Business Combinations and Reorganizations
55-17 When common shares are issued to acquire a business in a business combination, the computations of EPS shall recognize the existence of the new shares only from the acquisition date. In reorganizations, EPS computations shall be based on analysis of the particular transaction and the provisions of this Subtopic.
SEC Final Rule 33-10786 should not change the SEC staff’s views on the guidance that addresses retrospective treatment of modifications of securities that occur after the balance sheet date.
The staff legal bulletin represents the views of the staff of the SEC’s Division of Corporation Finance and is not a rule, regulation, or statement of the SEC.
All but three of these filings occurred before the amendments made by SEC Final Rule 33-10786 to the pro forma financial information requirements of Article 11. Therefore, the analyses presented below related to such filings could be affected by the different pro forma financial information requirements before the amendments made by SEC Final Rule 33-10786.
The subsidiary entity established by the parent to effectuate the spin-off may be initially capitalized with a nominal number of shares of common stock. At or before the time the spin-off occurs, the number of common shares is increased significantly (e.g., in conjunction with the distribution ratio in a spin-off). In these situations, the number of common shares issued as of the date the spin-off occurs represents the relevant number of common shares to include in the denominator for all historical financial reporting periods. The increase from the number of nominal shares at initial formation to the number of shares issued as of the spin-off date represents a stock split that is treated retrospectively, as described in Section 8.2.1.
See footnote 7.
It is not uncommon for existing subsidiaries to have been historically capitalized with a nominal number of common shares. At the time the existing subsidiary’s common stock is distributed in a spin-off, the number of common shares is increased significantly through a stock split. In accordance with ASC 260, an entity should retrospectively adjust the outstanding common shares used to compute the weighted-average shares outstanding for the effects of the stock split. Additional common shares that are sold (i.e., “new money”) should be included in EPS only from the issuance date. Therefore, adjustments to the EPS amounts previously included in the registration statement filed to effectuate the offering of the existing subsidiary’s common shares would most likely only be necessary to account for the effect of stock splits or reverse stock splits that occurred in conjunction with the offering (i.e., were effective as of the date of the offering). For the appropriate treatment of other changes in capital structure that occur in conjunction with the spin-off, which may include changes in the form of ownership or redemptions or conversions of securities other than common stock, see Section 8.6.2.
See footnote 9.
The compensation cost, however, will be included in the financial statements of the existing subsidiary.
This situation is more likely if the existing subsidiary had common stock owned by third parties other than the parent.
Ten of the 56 entities reported only losses in the historical periods before the spin-off. Three of the 10 entities that reported only losses in the historical periods disclosed a number of potential common shares that were excluded from the calculation of diluted EPS in the historical periods before the spin-off because the inclusion of those shares would have been antidilutive.