statements are filed.”
8.6.2 SEC Regulation S-X, Rules 3-09 and 4-08(g): Financial Statements and Summarized Financial Information for Equity Method Investments
Under SEC Regulation S-X, Rules 3-09 and 4-08(g), SEC registrants are required
to evaluate the significance of an equity method investee by performing the
tests in SEC Regulation S-X, Rule 1-02(w) (i.e., the asset, income, or
investment test), to determine whether they must provide the investee’s
(1) financial statements, (2) summarized financial information, or (3) both.
Because the calculation for the income test is based on a measure of income and
revenue (after intercompany eliminations) from continuing operations, the reporting of a discontinued operation could
affect the results of the significance test.
The prescribed significance tests are performed annually in connection with the
filing of a Form 10-K (i.e., at the end of the registrant’s fiscal year).
Accordingly, significance is not remeasured when updated financial statements
that reflect retrospective adjustments are filed in a Form 8-K (or included in
or incorporated into a registration statement). However, when a registrant files
its next Form 10-K, it should be mindful that significance should be measured
for each annual period presented in the financial statements on the basis of
amounts that were retrospectively adjusted. Consequently, as a result of
retrospective adjustments for discontinued operations, a previously
insignificant equity method investee may become significant and a registrant may
be required to file the investee’s financial statements (or summarized
information under Rule 4-08(g)) in the registrant’s next Form 10-K — even if the
registrant was not required to provide these items in a prior Form 10-K. See
paragraph
2410.8 of the FRM for additional guidance.
Example 8-4
Significance of an Equity Method Investee When a Discontinued Operation Is Reported
Company A, an SEC registrant, disposed of Component B on November 30, 20X5. Historically, A has not been required to provide separate financial statements for Equity Method Investment C because C has not met the significance thresholds. While preparing its Form 10-K for the year ended December 31, 20X5, which retrospectively reflects B as a discontinued operation for all periods presented, A determines that C is now more than 20 percent significant to each of the three years ended December 31, 20X5, as a result of the retrospective presentation of discontinued operations. Company A must file C’s audited financial statements as of December 31, 20X5, and December 31, 20X4, and for the three years ended December 31, 20X5.
8.6.3 SEC Regulation S-X, Rule 3-10: Financial Statements of Guarantors and Issuers of Guaranteed Securities
Registrants that have registered debt with subsidiary or parent guarantees may
make use of certain accommodations in SEC Regulation S-X, Rule 3-10, and provide
summarized financial information in lieu of separate financial statements for
guarantor subsidiaries.
When a registrant disposes of a guarantor subsidiary, that subsidiary is
typically released from its guarantee. Changes in the
composition of guarantors and nonguarantors (e.g., a change
in a subsidiary designated as guarantor to one designated as
nonguarantor) may affect the summarized financial
information. For further details, see Section
2.3.2.4.2 of Deloitte’s Roadmap SEC
Reporting Considerations for Guarantees and
Collateralizations.
8.7 “To-Be-Issued” Accountant’s Report
In anticipation of an initial public offering, an entity may enter into a
transaction to dispose of a component or group of components that meets the
discontinued-operations criteria in ASC 205-20. Although the disposal may occur
after the date of the entity’s most recent balance sheet included in the
registrant’s financial statements (in which case presentation as a discontinued
operation would typically be precluded under U.S. GAAP), in certain circumstances
the registrant may be able to present the transaction retrospectively in the
entity’s financial statements and include a “to-be-issued” auditor’s report on those
financial statements. See Sections
3.8 and 5.6.2.1 of Deloitte’s
Roadmap Initial Public
Offerings for further discussion of “to-be-issued” auditor’s
reports.
Specifically in relation to discontinued operations, the
highlights of the June 25, 2014, CAQ SEC Regulations Committee
joint meeting with the SEC staff discuss the following:
The FRM
guidance cites specific examples of when such a draft report may be used but
indicates that use of a draft report is not limited to these events. The
Committee asked the staff whether a registration statement including a
to-be-issued audit report and the related retrospectively revised financial
statements might be reviewed in a situation where a registrant has a component
that qualifies as a discontinued operation before an initial registration
statement is filed but after the date of the latest balance sheet included in
the initial filing.
In order to qualify, the following
must be completed prior to the initial filing: 1) the
disposal of the discontinued operation has occurred; 2) the audit of the
financial statements, including the retrospective revision; and 3) registrant consultation with the appropriate Assistant Director
group. [Emphasis added]
In addition to meeting all the requirements discussed by the SEC Regulations
Committee above, a pre-effective amendment to the registration statement must
contain (1) updated financial statements for a period that includes the disposal
date and (2) an unrestricted accountant’s report. That is, the registration
statement cannot be declared effective until the to-be-issued report is removed and
the accountant’s report is finalized. Entities are encouraged to consult with their
independent accountants if they believe that they meet the requirements noted
above.
8.8 Impairment Disclosures
Registrants often record impairments in connection with probable or actual disposal
transactions when an asset group is classified as held for sale, a discontinued
operation, or otherwise. In certain situations, SEC rules and regulations require
registrants to provide disclosures related to such impairments in their filings
(e.g., periodic or interim reports, registration statements). The SEC staff also
expects registrants to provide appropriate disclosures before incurring a material
impairment charge as well as about the specific events and circumstances that led to
the charge in the period of impairment. Through its filing review process, the SEC
staff may ask questions about the timing of impairment testing when assets are
classified as held for sale or are disposed of. For example, the staff may ask
whether assets that the registrant expects to sell or dispose of were tested for
impairment in prior periods.
8.8.1 Form 8-K Reporting Obligations for Material Impairment
Registrants must report a material impairment on a Form 8-K. Item 2.06 of Form
8-K requires a registrant to report a material impairment if it concludes that a
material charge for impairment to one or more of its assets is required under
GAAP. Item 2.06 states that the following information must be disclosed in the
Form 8-K:
(a) the date of the conclusion that a material charge is required
and a description of the impaired asset or assets and the facts and
circumstances leading to the conclusion that the charge for
impairment is required;
(b) the registrant’s estimate of the amount or range of amounts of
the impairment charge; and
(c) the registrant’s estimate of the amount or range of amounts of
the impairment charge that will result in future cash expenditures,
provided, however, that if the registrant determines that at the
time of filing it is unable in good faith to make a determination of
an estimate required by paragraphs (b) or (c) of this Item 2.06, no
disclosure of such estimate shall be required; provided further,
however, that in any such event, the registrant shall file an
amended report on Form 8-K under this Item 2.06 within four business
days after it makes a determination of such an estimate or range of
estimates.
In accordance with the instructions to Item 2.06, a registrant
is not required to file a Form 8-K under Item 2.06 if the conclusion is reached
in connection with (1) the preparation, review, or
audit of financial statements that must be included in the next periodic
Exchange Act report; (2) the periodic report is filed on a timely basis; and (3)
this conclusion is disclosed in the report. Further, as noted in Section 110,
Item 2.06, if an impairment conclusion is reached at a time
that coincides with, but is not in connection with, the preparation,
review, or audit of financial statements required to be included in the next
periodic Exchange Act report, an Item 2.06 Form 8-K is not required if the
aforementioned conditions within the instructions to Item 2.06 are satisfied.
8.8.2 Early-Warning Disclosures
SEC Regulation S-K, Item 303(b)(2), requires registrants to
discuss in MD&A a known uncertainty — specifically, to disclose the
potential for a material impairment charge — in light of potential impairment
triggers (i.e., whether the registrant should have provided early-warning
disclosures about the possibility of an impairment charge in future periods to
help financial statement users understand these risks and how they could
potentially affect the financial statements). For example, in the real estate
industry, the SEC staff continues to request early-warning disclosures about
tenant difficulties that alert investors to the underlying conditions and risks
that a registrant faces before a material charge or decline in performance is
reported. In addition, the staff may use hindsight, after an impairment or
charge is reported (e.g., a material goodwill impairment charge), to inquire why
the registrant did not include any early-warning disclosures in prior periods
leading up to the reporting of such impairment. Such disclosures alert investors
to the underlying conditions and risks that the company faces before a material
charge or decline in performance is reported.
The SEC staff expects a registrant that has recorded, or is at risk for
recording, impairment charges to disclose the following:
-
The adequacy and frequency of the registrant’s asset impairment tests, including the date of its most recent test.
-
The factors or indicators (or both) used by management to evaluate whether the carrying value of other long-lived assets may not be recoverable.
-
The methods and assumptions used in impairment tests, including how assumptions compare with recent operating performance, the amount of uncertainty associated with the assumptions, and the sensitivity of the estimate of the fair value of the assets to changes in the assumptions.
-
The registrant’s conclusions regarding its asset groupings.
-
The timing of the impairment, especially if events that could result in an impairment had occurred in periods before the registrant recorded the impairment.
-
The types of events that could result in impairments.
-
In the critical accounting estimates section of MD&A, the registrant’s process for assessing impairments.
-
The facts and circumstances that led to the impairments. A registrant should also consider disclosing in MD&A risks and uncertainties associated with the recoverability of assets in the periods before an impairment charge is recorded. For example, even if an impairment charge is not required, a reassessment of the useful life over which depreciation or amortization is being recognized may be appropriate.
See Section
2.11 of Deloitte’s Roadmap SEC Comment Letter Considerations, Including
Industry Insights for further details. In addition, see
Section
9510 of the FRM for discussion of goodwill impairment
disclosures expected by the SEC staff.