SEC Final Rule Release No. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed Businesses.
SRCs, as defined in SEC Regulation S-K, Item 10(f)(1), “General: Smaller Reporting Companies,” and issuers relying on SEC Regulation A (collectively referred to as SRCs) should refer to the discussion in the Smaller Reporting Companies section for a summary of how the amendments may affect them.
Investment companies registered under the Investment Company Act of 1940 and business development companies (collectively referred to as investment companies) should refer to the discussion in the Investment Companies section for a summary of how the amendments may affect them.
SEC Regulation S-X, Rule 3-05, “Financial Statements of Businesses Acquired or to Be Acquired.”
SEC Regulation S-X, Rule 3-14, “Special Instructions for Real Estate Operations to Be Acquired.”
SEC Regulation S-X, Rule 1-02(w), “Definitions of Terms Used in Regulation S-X: Significant Subsidiary.”
SEC Regulation S-X, Article 11, “Pro Forma Financial Information.”
SEC Proposed Rule Release No. 33-10635, Amendments to Financial Disclosures About Acquired and Disposed Businesses.
SEC Regulation S-X, Rule 11-01, “Presentation Requirements.”
FASB Accounting Standards Codification (ASC) Topic 805, Business Combinations.
IFRS 3, Business Combinations.
See paragraph 1170.1 of the SEC Division of Corporation Finance’s Financial Reporting Manual (FRM).
ASC 805 governs the measurement of consideration transferred unless the registrant is a foreign private issuer (FPI) that reports in accordance with IFRS-IASB, in which case IFRS 3 should be used.
The amendments clarify that the investment in the acquiree must include (1) the fair value of contingent consideration if it must be recognized at fair value under the applicable accounting standards or (2) all contingent consideration (unless the likelihood of payment is remote) if recognition at fair value is not required under the applicable accounting standards.
SEC Regulation S-X, Rule 3-09, “Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons.”
SEC Regulation S-X, Rule 4-08(g), “General Notes to Financial Statements: Summarized Financial Information of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons.”
Before adoption of the amendments, (1) the third year of financial statements was not required if the acquiree reported less than $100 million in revenue during its most recent fiscal year and (2) when three years of financial statements were required, the balance sheet for the third year could be omitted.
Before adoption of the amendments, emerging growth companies could omit the third year of any required acquiree financial statements during their IPO of common equity securities or for Form 8-K filings before the earlier of the filing or the filing deadline of their first Form 10-K. In addition, SRCs were not required to present more than two years of acquiree financial statements. Therefore, the amendments align the maximum number of acquiree financial statement periods to be presented for all registrants.
Individually insignificant acquisitions include any acquisitions after the most recent audited annual balance sheet date that (1) were consummated and do not exceed 20 percent, (2) were consummated within 75 days of the date of the final prospectus or prospectus supplement for a registration statement or the date the proxy statement is mailed and exceed 20 percent but do not exceed 50 percent, and (3) are probable and do not exceed 50 percent.
The amendments may accelerate reporting of historical financial statements for these acquirees in certain registration statements and proxy statements.
Waiver requests are granted in accordance with the SEC staff’s delegated authority under SEC Regulation S-X, Rule 3-13, “Filing of Other Financial Statements in Certain Cases.”
FASB Accounting Standards Codification Topic 280, Segment Reporting, defines operating segments. FPIs that report in accordance with IFRS-IASB should refer to IFRS 8, Operating Segments.
A foreign acquiree, as used in the context of this publication, is an acquired or to be acquired business that is not incorporated in the United States.
Such reconciliation is generally required if the significance of the foreign acquiree exceeds 30 percent.
IFRS 1, First-Time Adoption of International Financial Reporting Standards.
The amendments also revise Article 11 so that any forward-looking information supplied is expressly covered by the safe harbors under Securities Act Rule 175 and Exchange Act Rule 3b-6.
SEC Regulation S-X, Rule 11-02(a)(7)(ii)(D).
See SEC Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings.”
While a registrant that acquires real estate operations applies only the investment test to measure significance, a registrant considers all three significance tests outlined in Rule 1-02(w) when evaluating whether a disposition of real estate operations is significant.
See Section 2340 of the FRM for existing guidance regarding properties subject to triple-net leases.
Form 8-K, Item 2.01, Completion of Acquisition or Disposition of Assets, states the acquisition or disposition of assets that do not constitute a business in accordance with Article 11 is significant “if the registrant’s . . . net book value of such assets or the amount paid or received for the assets upon such acquisition or disposition exceeded 10% of the total assets of the registrant” [italics added].
SEC Regulation S-X, Article 8, “Financial Statements of Smaller Reporting Companies.”
SEC Regulation S-X, Rule 6-11, “Financial Statements of Funds Acquired or to Be Acquired.”
The final rule refers to including, for example, “any net realized gains and losses and net change in unrealized gains and losses.“
SEC Regulation S-X, Article 12, “Form and Content of Schedules.”
SEC Release No. 33-9929, Request for Comment on the Effectiveness of Financial Disclosures About Entities Other Than the Registrant.