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SEC 4550 - Financial statements of acquired or to be acquired businesses
Publication date: 30 Jun 2023
us PwC SEC Volume 4550
[Editor’s note: In May 2020, the SEC adopted amendments to its disclosure requirements relating to acquired and to be acquired businesses. See SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses (SEC Release 33-10786). The amendments became effective on January 1, 2021 subject to the transition provisions (including voluntary early compliance) described in Section II. F of SEC Release 33-10786.
SEC 4550 contains guidance relating to business acquisitions under the amended rules. The SEC codified some of its interpretive views relating to the financial statements of businesses acquired or to be acquired and pro forma information in SEC Codification of Financial Reporting Policies (FRP) 506. Additionally, the SEC staff has published extensive interpretive guidance (e.g., Topics 2 and 3 of the Division of Corporation Finance Financial Reporting Manual (SEC FRM)). Much of the guidance was issued prior to the adoption of SEC Release 33-10786. Care should be exercised when considering guidance that was issued prior to the adoption of SEC Release 33-10786.]
.1 General
.11 In what circumstances does the SEC require the filing of financial statements relating to acquired or to be acquired businesses?
The SEC requires the filing of financial statements of acquired or to be acquired businesses in many situations. S-X 3-05 and S-X 8-04 (for smaller reporting companies) are the principal rules that govern these types of financial statements. However, S-X 3-05 and S-X 8-04 are not the only sources of disclosure requirements relating to acquired or to be acquired businesses. The specific instructions of the applicable registration or reporting form that is being prepared must be evaluated to determine whether financial statements or other disclosures relating to an acquired or to be acquired business are required. For instance:
- if an issuer files a registration statement under either the Securities Act or the Exchange Act, the instructions to the specific registration form being used may require the filing of financial statements relating to an acquired or to be acquired business. See, for example, Item 11(e) of Form S-1, Item 11(b) of Form S-3, and Item 13 of Form 10, each of which requires full compliance with S-X 3-05 or S-X 8-04.
[Editor’s note: Some of the provisions of S-X 3-05 and S-X 8-04 may not be applicable in a situation in which an offering or sale is being made pursuant to an already effective registration statement. See SEC 4550.2221.]
- if an SEC registrant that is required to file current reports on Form 8-K acquires a significant business, Item 9.01(a) of Form 8-K specifies the financial statements that are required in the Form 8-K (e.g., Item 9.01(a)(1) references S-X 3-05 or S-X 8-04 for determining the financial statements that must be filed) and the timing.
[Editor’s note: Certain aspects of S-X 3-05 are not applicable to filings made on Form 8-K. For example, the aggregate significance analysis described in Step 3 of SEC 4550.23 does not apply.]
- SEC forms used in connection with business combination transactions (e.g., Form S-4) oftentimes require financial statements of the target business. See, for example, Items 15-17 of Form S-4 and Item 14 of Schedule 14A, each of which specifies the financial statements of the target that are required, generally without direct reliance on S-X 3-05 or S-X 8-04 with respect to the target’s financial statements. See SEC 2121.904 for additional guidance on the application of the S-X 3-05 requirements in relation to a Form S-4.
[Editor’s note: SEC 4550 is focused on the requirements applicable to a registrant that is neither a smaller reporting company nor a foreign private issuer. Other considerations may apply to a registrant that is a smaller reporting company or a foreign private issuer.]
S-X 3-05 generally does not apply to the acquisition of a business that is a predecessor of the registrant. The financial statements of an acquired or to be acquired business that is the predecessor to its acquirer must be provided in the filings of the acquirer pursuant to S-X 3-01 and S-X 3-02. See SEC FRM 2005.6 and SEC 4550.5.
.2 Applying S-X 3-05 in a registration statement or proxy statement
S-X 3-05 is generally applied in 3 distinct steps:
- Step 1: Determine whether a transaction has occurred or is probable that is within the scope of S-X 3-05. See SEC 4550.21.
- Step 2: Determine whether financial statements relating to an individual acquired or to be acquired business (including related businesses) are required. See SEC 4550.22.
- Step 3: Determine whether disclosures are required relating to aggregate significance of acquired and to be acquired businesses for which financial statements are not (or not yet) required. See SEC 4550.23.
.21 What criteria are used to determine whether a transaction has occurred or is probable that is within the scope of S-X 3-05 (Step 1)?
S-X 3-05 applies to business acquisitions that:
- occurred during the most recently completed fiscal year or subsequent interim period for which a balance sheet is required by S-X 3-01;
- occurred after the most recent balance sheet filed pursuant to S-X 3-01; or
- are probable.
S-X 3-05 does not apply to:
- the acquisition of a real estate operation (as defined in S-X 3-14(a)(2)(i)) subject to S-X 3-14 (see SEC 4555 for information relating to S-X 3-14); or
- to a business which was totally held (as defined in S-X 1-02(y)) by the registrant prior to consummation of the transaction.
.211 How is the term “business” defined for purposes of S-X 3-05?
S-X 3-05 uses the definition of a business set forth in S-X 11-01(d) to evaluate whether a particular transaction is within the scope of S-X 3-05.
[Editor’s note: The acquisition of a business under S-X 3-05 includes the acquisition of an interest in a business accounted for by the registrant under the equity method or, in lieu of the equity method, the fair value option. See S-X 3-05(a)(2)(ii).]
The SEC staff considers the continuity of the business operations to be a significant factor in determining whether a business has been acquired for purposes of S-X 11-01(d). The SEC staff focuses primarily on whether the nature of the revenue-producing activity will remain generally the same after the acquisition. The SEC staff also indicated that there is a presumption that an acquisition of a separate entity, subsidiary or division is considered in determining if a business has been acquired for purposes of S-X 11-01(d). See Topic III.B from the highlights of the September 2022 meeting of the CAQ SEC Regulations Committee. For example:
- the acquisition of a manufacturing plant where the acquirer elects to (1) produce a different product, (2) use a different sales and labor force, and (3) re-tool the plant, might be viewed as the acquisition of a fixed asset, since management of the acquirer does not expect to continue the previous business operation.
- the acquisition of customer lists, trademarks, tradenames, licenses, drawings, formulas, etc., relating to a product line, may be viewed as the acquisition of a business regardless of whether any tangible assets or liabilities are acquired or assumed in connection with the transaction.
- the acquisition of an idled plant may be an asset acquisition.
- the acquisition of a hotel is generally considered a business acquisition.
The facts and circumstances surrounding each acquisition must be carefully evaluated and weighed in determining whether a business was acquired.
See SEC FRM 2010.5 and 2010.6 for guidance related to bank branch acquisitions and insurance policy acquisitions, which may constitute business acquisitions for SEC reporting purposes.
[Editor’s note: The FASB’s definition of a business included in ASC 805, Business Combinations, is not the same as the definition of a business under S-X 11-01(d). Accordingly, what constitutes a business under S-X 11-01(d) may be different from what constitutes a business for accounting purposes under GAAP. See SEC FRM 2010.1 and footnote 8 to SEC Release 33-10786.]
The various attributes included in the definition of a business included in S-X 11-01(d) are not a checklist; rather, the totality of the factors need to be evaluated. In situations where there are questions regarding how to apply the factors, a company may want to discuss its analysis with the SEC staff. If the SEC staff does not agree with management’s conclusion, they may, nonetheless, waive the financial statement requirements when the financial statements will not provide incremental decision useful information. See SEC 4550.6.
.212 How is the term “probable” defined for purposes of S-X 3-05?
The SEC has not provided prescriptive guidance for determining whether an acquisition is probable. Instead, FRP 506.02.c.ii states that “consummation of a transaction is considered to be probable whenever the registrants’ [sic] financial statements alone would not provide investors with adequate financial information with which to make an investment decision.” See SEC FRM 2005.4.
Each situation must be evaluated based on the specific facts and circumstances, and companies may wish to consult with their legal counsel in making the probability determination.
.213 How are related businesses treated for purposes of applying S-X 3-05?
Acquisitions of a group of related businesses that are probable or that have occurred subsequent to the latest fiscal year-end for which audited financial statements of the registrant have been filed are treated as if they were a single business acquisition for purposes of determining significance under S-X 3-05. Businesses are deemed to be related if:
- they are under common control or management;
- the acquisition of one business is conditional on the acquisition of each other business; or
- each acquisition is conditioned on a single common event.
The required financial statements of related businesses may be presented on a combined basis for any periods they are under common control or management. See S-X 3-05(a)(3).
.22 How do you determine whether financial statements of an individual acquired or to be acquired business (including related businesses) are required (Step 2)?
The determination as to whether financial statements relating to an individual acquired or to be acquired business (including related businesses) are required generally depends on two distinct considerations: significance and timing.
[Editor’s note: If the evaluation is being made in connection with registering the offering of securities to the holders of the business being acquired, then the specific requirements of the registration form being used (e.g., Form S-4 or Form F-4) should be evaluated to determine whether financial statements are required. See SEC FRM 2200. See also SEC 2121.]
.221 What are the significance thresholds for purposes of determining whether an individual acquired or to be acquired business (including related businesses) are required under S-X 3-05?
The significance evaluation under S-X 3-05 is performed using the conditions of significance specified in S-X 1-02(w) substituting a 20% threshold for the 10% threshold set forth in S-X 1-02(w).
- If none of the significance conditions exceed 20%, then financial statements of the acquired or to be acquired business are not required based on individual significance. See S-X 3-05(b)(2)(i).
- If any of the three significance conditions exceeds 20%, but none exceed 40%, then financial statements of the acquired or to be acquired business must be filed for at least the most recent fiscal year and the most recent interim period specified in S-X 3-01 and 3-02 (subject to the considerations discussed in SEC 4550.222). See S-X 3-05(b)(2)(ii).
- If any of the three significance conditions exceeds 40%, then financial statements of the acquired or to be acquired business must be filed for at least the two most recent fiscal years and any interim periods specified in S-X 3-01 and 3-02 (subject to the considerations discussed in SEC 4550.222). See S-X 3-05(b)(2)(iii).
[Editor’s note: Under certain circumstances financial statements covering a period of 9 to 12 months will be deemed to satisfy a requirement for filing financial statements for a period of 1 year. See S-X 3-06.]
The significance determination must be made using the guidance in S-X 11-01(b)(3) and (4). Additionally, when determining the periods for which financial statements are required, the income test significance condition should be evaluated using the lower of the total revenue component or income or loss from continuing operations component. See S-X 3-05(b)(2) and (3).
S-X 11-01(b)(3) specifies the financial information to be used for purposes of determining significance, including in connection with the acquisition of net assets constituting a business that qualifies for the abbreviated financial statements model set forth in S-X 3-05(e) and the acquisition of a business that generates substantially all of its revenues from oil and gas producing activities (as defined in S-X 4-10(a)(16)) and qualifies for the abbreviated financial statements model set forth in S-X 3-05(f). See SEC 4550.32.
See also SEC 4550.902 and 4550.905.
.222 Under what circumstances are financial statements of an acquired or to be acquired business that is greater than 20% significant not required in a registration statement or proxy statement?
S-X 3-05(b)(4)(i) provides that a registration statement that is not subject to Securities Act Rule 419 (regarding offerings by blank check companies) or a proxy statement is not required to include the financial statements of a greater than 20% acquired or to be acquired business based on individual significance if:
- the acquired or to be acquired business is significant at or below the 50% level; and
- one of the following conditions is met:
(i) the acquisition has not been consummated; or
(ii) the date of the final prospectus or prospectus supplement relating to an offering as filed with the SEC pursuant to Securities Act Rule 424(b), or the mailing date in the case of a proxy statement, is no more than 74 days after consummation of the business acquisition, and the financial statements have not previously been filed by the registrant.
Accordingly, the financial statements of a significant to be acquired business generally do not need to be provided in connection with a registration statement that is not subject to Securities Act Rule 419 or a proxy statement based on individual significance unless the to be acquired business is significant above the 50% level.
The financial statements of a significant acquired business do not need to be provided in connection with a registration statement that is not subject to Securities Act Rule 419 or a proxy statement based on individual significance unless:
- the acquired business is significant above the 50% level;
- the acquired business’s financial statements have been previously filed by the registrant; or
- the date of the final prospectus or prospectus supplement, or the mailing date in the case of a proxy statement, is more than 74 days after the acquisition was consummated.
See also SEC 4550.903.
[Editor’s note: The ability to omit the financial statements of an acquired or to be acquired business under S-X 3-05(b)(4)(i) relates only to the assessment of whether financial statements of an individual acquired or to be acquired business (including related businesses) are required under S-X 3-05. Refer to Step 3 below for consideration of aggregate significance.]
[Editor’s note: The potential to omit the financial statements of the significant acquired or to be acquired business under S-X 3-05(b)(4)(i) relates solely to registration statements and proxy statements. A registrant (other than a foreign private issuer required to file reports on Form 6-K) that uses this temporary grace period to omit financial statements of a recently consummated business acquisition from its initial registration statement must still file those financial statements (and any required pro forma information) on a Form 8-K no later than 75 days after consummation of the acquisition. See S-X 3-05(b)(4)(ii). See SEC FRM 2045.17 for an example of the SEC staff’s historical application of this concept to an existing SEC registrant.]
.2221 Are there different considerations relating to an already effective registration statement?
Offerings generally should not be made pursuant to an already effective registration statement without providing the financial statements of an acquired business that is significant above the 50% level. However, the SEC permits the following offerings or sales of securities pursuant to a registration statement that is already effective to proceed during the applicable grace period without the financial statements of a greater than 50% significant acquired business:
- offerings or sales of securities upon the conversion of outstanding convertible securities, or upon the exercise of outstanding warrants or rights;
- dividend or interest reinvestment plans;
- employee benefit plans;
- transactions involving secondary offerings (secondary offerings are generally sales of securities by selling security holders and not by the issuers); or
- sales of securities pursuant to Rule 144.
See the Instruction to Item 9.01 of Form 8-K and SEC FRM 2050.3.
We understand that the 50% “bright line” threshold referred to above with respect to a completed business acquisition does not apply in the same way to a probable business acquisition. We understand that in a delayed or continuous offering pursuant to an already effective registration statement, separate financial statements of a to be acquired business that is greater than 50% significant are not always required; rather, we understand that the registrant should consider whether the probable acquisition represents a fundamental change. See SEC FRM 2045.3 for historical SEC staff guidance and Topic IV.A from the highlights of the October 2015 meeting of the CAQ SEC Regulations Committee.
[Editor’s note: The term “fundamental change” is not explicitly defined. Management generally obtains the views of its legal counsel in making this assessment.]
Registrants should also consider whether individually insignificant acquisitions occurring subsequent to effectiveness, when combined with individually insignificant acquisitions that occurred after the most recent audited balance sheet in the registration statement, but prior to effectiveness, may be of such significance in the aggregate that an amendment is necessary. See SEC FRM 2045.3.
[Editor’s note: The guidance in SEC 4550.2221 is applicable to offerings or sales of securities pursuant to a registration statement that is already effective. Registration statements and post-effective amendments to registration statements cannot become effective without the financial statements of a greater than 50% significant acquired or to be acquired business. This is true even if the registration statement or post-effective amendment relates solely to the types of offerings/sales listed above. See SEC FRM 2050.5.]
.223 Can the requirement to provide pre-acquisition financial statements be satisfied based on the inclusion of post-acquisition operating results in the registrant’s audited financial statements?
Separate financial statements of an acquired business may be omitted from a registration statement or proxy statement depending on (i) the significance of the acquired business and (ii) how many months of the acquired business’s operating results are included in the registrant’s audited financial statements as follows:
Level of significance |
Months for which operating results of the acquired business are included in the registrant’s audited financial statements |
Greater than 20% but not greater than 40% |
9 months |
Greater than 40% |
12 months |
See S-X 3-05(b)(4)(iii).
[Editor’s note: If a registrant believes other methods of using post-acquisition audit results to satisfy some or all of an acquired business’s pre-acquisition financial statement requirements are appropriate, they should consider contacting the SEC staff to discuss their specific facts and circumstances.]
Consider the following example.
Company M, a calendar year-end private company, which does not qualify as an emerging growth company, publicly files a registration statement on Form S-1 for an initial public offering in February 2024. Company M acquired Business B, a calendar year-end private company on March 17, 2023. The level of significance of the acquisition was 35% (i.e., a one-year audited annual financial statement requirement). The Form S-1 includes audited financial statements of Company M as of December 31, 2023 and 2022 and for each of the three years in the period ended December 31, 2023.
In this example, because Business B was not significant above the 40% level and Business B’s post-acquisition results have been included in Company M's audited financial statements for at least 9 months (i.e., the period from March 17, 2023 through December 31, 2023), separate financial statements of Business B are not required to be provided in the Form S-1 under S-X 3-05..23 How do you determine whether disclosures are required relating to aggregate significance of acquired and to be acquired businesses for which financial statements are not (or not yet) required (Step 3)?
In addition to considering the significance of acquired and to be acquired businesses on an individual basis, S-X 3-05(b)(2)(iv) requires consideration of the aggregate significance for businesses acquired or to be acquired since the date of the most recent audited balance sheet filed for the registrant for which financial statements are either:
(i) not required because the acquired or to be acquired business is not significant above the 20% level; or
(ii) not yet required based on the timing guidance referred to SEC 4550.222.
Aggregate significance is generally assessed by considering the tested group of businesses together. However, when evaluating the income test condition, businesses reporting income (the income group) should be evaluated separately from businesses reporting losses (the loss group). See S-X 1-02(w)(1)(iii)(B)(3). We understand this to be true for both the revenue component (if applicable) and the income component.
