5.4 Business Combinations

ASC 805-10-50-2(h) requires an acquirer that meets the definition of a public entity to disclose the following:

• “The amounts of revenue and earnings of the acquiree since the acquisition date included in the consolidated income statement for the reporting period.”
• “[T]he revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period.”
• “The nature and amount of any material, nonrecurring pro forma adjustments directly attributable to the business combination(s) included in the reported pro forma revenue and earnings.”

Entities must provide pro forma information for business combinations that occur (1) during the reporting period or (2) after the reporting date but before the financial statements are issued, unless the initial accounting for the business combination is incomplete at the time the financial statements are issued or are available to be issued. In addition, if multiple immaterial business combinations occur that are collectively material, pro forma information should be disclosed in the aggregate for those business combinations.

The ASC 805 pro forma disclosures are required only for public entities. Therefore, an entity may not have provided these disclosures in its financial statements before becoming a public entity. However, if a material business combination or multiple immaterial business combinations that are material in the aggregate have occurred in any of the reporting periods presented in the registration statement, the entity would be required to provide these disclosures in its registration statement.

The supplemental pro forma information required by ASC 805-10-50-2(h) (i.e., the revenue and earnings of the acquiree for the periods before the acquisition) does not need to be audited. Auditors, however, should perform the procedures required by PCAOB AS Section 2705.

The SEC’s rules on disclosure of pro forma financial information differ from the guidance in U.S. GAAP on this topic. Specifically:

• ASC 805-10-50-2(h) requires disclosure of pro forma financial information in the notes to the historical financial statements for revenue and earnings only.
• SEC Regulation S-X, Article 11, requires presentation of pro forma financial information in certain SEC filings (e.g., Form 8-K, registration statements, and proxy statements) to reflect a pro forma balance sheet and income statement.

In complying with the more extensive presentation requirements of Article 11, it is insufficient for an entity to provide only the pro forma financial information disclosures required by ASC 805. Because the FASB does not provide detailed guidance on preparing pro forma financial information, registrants preparing disclosures required by ASC 805 may apply the same concepts described in Article 11.

For more information about presenting pro forma financial information under ASC 805, see Deloitte’s Roadmap Business Combinations.