The SEC has adopted amendments to the financial disclosure requirements in Regulation S-X for acquisitions and dispositions of businesses. When a registrant acquires a significant business, other than a real estate operation, Rule 3-05 of Regulation S-X generally requires a registrant to provide separate audited annual and unaudited interim pre-acquisition financial statements of that business. The number of years of financial information that must be provided depends on the relative significance of the acquisition to the registrant. Significance is measured using one of the highly technical tests specified under the rules.
In addition, Article 11 of Regulation S-X requires registrants to file unaudited pro forma financial information relating to the acquisition or disposition. Pro forma financial information typically includes a pro forma balance sheet and pro forma income statements based on the historical financial statements of the registrant and the acquired or disposed business, including adjustments to show how the acquisition or disposition might have affected those financial statements.
Under the final amendments, the complex significance tests have been modified to:
- revise the investment test to compare the registrant’s investments in and advances to the acquired or disposed business to the registrant’s aggregate worldwide market value if available;
- revise the income test by adding a revenue component;
- expand the use of pro forma financial information in measuring significance; and
- conform, to the extent applicable, the significance threshold and tests for disposed businesses to those used for acquired businesses (including increasing the threshold for determining the significance of a business disposition from 10 percent to 20 percent).
The final amendments also:
- require the financial statements of the acquired business to cover no more than the two most recent fiscal years;
- permit disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity; and
- 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.
The revised rules amend the pro forma financial information requirements to improve the content and relevance of such information. More specifically, the revised pro forma adjustment criteria provide for:
- “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; and
- Optional “Management’s Adjustments” depicting synergies and dis-synergies of the acquisitions and dispositions for which pro forma effect is being given if, in management’s opinion, 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.
The amendments will be effective Jan. 1, 2021. However, voluntary compliance with the final amendments is permitted in advance of the effective date.
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