5.1 Financial Statements for a Registrant and Its Predecessor

Two examples of situations in which carve-out financial statements may be included in an initial registration statement for the registrant and its predecessor would be (1) a public entity’s planned spin-off of a business or group of businesses to shareholders as a separate public company and (2) a sale of a portion of a company to the public in an initial equity offering or a merger with a SPAC. Other, less common transactions, such as put-together transactions, drop-down transactions, split-offs, and “Up-C” transactions, may result in a similar carve-out presentation for a registrant and its predecessor.

In these circumstances, management must take into account the following considerations related to reporting and financial statement form and content in preparing carve-out financial statements for the registrant and its predecessor in an initial registration statement:

The general financial statement requirements in Rules 3-01 through 3-04 must be applied; the number of audited periods (two or three years) will depend on the registrant’s filer category (e.g., EGC,4 non-EGC, SRC5).
Management must apply SEC reporting and disclosure requirements (e.g., those in Regulation S-X, Staff Accounting Bulletins, Financial Reporting Releases [FRRs], and Compliance and Disclosure Interpretations [C&DIs]).
Public-entity6 accounting principles must be applied.
Private-company reporting alternatives in U.S. GAAP, including those developed by the PCC and subsequently endorsed by the FASB, cannot be applied in carve-out financial statements for the registrant and its predecessor; therefore, the effects of any previously elected private-company alternatives must be eliminated.
Transition provisions related to the adoption of new accounting standards must be evaluated. See Section 4.8 for a discussion of effective dates.
The independent registered public accounting firm must apply PCAOB standards in auditing the financial statements included in a registration statement filed with the SEC. In certain circumstances, the auditor’s report is required to refer to both auditing standards generally accepted in the United States (i.e., AICPA standards) and PCAOB standards related to financial statement audits of certain nonissuers, including, but not limited to, entities that (1) confidentially submit an initial public registration statement under the Jumpstart Our Business Startups (JOBS) Act, (2) voluntarily submit a registration statement to the SEC staff for nonpublic review before a public filing, and (3) file a Form 10 to effect an initial registration of securities (i.e., a spin-off from a public parent entity). Unless the registrant is an EGC, the auditor’s report must include communication of critical audit matters.
Unaudited interim financial statements and related footnote disclosures may be required depending on the time that has elapsed between the most recent fiscal year and the filing of the initial registration statement and any subsequent amendments through the date the registration statement is declared effective.

An initial registration statement, in addition to containing the carve-out financial statements of the registrant and its predecessor, must also meet certain SEC reporting requirements.7 Under those requirements, it may be necessary to incorporate other financial information, such as other entities’ financial statements, into the initial registration statement. Such financial information would include, but would not be limited to, information about acquired or to be acquired businesses or real estate operations, equity method investments, guarantees or collateralizations, material quarterly changes, management’s discussion and analysis, and pro forma effects. For more information about financial statement and disclosure requirements in a registration statement for an IPO, see Deloitte’s Roadmap Initial Public Offerings.

Changing Lanes

On March 21, 2022, the SEC issued a proposed rule that would require public companies to provide enhanced and standardized climate-related disclosures. Carve-out entities completing an IPO and private carve-out entities (targets) merging with a registrant (including SPACs) would be subject to the proposed rule’s requirements. In addition, the proposed rule would not exempt EGCs undertaking an IPO; therefore, such entities would be subject to the same disclosure requirements as non-EGCs. For more information about the proposed rule, see Deloitte’s March 21, 2022 (updated March 29, 2022), Heads Up.

The SEC also issued a proposed rule on March 30, 2022. That proposal is intended to “more closely align the financial statement reporting requirements in business combinations involving a shell company and a private operating company [target company] with those in traditional [IPOs].” For more information about the proposed rule as well as SPACs, see Deloitte’s October 2, 2020 (updated April 11, 2022), Financial Reporting Alert.

Footnotes

While an EGC would generally present two years of financial statements for its initial equity offering, it would typically be required to present three years of financial statements for an IPO of debt securities or a registration statement on Form 10 for a spin-off or direct listing.

A registrant that qualifies as an SRC, as defined in SEC Regulation S-K, Item 10(f)(1), may choose to prepare its disclosures by relying on the scaled disclosure requirements in SEC Regulation S-X, Article 8, and present two years of financial statements rather than three. For more information on SRCs, see Section 1.5 of Deloitte’s Roadmap Initial Public Offerings.

The term “public entity” is generally used to refer to an entity that files its financial statements with the SEC. However, there are various definitions of public or nonpublic entities in U.S. GAAP depending on which ASC topic is being applied (e.g., ASC 280 on segment reporting). Some ASC topics may refer to a “public business entity” as defined in the ASC master glossary; others may refer to “SEC filer” as defined in the ASC master glossary.

SRCs should consider the requirements in SEC Regulation S-X, Article 8, and Section 1.5 of Deloitte’s Roadmap Initial Public Offerings.