5.4 Pro Forma Financial Information

Pro forma financial information allows investors to understand and evaluate the impact of a transaction by showing how that specific transaction (or group of transactions) might have affected the registrant’s historical financial position and results of operations if the transaction had occurred at an earlier date. Article 11 lists several circumstances in which a registrant may be required to provide pro forma financial information, including when a significant business acquisition or disposition has occurred or is probable. For example, a registrant that sells or spins off a significant business must provide pro forma financial information reflecting such transaction. For additional guidance on preparation of pro forma financial information for an entity that has disposed of a significant portion of its business, see Chapter 8 of Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations.

In addition, a registrant that was previously part of another entity (e.g., a carve-out entity that is spun off) must present pro forma financial information in a registration statement to reflect its “operations and financial position” as an autonomous entity (see Rule 11-01(a)(7)).

The sections below provide additional insight into pro forma financial information for the carve-out entity.

5.4.1 Pro Forma Adjustments

There are two categories of required pro forma adjustments:

Transaction accounting adjustments — These adjustments are limited to those that reflect the accounting for the transaction in accordance with U.S. GAAP or IFRS® Accounting Standards, as applicable. For an acquisition, such adjustments may include, among other items, the recognition of goodwill and intangible assets and adjustments of assets and liabilities to fair value on the balance sheet, as well as the related impacts on the statement of comprehensive income.
Autonomous entity adjustments — These adjustments, which are only required if the registrant was previously part of another entity, reflect incremental expenses or other changes necessary to reflect the registrant’s financial condition and results of operations as if it were a separate stand-alone entity. (See Section 5.4.2.)

In addition to the required adjustments noted above, the pro forma rules give registrants the flexibility to present, in the explanatory notes to the pro forma financial information, management’s adjustments, that reflect synergies and dis-synergies related to acquisitions and dispositions. Management’s adjustments also may provide insight into the potential effects of an acquisition or disposition and the plans that management expects to take after a transaction (which may include forward-looking information).

5.4.2 Autonomous Entity Adjustments

If a registration statement includes carve-out financial statements for a registrant in connection with an IPO or spin-off transaction, the pro forma financial statements for the carve-out entity must include autonomous entity adjustments, presented in a separate column from transaction accounting adjustments, if any, to reflect the incremental costs expected to be incurred as if the carve-out entity were a separate stand-alone entity.

At the 2021 AICPA & CIMA Conference on Current SEC and PCAOB Developments, the SEC staff addressed considerations related to distinguishing between autonomous entity adjustments and management’s adjustments. The staff noted that changes to a carve-out entity’s cost structure that are supported by a contractual arrangement may be considered autonomous entity adjustments (e.g., a new lease agreement or a transition services agreement with the former parent). By contrast, changes in a carve-out entity’s costs that are not supported by contractual arrangements generally do not represent autonomous entity adjustments. However, such changes may represent synergies or dis-synergies that may be presented as management’s adjustments if they meet the conditions in Regulation S-X, Rule 11-02(a)(7). The SEC staff also clarified that a registrant that presents synergies must separately present any related dis-synergies; the dis-synergies may not be presented “net” against the synergies.

For additional discussion of pro forma financial statement requirements, see Chapter 4 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions.