3.2 SEC Reporting

SEC authoritative literature includes a number of requirements in Regulation S-X that govern the form and content of a registrant’s financial statements and other information that must be included in filings with the SEC, including financial statements and financial information of other entities. The SEC staff often comments on these requirements, and they have been the subject of discussion at a variety of forums, including the annual AICPA Conference, various industry conferences, and joint meetings of the SEC staff and the CAQ SEC Regulations Committee. However, there may be situations in which registrants seek relief from complying with certain SEC reporting requirements. With this in mind, the SEC staff has acknowledged that relief may be warranted in some cases and that registrants may seek to obtain a waiver from the SEC’s Division of Corporation Finance, Office of the Chief Accountant (CF-OCA). Such a waiver may be granted when the application of Regulation S-X results in a requirement to provide more information than what is necessary to reasonably inform investors in light of the total mix of information available. For additional guidance on Rule 3-13 waivers and prefiling letter requests, see Appendix B.

3.2.1 Use of Private-Company Adoption Dates for Accounting Standards

There are instances in which a registrant must provide the financial statements of other entities in its registration statements or periodic filings. Among the entities that meet the definition of a PBE in the ASC master glossary are those that are “required by the [SEC] to file or furnish financial statements, or [do] file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).” Therefore, other entities that may not be SEC filers but whose financial statements are provided under Regulation S-X, Rules 3-05 and 3-09, or whose summarized financial information is provided under Regulation S-X, Rules 4-08(g) and 10-01(b)(1), for example, generally meet the definition of a PBE. Such other entities that meet the definition of a PBE are not permitted to adopt private-company accounting alternatives. Accordingly, the effects of any previously elected private-company accounting alternatives would have to be eliminated from the historical financial statements of an entity whose financial statements are included in the SEC filing of a registrant.

In November 2019, the FASB issued ASU 2019-10, which introduced a “two-bucket” framework to determine the effective dates for certain future major accounting standards. Under the FASB’s framework, the buckets are defined as follows:

Bucket 1 — All PBEs that are SEC filers (as defined in U.S. GAAP), excluding smaller reporting companies (SRCs) (as defined by the SEC).
Bucket 2 — All other entities, including SRCs, other PBEs that are not SEC filers (such as significant acquirees or investees), private companies, not-for-profit organizations, and employee benefit plans.

The FASB decided that for future major accounting standards, the effective date for entities in Bucket 2 would be at least two years after the effective date for entities in Bucket 1.

See Deloitte’s November 19, 2019, Heads Up for further details.

3.2.2 Significant Business Acquisitions (Regulation S-X, Rule 3-05)

Examples of SEC Comments

We note that you consummated the [Company A] acquisition . . . but to date you have not filed audited financial statements of the acquired business or pro forma information relating to the acquisition. Please provide us with your calculations of the significance tests outlined in Rule 1-02(w) of Regulation S-X that you used in applying the requirements of Rule 3-05 and Article 11 of Regulation S-X.
The company filed a Form 8-K . . . indicating that it intends to file by amendment the historical financial statements of [Company A], and pro formas reflecting the acquisition, not later than 71 calendar days after the date the Form 8-K was required to be filed. Your registration statement may not be declared effective before the financial statements meeting the requirements of Rule 3-05 of Regulation S-X are provided, if the transaction exceeds the 50% significance level. Please provide us with a reasonably detailed presentation of your significance level computations.
[Please] tell us the amount of income from continuing operations before taxes . . . of [Company A] used to measure the significance of the acquired business under Rule 3-05 of Regulation S-X.
We note [that] you acquired all of the issued and outstanding equity ownership of [Company A]. Please revise to file the financial statements of [A] for the required periods pursuant to Rule 3-05 of Regulation S-X and pro forma financial information as required by Article 11 of Regulation S-X or provide us with the significance test calculations of Rule 1-02(w) of Regulation S-X, supporting your conclusion that [A’s] financial statements are not required to be presented.
Tell us how you evaluated Rule 3-05 and Article 11 of Regulation S-X in determining you would not file historical and pro forma financial statements relative to the businesses acquired, and provide us with the significance testing performed in formulating your view.

When a registrant consummates, or it is probable that a registrant will consummate, a significant business acquisition, the SEC staff may require the registrant to file certain financial statements for the acquired or to be acquired business (acquiree) in accordance with Regulation S-X, Rule 3-05, in a Form 8-K, registration statement, or proxy statement. The following factors govern whether, and for what period, financial statements for the acquiree are required:

Whether the acquired or to be acquired assets and liabilities meet the definition of a business for SEC reporting purposes. The definition of a business for SEC reporting purposes under Regulation S-X is not the same as the definition under ASC 805 for U.S. GAAP purposes. This holds true even after adoption of ASU 2017-01, which clarifies the definition of a business for U.S. GAAP purposes.
The significance of the acquired or to be acquired business. The significance is calculated on the basis of three tests:
- The investment (purchase price) test.
- The asset test.
- The income test, which includes an assessment of a pretax income component and, in certain circumstances, a revenue component.
Whether consummation of the business acquisition is probable or has occurred.

