December 4, 2018 — CAQ SEC Regulations Committee Releases Highlights of September 12, 2018, Joint Meeting With the SEC Staff

Disclosures required by ASC 6061 — The SEC staff discussed further observations on the disclosures of first-time adopters of ASC 606; these observations are consistent with those discussed at the July 12, 2018, CAQ SEC Regulations Committee Meeting.

Impact of retrospective adoption of new accounting standards on the fourth and fifth years of selected financial data table2 — The SEC staff indicated that all five years in the selected financial data table should generally be revised when a new accounting standard is adopted on a retrospective basis, in accordance with paragraph 1610.1 of the SEC Division of Corporation Finance’s Financial Reporting Manual (FRM). The SEC staff encouraged registrants to “discuss their individual facts and circumstances with the Assistant Director group responsible for reviewing their filings,” if necessary.

Transition from emerging growth company (EGC) status — The SEC staff followed up on a previous discussion regarding the impact of a registrant’s loss of EGC status3 in the year of adoption of a new accounting standard when the registrant has elected to adopt accounting standards using private-company adoption dates, including the impact on the adoption of ASC 606. A calendar-year-end EGC that has elected to adopt ASC 606 using private-company adoption dates will generally apply the standard for annual periods beginning on January 1, 2019, and in interim periods within annual periods beginning on January 1, 2020. The SEC staff noted that it may address this topic in future communications.

The SEC staff also indicated that it is considering issues related to the requirement to recast the 2019 comparable quarters in the 2020 Form 10-Q for EGC registrants that elected to adopt ASC 606 using private-company adoption dates, according to the guidance in paragraph 11110.2 of the FRM.

Audit requirements for transactions involving special-purpose acquisition companies (SPACs) — The Committee and SEC staff discussed the audit requirements for transactions in which a SPAC (a public shell company) consummates a merger with a private operating company. Such transactions are often conducted using a Form S-4 or merger proxy. When the transaction closes, the former private operating company generally becomes the predecessor to the SPAC registrant and, within four days of the closing, is required to file a Form 8-K that includes all the information that would be required if the former private operating company was registering securities on a Form 10 (referred to as a “Super Form 8-K”). Because the former private operating company is considered the predecessor to the registrant, the financial statements included in the Super Form 8-K and Form S-4 or merger proxy must be audited by a PCAOB-registered accounting firm in accordance with PCAOB standards. Registrants that believe they cannot obtain a PCAOB opinion for the operating company for inclusion in a Form S-4 or merger proxy should discuss their facts and circumstances with the SEC staff.

The SEC staff also indicated that “the financial statements of the operating company should be presented as if it were the private operating company’s initial registration statement” and accordingly, “the financial statements . . . would need to comply with public company GAAP disclosures,” including segments and earnings per share, and also include any required financial statements for significant probable and consumed acquisitions under SEC Regulation S-X, Rule 3-05.4

Leases (ASC 8425) — Impact of Article 116 conclusions for master limited partnership (MLP) drop-down transactions previously accounted for as common-control business combinations under ASC 8057 and now accounted for as failed sale-leaseback transactions under ASC 842 — MLP drop-down transactions may be accounted for as failed sale-leaseback transactions after the adoption of the new leasing guidance under ASC 842. Accordingly, the MLP would not account for the transaction as a common-control business combination, in which the assets would be recorded on the balance sheet and the related revenue and costs would be recognized in the income statement; instead, the MLP would record a financing receivable on the balance sheet and interest income in the income statement. The SEC is considering whether such transactions represent the acquisition of an asset or a business for purposes of applying the requirements in Item 2.01 of Form 8-K. This distinction determines whether financial statements of the acquiree and related SEC Regulation S-X, Article 11, pro forma information are required.