Disclosure amendments: Acquired and disposed businesses

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.