[Editor’s note: We understand that related businesses (see SEC 4550.213) should be considered as a single acquisition for purposes of determining whether the group of related businesses should be evaluated in the income group or the loss group.]
[Editor’s note: There are generally two components to consider when assessing whether the income test condition has been met: the revenue component and the income component. However, S-X 1-02(w)(1)(iii)(A)(2) indicates that the revenue component is not applicable “if either the registrant and its subsidiaries consolidated or the tested subsidiary did not have material revenue in each of the two most recently completed fiscal years.” We understand that when considering whether the revenue component is applicable in the context of an aggregate assessment of the income test condition, the registrant should consider whether the tested group of businesses had material revenue in each of the two most recently completed fiscal years on an aggregate basis. This means the revenue component might be applicable to one group of tested businesses (e.g., the income group) and not the other (e.g., the loss group).]
[Editor’s note: The significance calculations performed in connection with the aggregate significance evaluation may be different from the calculations performed at the time an acquisition was completed.]
[Editor’s note: Aggregate significance under the investment test may also need to include certain acquired or to be acquired real estate operations as described in S-X 3-05(b)(2)(iv).]
If any of the three aggregate significance conditions exceeds 50%, the following disclosures are required:
- financial statements covering at least the most recent fiscal year and the most recent interim period specified in S-X 3-01 and S-X 3-02 for any acquired or to be acquired business (or real estate operation, if applicable) for which financial statements are not yet required based on the timing guidance provided in SEC 4550.222 or S-X 3-14(b)(3)(i); and
- pro forma financial information pursuant to S-X 11-01 through 11-02 that depicts the aggregate impact of the acquired or to be acquired businesses and, if applicable, real estate operations, in all material respects.
See S-X 3-05(b)(2)(iv)(A) and (B).
[Editor’s note: The financial statement requirements under the aggregate significance assessment are limited to acquired or to be acquired businesses (and real estate operations, if applicable) that are significant above 20% individually. However, the pro forma financial information is required to depict the aggregate impact of all the acquired or to be acquired businesses (in all material respects) without regard to whether their historical financial statements are required to be provided.]
The example below illustrates the aggregate significance evaluation methodology described above in connection with a registration statement to be filed on December 14, 2023 by Company X, a calendar year-end SEC registrant. For purposes of this example, assume that Acquisitions 1, 2, and 3 (the Income Group) all reported income for purposes of the income component of the income test and Acquisitions 4, 5, and 6 (the Loss Group) all reported losses for purposes of the income component of the income test. Acquisition 5 in this example was completed in early December 2023 and the financial statements have not yet been filed. Acquisition 6 is probable, but not yet completed. Also assume that the revenue test has been determined to be applicable to both the Income Group and the Loss Group. None of the businesses are “related businesses” and all businesses use a calendar year-end.
Income test |
|||||||
Asset Test |
Investment Test |
Revenue Component |
Income Component |
||||
Acquisition 1 |
5% |
6% |
21% |
13% |
|||
Acquisition 2 |
6% |
5% |
17% |
24% |
|||
Acquisition 3 |
5% |
6% |
16% |
15% |
|||
Acquisition 4 |
5% |
5% |
7% |
16% |
|||
Acquisition 5 |
21% |
4% |
2% |
25% |
|||
Acquisition 6 |
7% |
6% |
3% |
21% |
|||
Aggregate asset test |
49% |
||||||
Aggregate investment test |
32% |
||||||
Aggregate income test-Income Group |
54% |
52% |
|||||
Aggregate income test-Loss Group |
12% |
62% |
|||||
In this example, because both the aggregate revenue and aggregate income components for the Income Group (Acquisitions 1, 2, and 3) exceeded 50%, the aggregate income test condition has been met and the following disclosures required by S-X 3-05(b)(2)(iv) are required to be included or incorporated by reference in the Form S-3:
- Financial statements of Acquisition 5 as of December 31, 2022 and for the year then ended (audited) and as of September 30, 2023 and for the nine months then ended (unaudited); and
- A pro forma balance sheet of Company X as of September 30, 2023 and pro forma statements of comprehensive income of Company X for the year ended December 31, 2022 and for the nine months ended September 30, 2023 depicting the aggregate impact of Acquisitions 1-6, in all material respects.
[Editor’s note: Separate financial statements for Acquisition 5 are required because Acquisition 5 was significant individually, but the financial statements were not yet required based on the timing guidance described in SEC 4550.222. None of the other acquired or to be acquired business were significant individually; accordingly historical financial statements are not required for those acquired or to be acquired businesses.]
.3 Financial information requirements of acquired or to be acquired businesses
.31 Are the financial statements provided pursuant to S-X 3-05 the same as if the acquired or to be acquired business were a registrant?
SEC FRM 2005.1 states a general principle that the financial statements of an acquired or to be acquired business provided pursuant to S-X 3-05 are generally the same as if the acquired or to be acquired business were a registrant, except that the periods to be presented are determined by the level of significance.
There are, however, exceptions to this general principle. For instance, while S-X 3-05(a)(1) makes it clear that the financial statements should be prepared in accordance with Regulation S-X, it also provides that related schedules required by S-X Article 12 are not required to be filed. Also, SEC FRM 2005.5 indicates that “[f]inancial statements of recently acquired businesses of the acquiree or equity method investees of the acquiree need not be filed unless their omission would render the acquiree's financial statements misleading or substantially incomplete.” Additionally, careful consideration should be given to the scope and/or adoption dates of individual accounting standards/requirements to determine whether they are applicable. See SEC FRM 2005.1 for examples.
We believe the financial statements of an acquired or to be acquired business also should comply with relevant Staff Accounting Bulletins.
