4.3 Public-Entity Disclosures and Transition Provisions

Certain provisions of U.S. GAAP differ for public and nonpublic entities. A registrant’s financial statements in an IPO must adhere to accounting principles and disclosures required for public entities for all periods presented. The term “public entity” generally refers to an entity that files its financial statements with the SEC. However, there are different definitions of a public entity under U.S. GAAP. Topics in which certain accounting principles and disclosures apply only to public entities include EPS, segment reporting, certain supplemental disclosures related to revenue and business combinations, temporary equity classification of redeemable securities, certain disclosures related to income tax, and certain disclosures related to pensions and other postretirement benefits.

In addition, the effective date of a new accounting pronouncement may be sooner for certain public entities than for nonpublic entities. Since registrants generally must apply public-entity guidance for all periods presented in the IPO financial statements, a nonpublic entity may be required to retrospectively change its date of adoption of a new standard to that required for a public entity. However, an EGC is not required to adopt new or revised accounting pronouncements as of the effective dates for public entities. Instead, an EGC adopts new or revised accounting standards as of the effective dates for nonpublic entities unless it elects to opt out of the extended transition period. When an EGC that has initially elected to use the adoption dates applicable to private entities loses its EGC status, it will be required to conform its adoption dates to those applicable to public entities. See Section 3.8.1.2 for more information about (1) EGCs that elect to use the adoption dates applicable to private entities and (2) EGCs that plan to use those deferred adoption dates but subsequently lose their EGC status.

Further, a company that is preparing to go public — or that may consider going public in the future — should be cautious about electing the alternatives developed by the PCC or practical expedients applicable to nonpublic entities. Once a company is considered a PBE, it would no longer be permitted to apply PCC accounting alternatives (e.g., amortization of goodwill) or practical expedients applicable to nonpublic entities (e.g., use of a risk-free rate for leases). Consequently, any previously elected PCC alternatives or practical expedients applicable to nonpublic entities would need to be eliminated from the company’s historical financial statements before such statements can be included in its IPO registration statement regardless of whether the registrant qualifies as an EGC. EGC status only allows companies to defer the adoption of new accounting standards. Once a new accounting standard is adopted, even an EGC must comply with the requirements of that standard that apply to PBEs. For discussion about the unavailability of private-company accounting alternatives to entities that meet the definition of a PBE even though they may not be SEC filers, see Section 3.2.1.

In an IPO, the registrant’s financial statements should also comply with the applicable requirements of Regulation S-X, and SEC staff views in SABs, for each period presented in the financial statements. Because such requirements and views are new to private companies undertaking an IPO, those companies’ disclosures may not be fully compliant; as a result, the SEC staff frequently requests additional disclosures. Regulation S-X prescribes the types, form, and content of the financial information that registrants must file. Many of these requirements expand on the disclosures directly required by U.S. GAAP. SABs provide staff views on 14 broad topics, including business combinations, revenue recognition, and share-based payment arrangements.

Requirements addressed by Regulation S-X and SABs that often affect nonpublic-entity financial statements during the IPO process include, but are not limited to, the following:

• Balance sheet and income statement presentation requirements (Regulation S-X, Rules 5-02 and 5-03, for commercial and industrial registrants).
• Age of financial statement requirements applicable once the financial statements are publicly filed (Regulation S-X, Rule 3-12).
• Summarized financial information of subsidiaries not consolidated and 50 percent or less owned persons (Regulation S-X, Rule 4-08(g)).
• Income tax expense (Regulation S-X, Rule 4-08(h)).
• Related-party disclosures (Regulation S-X, Rule 4-08(k)).
• Audited financial statement schedules (Regulation S-X, Articles 5 and 12).
• Preferred stock and other securities (e.g., common stock) subject to mandatory redemption requirements or whose redemption is outside the issuer’s control (Regulation S-X, Rule 5-02(27); ASR 268; ASC 480-10-S99-3A).

For additional reporting considerations related to these topics, see Sections 2.4, 2.9, 2.12, and 3.2.