The SEC staff issues comments on the application of Rule 3-05 in connection with significant business acquisitions when registrants:

Incorrectly determine that the acquired or to be acquired assets and liabilities do not meet the definition of a business for SEC reporting purposes.
Do not perform the significance calculations correctly. Some of the most common mistakes are misapplications of the income test, such as excluding unusual or one-time gains or losses from the test.
Do not realize that Rule 3-05 also applies, in a registration statement or certain proxy statements, to probable acquisitions whose significance is greater than 50 percent.
Do not consider, in a registration statement or proxy statement, the cumulative significance of previously consummated individually insignificant acquisitions.

The staff may also question the financial statements provided by a registrant under Rule 3-05 when the registrant has acquired only selected parts of an entity. In such situations, it may be appropriate, on the basis of the facts and circumstances, for the registrant to include (1) full financial statements of the entity, (2) carve-out financial statements of the net assets and operations acquired, or (3) abbreviated financial statements (i.e., Statement of Assets Acquired and Liabilities Assumed; Statement of Revenue and Direct Expenses). For additional guidance on these topics, see Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions.

3.2.3 Investments in Equity Method Investees (Regulation S-X, Rules 3-09, 4-08(g), and 10-01(b)(1))

Examples of SEC Comments

Please tell us how you complied with Rule 3-09 and Rule 4-08(g) of Regulation S-X. In this regard, please provide us with your significance test calculations pursuant to Rule 3-09 and Rule 4-08(g) of Regulation S-X.
Please demonstrate how the denominator used in your significance calculation complies with Rule 3-09 of Regulation S-X. Please note that the denominator should begin with the amount identified in Rule 5-03(b)10 of Regulation S-X, which is a figure that excludes equity in earnings of unconsolidated affiliates. The Rule 5-03(b)10 figure should be adjusted to include your equity in the pre-tax earnings of unconsolidated affiliates, exclusive of amounts attributable to any noncontrolling interests of the investees, and exclude the portion of your pre-tax income attributable to any noncontrolling interests in your subsidiaries. Please recalculate the denominator used in your [Company A] significance test or clarify how the $[X] million figure you used in your calculation was appropriate.
We note that the $[X] million equity in losses of [Company A] appears significant to your pre-tax income. Please provide us your analysis indicating why it is appropriate to exclude separate financial statements of this equity method investee under Rule 3-09 of Regulation S-X.
Please explain to us, and revise to disclose why it appears you continue to account for this investment under the equity method of accounting, rather than consolidation. Additionally, we note your disclosure that for [fiscal years 3, 2 and 1], your share of losses of your affiliates was $[X], $[Y] and $[Z], respectively. In light of the apparent significance of these amounts to your consolidated income before taxes, please explain to us how you evaluated your equity method investments under the requirements of Rule 3-09 of Regulation S-X.
[I]f you account for your [X]% investment in [Company A] under the equity method, tell us how you considered the requirements of Rule 3-09 of Regulation S-X with regard to the separate financial statements of your investee.

When a registrant has a significant equity method investment, Regulation S-X, Rules 3-09, 4-08(g), and 10-01(b)(1), may require the registrant to provide summarized financial information of the investee in the footnotes to the financial statements, separate financial statements of the investee, or both. To determine whether summarized information is required under Rule 4-08(g), a registrant must perform all three significance tests: the investment test, the asset test, and the income test (which includes an assessment of a pretax income component and, in certain circumstances, a revenue component).

Under Rule 3-09, significance is calculated for equity method investees on the basis of only two tests performed annually:

The investment test.
The income test, which includes an assessment of a pretax income component and, in certain circumstances, a revenue component.

If an investee is significant under Rule 3-09, its separate financial statements must be filed in the registrant’s Form 10-K or in a related amendment. Thus, a registrant’s compliance with Rule 3-09 is particularly important because its failure to file the financial statements of a significant investee may cause it to become a delinquent filer and lose Form S-3 eligibility.

To determine whether summarized income statement information is required under Rule 10-01(b)(1) in its quarterly reports, a registrant must apply both the investment test and the income test to each equity method investee.

Common errors that registrants make when performing the significance tests under Rules 4-08(g) and 3-09 include:

Failure to document the tests each year — This is most common when an equity method investee has been clearly insignificant in the past. In certain situations, such as a near-break-even year for the registrant or a large income or loss at the investee level, the current year’s significance may change, making the equity method investee significant for the first time under Rule 3-09 and thus requiring audited financial statements for the current year and unaudited financial statements for prior years.
Consider the need to update the tests each period — For example, when reporting a discontinued operation, registrants should reassess the significance tests for all periods affected by such retrospective change. Also, in such instances when considering significance under Rule 10-01(b)(1) for interim periods, registrants should use the balance sheet as of the end of the most recently completed fiscal year that is included in the subsequent quarterly report since it will reflect the impact of any such retrospective change. See paragraph 2410.8 and the note to paragraph 2420.7 of the FRM.

For additional guidance, see Deloitte’s Roadmap SEC Reporting Considerations for Equity Method Investees.