The audit of the financial statements of an acquired or to be acquired business provided pursuant to S-X 3-05 may be conducted in accordance with i) AICPA standards, ii) PCAOB standards, or iii) both AICPA and PCAOB standards, as appropriate. The SEC does not generally require financial statements of a non-SEC registrant prepared to comply with S-X 3-05 to be audited by a PCAOB-registered independent public accounting firm, or that the audit be performed in accordance with PCAOB standards. See SEC FRM 4110.5 for various examples of the SEC staff’s requirements relating to auditing standards and auditor registration with the PCAOB.
The SEC will not accept an audit conducted solely in accordance with International Standards on Auditing or auditing standards of a foreign jurisdiction. See SEC FRM 4210.3 and section II.6.c of SEC Release 33-10786.
The financial statements of a foreign business or entity that would qualify as a foreign private issuer (FPI) if it were a registrant can be prepared either in the same currency as the issuer or in the currency normally used for the preparation of such entity’s financial statements. See SEC FRM 6620.7.
[Editor’s note: See SEC 4550.5 for information relating to a predecessor.]
.32 Are there circumstances under which the SEC will accept abbreviated financial statements relating to an acquired or to be acquired business in satisfaction of S-X 3-05?
Registrants frequently acquire a component of an entity that is a business as defined in S-X 11-01(d) but does not constitute a separate entity, subsidiary, or division (e.g., a product line or a line of business contained in more than one subsidiary of the selling entity). S-X 3-05(e) permits a registrant to provide abbreviated financial statements if the acquired or to be acquired business meets all the qualifying conditions set forth in S-X 3-05(e)(1). If those conditions are met, the abbreviated financial statements must be prepared in accordance with the requirements of S-X 3-05(e)(2).
Additionally, S-X 3-05(f)(2) sets forth an abbreviated financial statements reporting model for the acquisition of a business which generates substantially all of its revenues from oil- and gas-producing activities (as defined in S-X 4-10(a)(16)). Under this model, if the acquired or to be acquired business generates substantially all of its revenues from oil- and gas-producing activities and the qualifying conditions in S-X 3-05(e)(1) are met, the financial statements may consist of only statements of revenues and expenses. The statements of revenues and expenses should exclude expenses not comparable to the proposed future operations, such as depreciation, depletion and amortization, corporate overhead, income taxes and interest associated with debt that will not be assumed by the registrant. If the financial statements are limited to statements of revenues and expenses, they should include the footnote disclosures specified in S-X 3-05(e)(2)(iii).
See SEC 4550.33 regarding auditor reporting considerations relating to abbreviated financial statements.
.33 Are there any auditor reporting considerations relating to abbreviated financial statements?
Abbreviated financial statements are generally considered special purpose financial presentations (sometimes referred to as an incomplete presentation otherwise in accordance with GAAP). Auditor reporting guidance relating to special purpose financial presentations is discussed in AICPA AU-C 805, Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement and PCAOB AS 3305, Special Reports.
One of the key factors required by professional auditing literature to be present in order to permit the auditor to issue a general use report on a special purpose presentation for use in a general purpose document (which includes registration statements and many private placement offering documents) is that the presentation be prepared pursuant to an acceptable financial reporting framework suitable for general use.
We believe the models set forth in S-X 3-05(e) and (f) represent acceptable financial reporting frameworks for the special purpose presentations discussed therein for the purposes of:
- complying with S-X 3-05 in connection with an SEC filing; or
- preparing abbreviated financial statements of an acquired or to be acquired business (that would be permitted by S-X 3-05 in connection with an SEC registered offering) for use in offering materials relating to a private placement of securities if the issuer intends to register the private placement securities with the SEC (or exchange the private placement securities for SEC-registered securities).
[Editor’s note: Auditing subsequent periods or reviewing interim periods may result in different reporting conclusions. Registrants should be aware that a conclusion that may be acceptable in a SEC filing may not be acceptable in a different context.]
In the case of either a registered offering, or a private placement of securities where the securities will subsequently be registered with the SEC (or exchanged for SEC-registered securities) where the abbreviated financial statements are not prepared in accordance with S-X 3-05(e) or (f) (e.g., the qualifying conditions in S-X 3-05(e)(1) are not present), SEC staff agreement to the special purpose presentation is obtained prior to the issuance of a report.
.34 May the financial statements of an acquired or to be acquired business that meets the definition of a foreign business be prepared on a basis of accounting other the US GAAP for purposes of S-X 3-05?
[Editor’s note: SEC 4550.34 is focused on the requirements applicable to a registrant that is a domestic registrant, not a foreign private issuer. Other considerations may apply to a registrant that is a foreign private issuer.]
S-X 3-05(c) allows the financial statements of an acquired or to be acquired foreign business (as defined in S-X 1-02(l)) to comply with Item 17 of Form 20-F (see SEC 8100.925). Pursuant to Item 17, the financial statements of a foreign business may be prepared under US GAAP, IFRS as issued by the IASB (IFRS-IASB) or a comprehensive basis of accounting other than US GAAP or IFRS-IASB. If the foreign business prepares its financial statements on a comprehensive basis other than US GAAP or IFRS-IASB, Item 17 requires the financial statements of the foreign business to include a reconciliation to US GAAP prepared pursuant to the guidance in Item 17(c) of Form 20-F if the acquired or to be acquired foreign business exceeds the 30% level under the tests of significance which call for the inclusion of its financial statements. See Item 17(c)(2)(v) of Form 20-F and SEC FRM 2055.1.
[Editor’s note: If financial statements for an acquired or to be acquired foreign business are required in a Form S-4, and the foreign business prepares its financial statements using a comprehensive basis other than US GAAP or IFRS-IASB, a reconciliation must be provided regardless of the level of significance of the transaction. See SEC FRM 6410.6(c).]
[Editor’s note: Even if a reconciliation is not required, a discussion of the differences between local GAAP and US GAAP should be presented in a note to the audited financial statements. See section IX.E. of International Reporting and Disclosure Issues in the Division of Corporation Finance. Such discussion is not required if the financial statements are presented in accordance with IFRS-IASB.]
