Chapter 7 — SEC Reporting Considerations

7.5 Reporting Implications of Retrospective Changes

As noted in Sections 4.9, unless restatement is impracticable, an entity must restate prior-period segment disclosures when there has been a change in the composition of its reportable segments. Disclosure based on the new reportable segments should not ordinarily be presented until financial statements for periods managed on the basis of the new structure are presented in the normal course of filings. Accordingly, an SEC registrant must consider the impact of the retrospective change on the historical financial statements included in its Exchange Act reports (e.g., Forms 10-K and 10-Q) and in registration statements under the Securities Act (e.g., registration statements on Form S-3) and other nonpublic offerings.

Changing Lanes

ASU 2023-07 amends ASC 280 to replace the word “restate” with “recast.” This update was made to distinguish the recasting of segment information from the correction of an error under ASC 250.

In addition to the requirements for a registrant to recast prior-period segment disclosures when there has been a change in the composition of its reportable segments as discussed in this section, ASU 2023-07 includes the following regarding changes in prior-period segment expense information:

As is consistent with the existing recasting requirements related to a change in the composition of the entity’s reportable segments, if an entity (1) “changes the segment information that is regularly provided to the [CODM] in a manner that causes the identification of significant segment expenses to change” or (2) “changes its internal reports and the segment expense information that is regularly provided to the CODM changes in the current period,” it is required to recast all periods, including interim periods, unless it is impracticable to do so.
Recasting is not required for an entity that has “significant changes from prior periods to the measurement methods of expenses, the method for allocating expenses to a segment, or changes in the method for allocating centrally incurred expenses.” However, in a manner consistent with the existing recasting requirements for reflecting a change in the measurement of a segment’s profit or loss, “it is preferable to show all segment information on a comparable basis to the extent it is practicable to do so.”

Therefore, after adopting ASU 2023-07, in addition to recasting for changes in the composition of its reportable segments (as historically done), a registrant will now also need to evaluate whether changes in segment expenses will result in a requirement to recast its historical financial statements.

7.5.1 Financial Statements and Other Affected Financial Information in Exchange Act Reports

If there has been a change in the composition of an entity’s reportable segments, the entity must retrospectively restate its segment disclosures for all prior periods presented when it first reports the change in reportable segments. In addition, the entity should update other affected financial information for such prior periods (e.g., description of the business, MD&A2) to reflect the change in reportable segments.

If a registrant first reports a change in reportable segments in interim financial statements in a Form 10-Q, the 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 change in reportable segments. A registrant is generally not required to adjust the annual pre-event financial statements to reflect the change in reportable segments until they are comparatively presented with the annual financial statements that report the change in reportable segments (generally in the registrant’s next Form 10-K). However, see Section 7.5.2 for circumstances and types of filings in which this requirement may be accelerated.

Example 7-1

In January 20X6, Company A, an SEC registrant with a calendar year-end, changed its management structure, which resulted in a change in its reportable segments. When A files its Form 10-Q for the quarter ended March 31, 20X6, it must retrospectively restate its segment disclosures for the comparative interim period ended March 31, 20X5. Company A must also update the business description and MD&A for the comparative interim period ended March 31, 20X5, to reflect the changed segments. However, there is no immediate requirement for A to retrospectively restate its segment disclosures for the annual financial statements presented in its Form 10-K for the year ended December 31, 20X5.

7.5.2 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 change in reportable segments. A registrant may need to similarly consider other retrospective changes, such as reporting a discontinued operation under ASC 205-20 and certain accounting changes resulting from the adoption of a newly issued standard. See Section 8.3 of Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations for details.

7.5.2.1 New Registration Statements (Other Than Form S-8)

If a registrant files a new or amended registration statement3 before it files the Form 10-Q that first reports a change in reportable segments, the registrant is not required (or permitted)4 to file restated financial statements for prior periods to reflect the change in reportable segments. However, the registrant should consult with its legal counsel and independent accountants regarding the appropriate disclosure to provide in the registration statement.

If a registrant files a new or amended registration statement after it files the Form 10-Q that first reports a change in reportable segments, the registrant is generally required to file restated financial statements that reflect the change in reportable segments for all periods presented. In addition, the registrant should update other affected financial information (e.g., description of the business, MD&A) to reflect the change in reportable segments. For new or amended registration statements that normally incorporate the financial statements by reference (e.g., Form S-3), the registrant may file, for all periods presented, restated financial statements and other affected financial information that reflect the new segments on Form 8-K; alternatively, the registrant can include the retrospectively adjusted financial statements and related information in its registration statement for all periods presented. If the restated financial statements and other information are filed on Form 8-K, that form 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 restated financial statements and other affected financial information that reflect the new segments in a Form 8-K once the change in reportable segments 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 it files the Form 10-Q that reports the change in reportable segments but before or simultaneously with the filing of the new registration statement.

Example 7-2

Facts

Company A, an SEC registrant, files its Form 10-K for the year ended December 31, 20X5, on February 28, 20X6. In June 20X6, A changed its management structure, resulting in a change in its reportable segments. Company A files its Form 10-Q for the quarter ended June 30, 20X6, on July 28, 20X6, and presents the change in reportable segments for the interim periods presented, including recasting the prior interim periods to conform to the current presentation.

Scenario 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 the change in reportable segments for all periods presented or (2) incorporate by reference a previously filed Form 8-K that contains financial statements and other affected financial information that present the change in reportable segments for all periods presented.

Scenario 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 the change in reportable segments. Company A is not required (or permitted)5 to (1) include in its registration statement restated financial statements that present the change in reportable segments or (2) incorporate by reference a Form 8-K containing restated financial statements and other affected financial information that present the change in reportable segments. However, A should consult with its legal counsel and independent accountants regarding the appropriate disclosure to provide in the new registration statement.

7.5.2.2 Form S-8

The requirements for a Form S-8 are addressed in Question 126.40 of the SEC staff’s C&DIs related to Securities Act forms:

C&DIs — SEC Securities Act Forms

Question 126.40

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, a registrant is generally not required to update its previously issued financial statements in a new Form S-8 to reflect a change in reportable segments unless it constitutes a “material change in the registrant’s affairs.”

7.5.2.3 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 or incorporated in the effective registration statement. Management, in consultation with legal counsel, should determine whether the retrospective presentation of a change in reportable segments 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 change in reportable segments is a fundamental change, restated financial statements and other affected financial information should be filed on Form 8-K or included in the amended registration statement, as described above. If the registrant and its legal counsel determine that the change in reportable segments is not a fundamental change, the financial statements do not need to be restated, but the registrant should consult with its legal counsel and independent accountants regarding the appropriate disclosure to provide in the prospectus supplement.

Note that all post-effective amendments are considered “new filings” and are subject to the guidance discussed in Section 7.5.2.1.

7.5.2.4 Nonpublic Offerings by SEC Registrants

Financial statements subject to retrospective changes may also be included (i.e., reproduced) in or incorporated by reference into a nonpublic offering, such as a private placement in accordance with SEC Regulation D or Rule 144A of the Securities Act:

Financial statements included in a nonpublic offering — We believe that entities are generally required to recast the financial statements to reflect the change in reportable segments for the applicable periods. Accordingly, the considerations related to recasting the financial statements for a change in reportable segments would generally be the same as those discussed in Section 7.5.2.1.
Financial statements incorporated by reference into a nonpublic offering — We believe that the considerations related to recasting the financial statements for the change in reportable segments would be the same as those discussed in Section 7.5.2.3.

Changing Lanes

ASU 2023-07 adds other instances in which recasting may be needed when there is a change in prior-period segment expense information. Entities should be mindful of the above considerations related to these instances (see Section 7.5).

7.5.2.5 Supplemental Disclosure

We have observed that at times, an entity may also wish to provide unaudited supplemental disclosures about a change in reportable segments before filing financial statements for periods managed on the basis of the new segment structure. For example, an entity may change its reportable segments during the first quarter but may also wish to provide unaudited supplemental disclosure about the new segment structure for each quarter and annual periods on a basis consistent with the new segment structure. While such disclosure would not be required (or permitted)6 in its financial statements until the entity first reports financial statements for periods managed on the basis of the new segment structure, the entity may determine that such supplemental disclosure would inform financial statement users of the change. Accordingly, we have observed that an entity generally furnishes such unaudited supplemental disclosure through a press release filed on Form 8-K or on the entity’s Web site, typically in less detail than in the required disclosures under ASC 280 (i.e., the unaudited supplemental disclosure does not have the same “look or feel” as disclosures in a financial statement segment footnote addressing the change).

7.5.3 Restatement of Prior Periods Because of a Change in Reportable Segments in a Spin-Off

As discussed above, the SEC staff has stated that disclosure based on a new segment structure generally should not be presented until financial statements for periods managed on the basis of the new segment structure are presented. This guidance would also typically apply to a change in reportable segments as a result of a spin-off. However, a registrant should consider all facts and circumstances and is encouraged to consult with its legal counsel and independent accountants.

7.5.4 “To-Be-Issued” Accountant’s Report in an Initial Public Offering

In anticipation of an initial public offering, an entity may enter into retrospective changes (e.g., a change in reportable segments, a stock split, the reporting of a discontinued operation under ASC 205-20, and certain accounting changes resulting from the adoption of a newly issued standard). In such limited circumstances, the entity may be able to present the transaction retrospectively in its financial statements earlier than in the typical reporting framework and include a “to-be-issued” accountant’s report on those financial statements. A “to-be-issued” accountant’s report is a draft report in the form that will be expressed when the registration statement is declared effective by the SEC. An entity is required to comply with very specific accounting, reporting, and audit requirements in this instance given that the early disclosure based on such retrospective changes is not otherwise permitted from an accounting perspective until the event is reported in the financial statements. For a list of such requirements and further details, see Section 3.8 of Deloitte’s Roadmap Initial Public Offerings.

Footnotes

See Section 9830 of the FRM for guidance on MD&A in registration statements.

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.

See the highlights of the June 23, 2009, CAQ SEC Regulations Committee joint meeting with the SEC staff.

See footnote 4.

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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.