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Chapter 5 — SEC Reporting Topics

5.2 Financial Statements of Businesses Acquired or to Be Acquired (SEC Regulation S-X, Rule 3-05)

5.2 Financial Statements of Businesses Acquired or to Be Acquired (SEC Regulation S-X, Rule 3-05)

Carve-out financial statements are often used to satisfy the requirements of Rule 3-05, under which a registrant must file separate preacquisition historical audited financial statements when the registrant and its predecessor acquire (or it is probable that they will acquire) selected parts of an entity that meet the definition of a business8 that is significant. The number of audited financial statement periods that must be filed (i.e., one or two years of audited financial statements) will be based on the significance level determined by performing the tests described in SEC Regulation S-X, Rule 1-02(w) (i.e., the asset, income, or investment test). Unaudited financial statements as of and for the appropriate interim periods preceding the acquisition may also be required. In addition, the registrant must provide pro forma financial information in accordance with SEC Regulation S-X, Article 11, to reflect the acquisition.

Footnotes

8
Separate financial statements of an acquiree are required only if the acquiree meets the definition of a business under Rule 11-01(d). The definition of a business for SEC reporting purposes is not the same as the definition for U.S. GAAP accounting purposes. See Section 2.1.1 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions for further discussion of the definition of a business for SEC reporting purposes.
9
Such requirements include classification of redeemable securities or securities whose redemption is outside the control of the issuer as temporary equity in accordance with (1) SEC Regulation S-X, Rule 5-02.27, and (2) ASR 268 (FRR Section 211).
10
If the acquiree is a foreign business or a foreign private issuer, see Topic 6 of the FRM.
11
In accordance with the definition of a PBE in the ASC master glossary, an “entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.” Accordingly, an acquiree can elect to use private-company accounting alternatives in its stand-alone financial statements that are not included in an SEC filing. However, an acquiree that makes such an election would be required to maintain two sets of accounting records and financial information.
12
If an acquiree is identified as a predecessor, the audit must be performed in accordance with PCAOB standards. In certain circumstances, a reference to both auditing standards generally accepted in the United States (i.e., AICPA standards) and the standards of the PCAOB may be appropriate for a predecessor in an initial registration statement (i.e., if the entity does not meet the definition of an issuer).