In a recent meeting of the Center for Audit Quality SEC Regulations Committee with SEC staff members, the following emerging financial reporting issues, among others, were discussed:
- When applying SEC Final Rule 33-10890, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, the new critical accounting estimates disclosures are required in a Form 10-Q if a company adopts the new rule in an interim period. With respect to interim period MD&A disclosure, a registrant that elects to revise the quarterly periods being compared upon initial compliance with the new rule would be required to present the MD&A
comparison in both its historic presentation and the new revised presentation. It also should disclose the reason for the change. - In a reverse merger transaction where a non-reporting operating target merges with a shell company or SPAC:
- The determination of the target company follows the legal form of the transaction irrespective of the accounting for the transaction, and that target’s financial statement requirements in Form S-4 are based on several factors, including whether it is a reporting or non-reporting company.
- If the non-reporting operating company merges with a public operating company, the SEC staff encourages companies to adopt a new accounting standard using the public business entity (PBE) adoption dates in the Form S-4, given that the Form 8-K reporting the acquisition will need to be prepared using such adoption dates. If non-PBE adoption dates are used in the financial statements included in the Form S-4, the SAB 74 disclosures are expected to be robust and include quantitative information, given the short period of time between merger consummation and when target financial statements using PBE adoption dates would be required in the subsequent Form 8-K.
- The SEC staff provided a reminder that draft or initial registration statements must be complete when submitted/filed, except for the items specified in the FAST Act or the SEC’s confidential submission policy.
- When convertible securities will automatically convert to common stock upon an initial public offering, the number of shares used to compute pro forma earnings per share should include the number of common shares into which the securities will convert as if they were outstanding as of the beginning of the most recently completed fiscal year presented in the Regulation S-X Article 11 pro forma financial statements, irrespective of when the convertible instrument was issued.
- Article 11 states that when determining significance, a registrant should use “the registrant's most recent annual consolidated financial statements required to be filed at or prior to the date of acquisition or disposition and the business's pre-acquisition or pre-disposition financial statements for the same fiscal year as the registrant…” (emphasis added). Committee members and staff discussed how registrants should evaluate significance for transactions that closed early in the fiscal year in the following circumstances:
- Assume a calendar-year-end company files an IPO registration statement in 2021 and includes its audited financial statements for both 2020 and 2019. If the company had an acquisition on February 5, 2020, the registrant would be required to assess significance on the basis of the issuer’s December 31, 2019 financial statements.
- If a registrant acquired a company on February 5, 2021 and voluntarily filed its December 31, 2020 Form 10-K on February 1, 2021, the registrant would have an option to use either its December 31, 2019 or December 31, 2020 financial statements to determine significance.
