Initial Public Offerings

Further, a registrant may need to consider whether separate financial statements or pro forma financial information is required for “significant” business acquisitions, dispositions, or equity method investments.

The financial statement periods to be included in the IPO registration statement depend on the company’s characteristics and the timing of the document’s submission. Smaller reporting companies (SRCs) and emerging growth companies (EGCs) generally have the option of presenting only two years of audited annual financial statements in a traditional IPO, while all other entities must present three years. Further, under SEC regulations, the financial statements in an IPO must meet certain age requirements as of each registration-statement filing date as well as when the registration is declared effective; otherwise, the financial statements will be considered “stale.” In general, the financial statements in an IPO filing must not be more than 134 days old (i.e., the gap between the date of filing or effectiveness and the date of the latest balance sheet cannot be more than 134 days). However, third-quarter financial statements are considered timely through the 45th day after the most recent fiscal year-end, after which the audited financial statements for the most recent fiscal year are required. Thus, a company that fails to file a registration statement before one of these critical cut-off dates will be required to include additional financial statement periods in the registration statement; in such cases, there may be a significant delay in the company’s preferred IPO timeline.

In addition, a company undertaking an IPO must present financial statements that are consistent with public-entity accounting principles and must comply with the disclosure requirements for public entities for all periods presented. The following are examples (not all-inclusive) of topics for which the accounting principles or disclosures may apply to public entities but do not apply to nonpublic entities:

• Earnings per share.
• Segment reporting.
• Temporary equity classification of redeemable securities.
• Certain income-tax-related disclosures.
• Certain disclosures related to pensions and other postretirement benefits.

Further, public entities are subject to various SEC rules and regulations that may affect the financial statements and related disclosures (e.g., the additional disclosure requirements of Regulation S-X). Some of these requirements are broadly applicable, and some apply only to entities in certain industries. Therefore, a nonpublic entity’s previously issued financial statements will typically need to be revised for all periods presented to reflect the additional SEC disclosure requirements. However, an entity that meets the SRC criteria may be eligible to apply scaled disclosure requirements. SRCs generally do not have to apply the disclosure provisions of Regulation S-X in their entirety except when specified.

Because the SEC’s and PCAOB’s independence rules are generally more restrictive than the AICPA’s, both the auditor and management, with oversight from the audit committee, need to determine whether (1) there is possible noncompliance with the SEC’s and PCAOB’s independence rules or (2) there are conflicts of interest before the entity undertakes an IPO.

A public company will need to address two types of controls and procedures in its post-IPO filings with the SEC:

• Internal control over financial reporting (ICFR) — ICFR refers to procedures a company performs to reasonably ensure compliance with its policies related to preparing financial statements in accordance with U.S. GAAP and Regulation S-X. Management must annually file a report on the effectiveness of its ICFR. Moreover, non-EGC accelerated and large accelerated filers must generally include an auditor’s attestation report on the effectiveness of ICFR in their annual reports. However, all new public companies can apply a phase-in exception under which management’s report and the auditor’s attestation are not required before the second annual report (i.e., until a registrant has been required to file or has filed a Form 10-K for the prior fiscal year). Certain additional exceptions may also apply.
• Disclosure controls and procedures — These are a broader set of controls that largely encompass ICFR and are designed to provide assurance that information that the registrant must disclose in reports that it files or submits under the Securities Exchange Act of 1934 (the “1934 Act”) is recorded, processed, summarized, and reported within the periods specified.

Companies also must continue to comply, on a quarterly basis, with reporting requirements related to material changes to ICFR and disclosure controls and procedures. In addition, in quarterly and annual reports, the registrant’s principal executive and principal financial officer (typically the CEO and CFO) must file certifications prescribed by Sections 302 and 906 of the Sarbanes-Oxley Act.