Under S-X 3-05, the period for which audited financial statements must be presented for a significant acquired or to be acquired business varies from one to two years, depending upon its significance to the registrant. However, IFRS-IASB specifically requires prior year comparative financial statements to be presented when the most recent fiscal year is presented. In situations where only one year of financial statements is required by S-X 3-05, the SEC staff has indicated that they would not object if the audit report includes a qualification noting a departure from IFRS-IASB (or home-country GAAP, if applicable) solely for the absence of comparative prior year financial statements. See Appendix A of the May 2019 IPTF meeting highlights.
[Editor’s note: The SEC staff has indicated that they would not object if interim financial statements prepared in accordance with IFRS-IASB do not include comparative prior period statements when prepared to comply with S-X 3-05 requirements. See Topic V of the November 2020 IPTF meeting highlights.]
.35 May the financial statements of an acquired or to be acquired business that does not meet the definition of a foreign business but would qualify as a foreign private issuer if it were a registrant be prepared on a basis of accounting other than US GAAP for purposes of S-X 3-05?
[Editor’s note: SEC 4550.35 is focused on the requirements applicable to a registrant that is a domestic registrant, not a foreign private issuer. Other considerations may apply to a registrant that is a foreign private issuer.]
If an acquired or to be acquired business is not a foreign business (as defined in S-X 1-02(l)) but would qualify as a foreign private issuer (as defined in Securities Act Rule 405 and Exchange Act Rule 3b-4) if it were a registrant, S-X 3-05(d) permits the acquired or to be acquired business to provide financial statements using either US GAAP or IFRS-IASB without a reconciliation to US GAAP. However, a reconciliation to US GAAP, prepared pursuant to Item 18 of Form 20-F, would be required if the financial statements of the acquired or to be acquired business were prepared using a comprehensive basis of accounting other than US GAAP or IFRS-IASB. See footnote 161 of SEC Release 33-10786. The reconciliation to US GAAP required when local GAAP is used must be provided regardless of significance.
.36 May the financial statements of an acquired or to be acquired foreign incorporated business that does not meet the definition of a foreign business and would not qualify as a foreign private issuer if it were a registrant be prepared on a basis of accounting other than US GAAP for purposes of S-X 3-05?
A foreign incorporated acquired or to be acquired business that is not a foreign business (as defined in S-X 1-02(l)) and would not qualify as a foreign private issuer (as defined in Securities Act Rule 405 and Exchange Act Rule 3b-4) if it were a registrant, must prepare its financial statements in conformity with (i) US GAAP, (ii) home-country GAAP reconciled to US GAAP in accordance with Item 18 of Form 20-F, or (iii) IFRS-IASB reconciled to US GAAP in accordance with Item 18 of Form 20-F. The reconciliation to US GAAP must be provided regardless of significance. See SEC FRM 6410.9.
.37 When should the pro forma financial information required by S-X Article 11 generally be filed?
The pro forma financial information described in S-X Article 11 generally must accompany financial statements required to be provided pursuant to S-X 3-05. If pro forma financial information is required by S-X Article 11, it should generally be filed at the same time the audited financial statements of the acquired or to be acquired business are filed. See SEC FRM 3110.4.
See SEC 4560 for a discussion of pro forma financial information under S-X Article 11.
.4 Age of financial statements
.41 What are the age of financial statement requirements related to acquired or to be acquired businesses in a registration statement or proxy statement?
[Editor’s note: The discussion in SEC 4550.41 is focused on an acquired or to be acquired business that does not meet the definition of a foreign business in S-X 1-02(l). See SEC 4550.42 for information relating to an acquired or to be acquired business that meets the definition of a foreign business).]
Financial statements of an acquired or to be acquired business provided in a registration statement or proxy statement pursuant to S-X 3-05 should comply with the SEC’s age of financial statements rules at the initial filing date, at the date of any amendment, at the time of effectiveness (with respect to a registration statement) or at the mailing date (with respect to a proxy statement).
The age of financial statements analysis is largely the same as it is with respect to SEC registrants. See SEC FRM 2045.5 for a chart depicting the age of financial statements requirements with respect to annual financial statements and SEC FRM 2045.7 for information relating to interim financial statements. See also SEC 4600.2 through .3.
[Editor’s note: Financial statements of an acquired business generally do not need to be updated if the omitted period is less than a complete quarter. However, disclosure of significant events occurring during the omitted interim period may be necessary. See SEC FRM 2045.9 and SEC 4560.34.]
One exception to the general guidance relates to the need (in certain circumstances) to provide audited annual financial statements for the most recently completed fiscal year in connection with a registration statement or proxy statement more than 45 days after the acquired or to be acquired business’s fiscal year-end. When assessing the 45-day updating rule in connection with an acquired or to be acquired business pursuant to S-X 3-05, the provisions of S-X 3-01(c) are assessed based on the registrant’s characteristics rather than the acquired or to be acquired business’s characteristics.
[Editor’s note: For purposes of evaluating S-X 3-01(c), the references to the “most recent fiscal year for which audited financial statements are not yet available” should be replaced with “the most recently completed fiscal year prior to the acquisition date” even if those financial statements are available. See Note to SEC FRM 2045.5.]
[Editor’s note: The SEC staff will interpret the updating requirements in connection with a proxy statement in the same manner as for Securities Act filings. See SEC FRM 2045.12.]
[Editor’s note: Financial statements provided in connection with a registration statement may need to be more current than those previously filed under Item 9.01 of Form 8-K.]
See SEC 4550.904.
The following examples illustrate the age of financial statement requirements for Securities Act filings. Unless otherwise noted, the examples assume that the registrant and the acquired business are neither large accelerated filers nor accelerated filers. In all cases the acquiree is neither a foreign private issuer nor a foreign business.
[Editor’s note: The below examples relate to a registration statement that is not yet effective. After effectiveness, a domestic registrant has no specific obligation to update the prospectus except as stipulated by Securities Act Section 10(a)(3) and S-K 512(a) with respect to any fundamental change. See SEC 4550.2221 for additional information.]
