United States

Disclosure amendments: Acquired and disposed businesses

FINANCIAL REPORTING INSIGHTS  | 

The SEC recently issued a final rule that amends the financial disclosure requirements in Rules 3-05, 3-14, 8-04, 8-05, 8-06 and Article 11 of Regulation S-X, as well as related rules and forms, for businesses acquired or to be acquired and for business dispositions. Among other ramifications, the amendments:

  • Update the significance tests by:
    • Revising the investment test and the income test
    • Expanding the use of pro forma financial information in measuring significance
    • Conforming, to the extent possible, the significance threshold and tests for a disposed business to those used for an acquired business
    • Revising the aggregation requirements for immaterial acquisitions
  • Require financial statements of the acquired business to cover no more than the two most recent fiscal years 
  • No longer require separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for nine months or a complete fiscal year, depending on significance
  • Align Rule 3-14 with Rule 3-05 where no unique industry considerations exist
  • Clarify the application of Rule 3-14 regarding the determination of significance, the need for interim income statements, special provisions for blind pool offerings, and the scope of the rule’s requirements
  • Amend the pro forma financial information requirements to include disclosure of: 
    • “Transaction Accounting Adjustments” reflecting only the application of required accounting to the transaction 
    • “Autonomous Entity Adjustments” reflecting the operations and financial position of the registrant as an autonomous entity if the registrant was previously part of another entity
    • Optional “Management’s Adjustments” depicting synergies and dis-synergies, if such adjustments would enhance an understanding of the pro forma effects of the transaction and certain conditions related to the basis and the form of presentation are met
  • Make corresponding changes to the smaller reporting company requirements in Article 8 of Regulation S-X, which also will apply to issuers relying on Regulation A
  • Add Regulation S-X Rule 6-11 to govern financial reporting for fund acquisitions by investment companies and business development companies

The amendments will be effective January 1, 2021. However, early application of the amendments is permitted.

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