3.2.4 Restrictions on Dividends (Regulation S-X, Rules 4-08(e), 5-04, and 12-04)

Registrants must consider the requirements of Regulation S-X, Rules 1-02(dd), 4-08(e), 5-04, and 12-04, when the transfer of assets (cash or other funds) to the parent company/registrant from its subsidiary (or subsidiaries) or equity method investee (1) is materially restricted, (2) is limited, or (3) requires a third party’s approval.

For additional discussion, see Section 2.4.1.

3.2.5 Pro Forma Financial Information (Regulation S-X, Article 11)

Examples of SEC Comments

We note that . . . pursuant to [a stock purchase agreement] by and among [various companies, including your company (i.e., Company A) and Company Y], [A] completed the previously announced sale of one hundred percent (100%) of the outstanding shares of capital stock of [one of A’s businesses] to [Y]. Please explain why [A] did not provide pro forma financial information prepared in accordance with Article 11 for [its] most recently completed fiscal year and subsequent interim period. We refer you to Item 9.01 of the General Instructions to Form 8-K.
Please revise the notes to the pro forma combined financial information to explain the methods and assumptions used to determine the fair value of the deferred acquisition consideration.
You disclose in [a footnote] that earnings per unit assumes [X] common units are issued in your planned offering at the closing price . . . of $[X] per unit. Since it appears that the number of units to be sold and the related offering price are subject to change, please revise to include a sensitivity analysis indicating how your earnings per share would be impacted in the event the number of units issued or related offering price changes.
Please revise Management’s Adjustments to quantify each Management Adjustment. For example, your narrative description suggests that there are both synergies and dis-synergies, which should be separately quantified. To the extent that more than one Management Adjustment depicts such synergies and dis-synergies, each should be quantified separately. For example, your narrative disclosure refers to zero-based budgeting to determine headcount and also suggests there are other types of costs and considerations inherent in your synergies and dis-synergies. Further, please consider whether your presentation complies with the requirement to provide the disclosure for each Management Adjustment, including the material assumptions and limitations. Refer to Article 11-02(a)(7)(ii)(D) of Regulation S-X.
We note you present the operating results of [Company A] on a GAAP and non-GAAP basis. It appears you present financial information that combines post-merger results and unadjusted pre-merger results. Please explain how your presentation of combined results without reflecting all relevant and significant pro forma adjustments required by Article 11 of Regulation S-X is appropriate or revise.
We note that your Form 8-K includes pro forma information on a segment and consolidated basis for periods such as the [fourth, third, second, and first quarters of fiscal year X]. Please explain to us if these amounts are calculated in a manner consistent with the pro forma requirements in Article 11 of Regulation S-X. If not, disclosure of such amounts would not be appropriate as a Non-GAAP measure.

The objective of providing pro forma financial information is to enable investors to understand and evaluate the impact of a transaction (or a group of transactions) by showing how the transaction might have affected the historical financial position and results of operations of the registrant had it been consummated at an earlier date. 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. Pro forma information is required under Regulation S-X, Article 11, when (1) it is material to an understanding of a significant consummated or probable transaction, such as a business combination; (2) a transaction is subject to a shareholder vote; or (3) other conditions outlined in Article 11 are met. Pro forma financial information under Article 11 may be required in a registration statement, proxy statement, or Form 8-K, but it is not required in a Form 10-K or 10-Q. Although Article 11 pro forma financial statements are not required in a registrant’s Form 10-K or 10-Q, a registrant must separately evaluate the need for supplemental pro forma disclosures under ASC 805 (related to business combinations) in its financial statements included in a Form 10-K or 10-Q. See Section 2.1.5 for more information about supplemental pro forma disclosures that are required under U.S. GAAP.

Registrants should generally present Article 11 pro forma financial statements in columnar form with separate columns for historical financial information, pro forma adjustments, and pro forma results. There are two categories of required pro forma adjustments, which should be presented in separate columns: (1) transaction accounting adjustments and (2) autonomous entity adjustments (when a registrant was previously part of another entity). Registrants also have the flexibility to present, in the explanatory notes to the pro forma financial information, management’s adjustments, which reflect synergies and dis-synergies identified by management when evaluating whether to consummate an acquisition. In limited circumstances, registrants may present narrative disclosures in lieu of pro forma financial statements. The SEC staff continues to comment on certain form and content matters, such as when a registrant fails to clearly explain each pro forma adjustment or does not clearly demonstrate how the above requirements are met. Any assumptions on which pro forma adjustments are based should be clearly explained in footnotes.

When calculating pro forma adjustments, registrants should assume that the transaction occurred (1) as of the date of the most recent balance sheet for the pro forma balance sheet and (2) at the beginning of the fiscal year presented for the pro forma income statement.

Further, transactions may be structured in such a way that significantly different results may occur. In these instances, registrants should comply with the requirement under Regulation S-X, Rule 11-02(a)(10), to disclose additional pro forma information that gives effect to the range of possible outcomes resulting from the transaction.

For additional guidance on these topics, see Chapter 4 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions.