3.8 Retrospective Items and “To-Be-Issued” Accountant’s Report in an IPO

In anticipation of an IPO, an entity may wish to present — retrospectively in its financial statements — certain transactions that occur after the date of such financial statements. Such retrospective presentation may include a change in reportable segments (also see Section 4.9 of Deloitte’s Roadmap Segment Reporting), a stock split (also see Section 5.6.2.1), a legal reorganization (also see Section 5.2.3), the reporting of a discontinued operation under ASC 205-20, and certain accounting changes resulting from the adoption of a newly issued standard (also see Section 3.3). In such limited circumstances, the entity may be able to present the transaction retrospectively in its financial statements earlier than normally permitted and would include a “to-be-issued” accountant’s report, sometimes referred to as a “legend opinion,” on such financial statements.

A to-be-issued accountant’s report is a draft report in the form that will be used when the registration statement is declared effective by the SEC. The draft report includes a preface (or legend), signed by the auditor, stating that it expects to be in a position to issue the report in the form presented before the registration statement is declared effective by the SEC. The draft report that follows such a signed legend does not include the accountant’s signature, since the underlying event discussed in the legend has not yet occurred and thus cannot be audited as of the date of the preface (or legend).

The registration statement cannot be declared effective until the preface (legend) is removed and the accountant’s report is finalized. Entities are encouraged to consult with their independent accountants if they believe that the requirements noted above are met. Once the preface (legend) is removed, auditors typically would need to dual-date their audit opinions related to the retrospective event.

Connecting the Dots

The most common use of a to-be-issued report in an IPO registration statement is to reflect a stock split that has been approved by the board of directors but has not been filed with the state in which the company is incorporated. It will be finalized by the state shortly after the amended registration statement is filed but before the IPO is completed. SEC preclearance is not required in such circumstances. Registration statements that are filed after the board of directors’ approval and the state filing do not need to include a preface (legend).

Alternatively, assume that an entity enters into a transaction to dispose of a component or group of components that meets the discontinued-operations criteria in ASC 205-20 after the date of the entity’s most recent financial statements but before the IPO registration statement is filed. While professional standards would normally not permit an entity to recast prior periods before issuing financial statements for a period that includes the change, an entity may be able to do so in its IPO registration statement by using a to-be-issued report. In this situation, consultation with the SEC is suggested since the following conditions may need to be met as indicated at the June 2014 CAQ SEC Regulations Committee joint meeting with the SEC staff: (1) the disposal of the discontinued operation has occurred; (2) the financial statements have been audited, including the retrospective revision; and (3) the registrant has consulted with the appropriate industry group.

For more information, see Section 4710 of the FRM. Also see Section 8.7 of Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations.