SEC Improve Financial Disclosures About Acquisitions and Dispositions of Businesses

SEC Improves Financial Disclosures About Acquisitions and Dispositions of Businesses

May 21, 2020

The SEC has issued a final rule, Amendments to Financial Disclosures About Acquired and Disposed Businesses. The final rule amends the SEC’s rules and forms “to improve their application, assist registrants in making more meaningful determinations of whether a subsidiary or an acquired or disposed business is significant, and to improve the disclosure requirements for financial statements relating to acquisitions and dispositions of businesses, including real estate operations and investment companies.” Among other changes, the amendments:

Modify the investment test to use the aggregate worldwide market value of a registrant’s common equity.
Revise the income test to use the lower measure of significance on the basis of (1) income from continuing operations before taxes or (2) revenue.
Reduce required annual financial statement periods for acquirees to a maximum of the two most recent fiscal years.
Result in fewer circumstances in which acquiree financial statements would be required for an IPO and individually insignificant acquirees.
Permit the use of abbreviated financial statements for an acquiree in certain circumstances without a request for SEC staff permission.
Allow the use of, or reconciliation to, IFRS® Standards as issued by the International Accounting Standards Board (IASB®) (IFRS-IASB) in certain circumstances.
Amend the pro forma financial information disclosures to require adjustments and certain disclosures for (1) “Transaction Accounting Adjustments” and (2) “Autonomous Entity Adjustments,” which reflect the registrant as a separate entity if it was previously part of another entity. If certain conditions are met, a registrant also has the option to present “Management’s Adjustments” (e.g., synergies or dis-synergies for which there is a reasonable basis).
Align certain requirements for a real estate acquiree with those in SEC Regulation S-X, Rule 3-05.
Raise the significance threshold for reporting dispositions of a business from 10 percent to 20 percent to conform the threshold with that of a significant acquisition.
Make other changes specific to smaller reporting companies and investment companies.

The final rule will become effective at the beginning of a registrant’s fiscal year that starts after December 31, 2020 (e.g. January 1, 2021, for calendar-year-end companies); however, voluntary compliance is permitted before the effective dates as long as the final rule is applied in its entirety.