4.4 Pro Forma Financial Information

Regulation S-X, Article 11, lists several circumstances in which a registrant may need to provide pro forma financial information. Such information is most commonly required when a significant business combination or a disposition of a significant portion of a business has occurred or is probable. As part of an IPO, corporate reorganizations, changes in capitalization, and the use of proceeds are frequently reflected in pro forma financial information; however, a registrant needs to consider whether any other significant events or transactions have occurred or are probable that would also be meaningful to investors on a pro forma basis. Factors that may affect whether a registrant needs to provide pro forma financial information in a registration statement include (1) whether the event or transaction is significant; (2) whether it is already reflected in the historical financial statements; (3) if the event has not yet occurred, whether it is probable; and (4) in the case of the acquisition of a business, whether the separate financial statements of the acquiree are included in the registration statement (see Section 2.5 for more information).

Pro forma financial information, which is unaudited, typically includes an introductory paragraph, a pro forma balance sheet, pro forma income statement(s), and accompanying explanatory notes. The introductory paragraph briefly describes the transaction(s), the entities involved, the periods for which the pro forma financial information is presented, and any other information that may help readers understand the content of the pro forma information. The pro forma balance sheet and income statement are presented in a columnar format with separate columns for the registrant, the acquiree (in the case of a business combination), transaction accounting adjustments, autonomous entity adjustments, and pro forma totals. See below for more information about the types of pro forma adjustments. Further, each adjustment should include a reference to an explanatory note that clearly discusses the assumptions involved and how the adjustments are derived or calculated. In the limited cases in which only a few adjustments are required and those adjustments are easily understood, a registrant may include a narrative presentation of the pro forma effects of a transaction in lieu of full pro forma financial information.

A pro forma balance sheet is required as of the same date as the registrant’s most recent balance sheet included in the IPO registration statement (i.e., one pro forma balance sheet as of the end of the fiscal year or the subsequent interim period, whichever is later). In the computation of pro forma balance sheet adjustments, it is assumed that the transaction was consummated on the balance sheet date. A pro forma balance sheet is not required if the transaction is already reflected in the historical balance sheet.

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 income statement, under the assumption that the balance sheet adjustments were made as of the beginning of the fiscal year presented. For dispositions, the adjustments may reflect the disposal of assets and related impacts. The SEC staff has also indicated that transaction accounting adjustments should generally be shown gross rather than net so that the reader can understand the nature and amount of each adjustment. Alternatively, a more detailed explanation of the components of the adjustments may be presented in the notes to the pro forma financial information. The transaction accounting adjustments should contain references to notes that clearly explain the assumptions involved and other relevant information for each adjustment.
• Autonomous entity adjustments — These adjustments, which are only required if the registrant was previously part of another entity, reflect incremental expense or other changes necessary to reflect the registrant’s financial condition and results of operations as if it were a separate stand-alone entity. For example, if a public entity plans to distribute a portion of its business to shareholders as a separate public company (e.g., spin-off), the spinnee’s pro forma financial statements must include autonomous entity adjustments to reflect the incremental costs expected to be incurred as if the distributed 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 (see following paragraph). The staff noted that changes to a spinnee’s cost structure that are supported by a contractual arrangement may be considered autonomous entity adjustments (e.g., a new lease agreement, a transition services agreement with the former parent). By contrast, changes in spinnee 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).

In addition to the information discussed above, certain pro forma information may need to be included in specific situations, as discussed in Section 3400 of the FRM. Such situations include distributions to owners under SAB Topic 1.B.3, changes in capitalization at or before the closing of an IPO, and changes in corporate structure that result in a change in tax status. For more information about distributions to owners, changes in capitalization, and changes in corporate structure, see Sections 5.6.1, 5.6.2, and 5.9.2, respectively.