Example 1
Company M, a calendar year-end SEC registrant, consummated an acquisition of Business B, a calendar year-end private company, on January 3, 2023. Business B is 45% significant. Company M does not meet the conditions in S-X 3-01(c). A Form 8-K reporting the acquisition was timely filed providing audited financial statements for Business B as of December 31, 2021 and 2020 and for the years then ended and unaudited interim financial statements as of September 30, 2022 and for the nine-month periods ended September 30, 2022 and 2021.
If Company M files a registration statement on Form S-3 on March 28, 2023, Business B’s financial statements would need to be updated to include audited financial statements of Business B as of and for the year ended December 31, 2022, since the acquisition occurred after December 31, 2022, the filing is made more than 45 days after Business B’s year-end but less than 90 days, and Company M (the registrant) is not eligible for relief under S-X 3-01(c).
Example 2
Company N, a calendar year-end SEC registrant, consummated the acquisition of Business D, a private company with a November 30 year-end, on January 3, 2023. Business D is 45% significant. Company N does not meet the conditions in S-X 3-01(c).
If Company N files a registration statement on Form S-3 on March 24, 2023, the registration statement would need to include Business D’s audited financial statements as of and for the years ended November 30, 2022 and 2021, since the acquisition took place after November 30, 2022, the registration statement is being filed more than 45 days after Business D’s year end but less than 90 days, and Company N (the registrant) is not eligible for relief under S-X 3-01(c).
Example 3
Company R, a calendar-year end SEC registrant, consummated the acquisition of Business F, a calendar year-end private company, on October 2, 2023. Business F is 45% significant. Company R timely filed its initial Item 2.01 Form 8-K reporting the completion of the acquisition of Business F on October 6, 2023 (the 4th business day after the acquisition) and filed an amended Form 8-K on December 18, 2023 (because December 16, 2023 - the 71st calendar day after October 6, 2023 – is a Saturday) which included audited financial statements of Business F as of and for the years ended December 31, 2022 and 2021 and unaudited financial statements as of June 30, 2023 and for the six-month periods ended June 30, 2023 and 2022.
If Company R were to file a registration statement on Form S-3 on December 21, 2023, Business F’s financial statements must be updated to include unaudited financial statements as of September 30, 2023 and for the nine-month periods ended September 30, 2023 and 2022 in order to meet the requirement that the financial statements be no more than 134 days old.
If Company R were to file a subsequent registration statement on Form S-3 after December 31, 2023, it would not be required to update the financial statements of Business F beyond September 30, 2023, since financial statements would only be required for the quarter preceding the acquisition date even if Company R’s financial statements were required to be updated. However, updates to the pro forma financial information reflecting the acquisition of Business F may still be required. See SEC 4560.366.
Example 4
Company S, a calendar year-end SEC registrant, consummated the acquisition of Business G, a calendar year-end private company, on March 7, 2023. Business G is 45% significant. Company S timely filed its Item 2.01 Form 8-K reporting the acquisition, which included audited financial statements of Business G as of and for the years ended December 31, 2021 and 2020 and unaudited interim financial statements as of September 30, 2022 and for the nine-month periods ended September 30, 2022 and 2021.
If Company S were to file a registration statement on Form S-3 on June 14, 2023, Company S would need to update Business G’s financial statements to include audited financial statements of Business G as of December 31, 2022 and for the year then ended. Since the acquisition of Business G occurred on March 7, 2023 (during the first quarter), unaudited interim financial statements will not be required for any future periods (i.e., beyond December 31, 2022) for Business G.
Example 5
Company T, a calendar year-end SEC registrant, consummated the acquisition of Business J, a private company with a March 31 year-end, on April 4, 2023. Business J is 45% significant. Further, assume that Company T does not meet the conditions in S-X 3-01(c). A Form 8-K reporting the acquisition was timely filed, providing audited financial statements for Business J as of and for the years ended March 31, 2022 and 2021 and unaudited interim financial statements as of December 31, 2022 and for the nine-month periods ended December 31, 2022 and 2021.
If Company T were to file a Form S-3 on June 23, 2023, Business J’s financial statements must be updated to include audited financial statements of Business J as of March 31, 2023 and for the year then ended, since the acquisition was completed after March 31, 2023, the filing is made more than 45 days after Business J’s year-end but less than 90 days, and Company T (the registrant) is not eligible for relief under S-X 3-01(c).
Example 6
Company Y, a calendar year-end, accelerated filer SEC registrant, consummated the acquisition of Business T, also a calendar year-end, accelerated filer SEC registrant, on February 3, 2023. Business T is 55% significant. Assume that both companies meet the conditions in S-X 3-01(c) and that neither company’s December 31, 2022 audited financial statements will be available until March 10, 2023.
If Company Y were to file a Form S-3 registration statement on March 8, 2023, the registration statement may include audited financial statements of Business T as of December 31, 2021 and 2020 and for the years then ended and unaudited interim financial statements as of September 30, 2022 and for the nine-month periods ended September 30, 2022 and 2021, because Company Y is eligible for relief under S-X 3-01(c) and the Form S-3 is filed is less than 75 days after Business T’s year end.
.42 What are the age of financial statement requirements applicable to acquired or to be acquired foreign businesses?
Registrants should apply the guidance in Item 8.A of Form 20-F when evaluating the age of financial statements with respect to an acquired or to be acquired foreign business (as defined in S-X 1-02(l)). See S-X 3-12(f) and SEC FRM 6220.4.
Item 8.A.4 of Form 20-F generally requires the audited financial statements of the acquired or to be acquired foreign business to be no more than 15 months old at the time of the offering or listing. Additionally, Item 8.A.5 of Form 20-F requires that if the document is dated more than nine months after the end of the last audited financial year, it should contain interim financial statements, which may be unaudited, covering at least the first six months of the financial year. Unaudited interim financial statements of an acquired or to be acquired foreign business generally do not need to be provided if the omitted period is less than six months and the acquired business does not prepare quarterly financial statements under its home-country reporting requirements. See SEC FRM 6220.7.
