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.27 Post-merger points
Publication date: 27 Jul 2018
us Investment companies ARM 9652.27
The merger transaction is not treated as a portfolio transaction by the acquiring fund. Accordingly, the effect of the merger transaction should be excluded from the note disclosure of security purchases. In addition, the instructions to Item 9 (Condensed Financial Information) of Form N-1A indicate that the value of merger securities acquired should be excluded from purchases and the value of sales of such securities made for the purpose of realigning the registrant's portfolio should be excluded from sales in calculating the portfolio turnover rate.
In preparing post-merger financial statements, the points set forth below should be considered. The post- merger financial statements:
- would not include the pre-merger activity of the acquired fund (i.e., statements of operations, changes in net assets, and financial highlights are not restated).
- would include a note describing the transaction, including the name and description of the acquiree, the percentage of voting interests acquired, a description of how the acquirer obtained control of the acquiree, the reasons for the acquisitions, the value of assets acquired and shares issued upon acquisition, the effective date of the transaction, the tax status of the transaction, the tax attributes of the transaction, the amount of unrealized appreciation (depreciation) of the acquired fund's investment portfolio at the transaction date, and other information which may be useful to the reader.
- would reflect an equity section as if the portfolios had conducted combined operations. The unrealized appreciation or depreciation should be adjusted so that its balance equals the aggregate differences between cost and value of the securities in the combined fund. (However, the unrealized appreciation/depreciation of the acquired fund as of the merger date should be excluded from the "change in unrealized appreciation for the year" reported in the acquiring fund's statement of operations). The accumulated realized gains or losses of the acquiring fund should be adjusted to reflect any accumulated losses brought forward from the acquired fund and available for use by the combined fund. Because the acquired fund would have distributed realized gains and investment income, there should be no undistributed income carried forward from the acquired fund, other than any unreversed book/tax differences that were carried forward to the acquiring fund. In short, the credit to the equity accounts for the issuance of merger shares will most likely reflect the equity position of the acquired fund on the merger date.
- would include disclosure of any limitations on the use of loss carryforwards under tax regulations, if material. If unrealized losses in the acquired fund are significant, consideration should be given to disclosure of any restriction of the fund's ability to offset such losses against realized gains pursuant to the tax code.
In his 1996 "Generic Comment Letter," the Chief Accountant of the SEC's Division of Investment Management expressed his view that, when several investment companies merge into one fund, and contemporaneously the acquiring fund implements a multi-class structure with each predecessor fund becoming a different class of the acquiring fund, only the existing successor class (i.e., the existing fund) represents the continuing entity whose operating history is reflected in the historical financial highlights. The financial highlights of the other predecessors (classes) are not carried forward, and each new class generates an operating history on a post-reorganization basis.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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