[Editor’s note: Registrants considering offerings of securities related to i) the exercise of outstanding rights granted by the issuer, ii) dividend or interest reinvestment plans, and iii) the conversion of outstanding convertible securities or exercise of outstanding transferable warrants, should consider the guidance in Instruction 2 to Item 8 of Form 20-F.]
Similar to the discussion in SEC 4550.41 with respect to an acquired non-foreign business, financial statements of an acquired foreign business provided in connection with a registration statement may need to be more current than those previously filed under Item 9.01 of Form 8-K. Additionally, a registrant may need financial information of an acquired or to be acquired foreign business that is more current than the financial statements specified by Item 8.A of Form 20-F for purposes of preparing the registrant’s pro forma financial information.
[Editor’s note: The age of financial statements of an acquired or to be acquired business that does not qualify as a foreign business but would be a foreign private issuer if it were a registrant must comply with the requirements for an acquired domestic business rather than the age of financial statement requirements in Item 8 of Form 20-F. See SEC Release 33-10786, footnote 161.]
The examples below illustrate the age of financial statements requirements under various scenarios relating to an acquired foreign business. In all examples, assume that the acquired foreign business is significant at the greater than 50% level, has a calendar year-end, and does not prepare quarterly financial statements under its home-country reporting requirements.
Example 1
Assume the acquisition is consummated on June 1, 2023.
Annual financial statements - Audited financial statements as of and for the years ended December 31, 2022 and 2021 are required in any post-acquisition registration statement because the audited financial statements cannot be more than 15 months old at the effective date.
Interim financial statements - Interim financial statements would never be required in a post-acquisition registration statement regardless of when it becomes effective because the omitted period would be less than six months.
Example 2
Assume the acquisition is consummated on September 5, 2023.
Annual financial statements – Same as Example 1.
Interim financial statements:
- Registration statement is effective prior to October 1, 2023 - No interim financial statements are required because the audited financial statements are not more than nine months old at the effective date. See SEC FRM 6220.7.a.
- Registration statement is effective after September 30, 2023 - Need interim financial statements as of June 30, 2023 and for the six-month periods ended June 30, 2023 and 2022 because the December 31, 2022 audited annual financial statements would be more than nine months old at the effective date.
Example 3
Assume acquisition is consummated on January 31, 2024.
Interim/annual financial statements:
- Registration statement is effective between January 31, 2024 and March 31, 2024 – The December 31, 2023 audited financial statements are not required because the December 31, 2022 audited financial statements are not more than 15 months old at the effective date. However, the June 30, 2023 and 2022 interim financial statements would be required because the December 31, 2022 financial statements would be more than nine months old at the effective date.
- Registration statement is effective after March 31, 2024 - The December 31, 2023 audited financial statements are required because the December 31, 2022 audited financial statements would be more than 15 months old at the effective date.
.5 Predecessor guidance
Securities Act Rule 405 defines a “predecessor” as:
“… a person the major portion of the business and assets of which another person acquired in a single succession, or in a series of related successions in each of which the acquiring person acquired the major portion of the business and assets of the acquired person.”
See also Exchange Act Rule 12b-2.
A registrant’s acquisition of a business determined to be the registrant’s predecessor is not evaluated for significance under S-X 3-05 or S-X 8-04. The financial statements of an acquired business that is determined to be the predecessor to its acquirer must be provided in the filings of the acquirer pursuant to S-X 3-01 and S-X 3-02 (or S-X 8-02 and S-X 8-03 for a smaller reporting company). See SEC FRM 2005.6.
S-X 3-02 addresses the financial statement requirements of the registrant and its predecessors. Accordingly, predecessor financial statements for periods preceding the date of the acquisition should be the same as those that would be required if the predecessor were the registrant.
In addition, although S-X 3-01 does not contain the term “predecessor” as in S-X 3-02, the SEC staff’s historical practice has generally been to apply the same principle as discussed above. Accordingly, one or more balance sheets of the predecessor may be required to satisfy the balance sheet requirements of S-X 3-01. The predecessor financial statements are in addition to those of the acquirer. See SEC FRM 1170.2.c.
If the registrant's financial statements are presented as of a date that is after the date of the acquisition of its predecessor, then the predecessor's financial statements through the date of the acquisition must also be presented. There can be no gap in coverage between the predecessor's pre-acquisition financial statements and the acquirer's post-acquisition results of operations, cash flows, and shareholders’ equity. If the registrant's post-acquisition financial statements are presented on an audited basis, then the predecessor's financial statements through the date of the acquisition must also be audited. When predecessor audited financial statements are provided for part of a fiscal year and successor audited financial statements are provided for the rest of the year, the predecessor is not required to provide comparative financial statements for the prior year partial period. See SEC FRM 1170.3.
For example, assume Company S, a calendar year-end SEC registrant operating company, acquired Company P, a calendar year-end private operating company, on September 7, 2023. Company S accounted for its acquisition of Company P as a business combination with Company S determined to be the accounting acquirer. Company P is determined to be Company S's predecessor.
Company S's quarterly report on Form 10-Q for the quarterly period ended September 30, 2023 should include the following financial statements:
Company S (Successor)
- Unaudited balance sheets as of September 30, 2023 (which includes Company P) and as of December 31, 2022 (which would not include Company P).
- Unaudited statements of comprehensive income and changes in stockholder's equity for the three- and nine-month periods ended September 30, 2023 and 2022. The unaudited statements of comprehensive income and changes in stockholders' equity for the three- and nine-month periods ended September 30, 2023 include Company P from September 7, 2023 through September 30, 2023.
- Unaudited statements of cash flows for the nine-month periods ended September 30, 2023 and 2022. The unaudited statement of cash flows for the nine-month period ended September 30, 2023 includes Company P from September 7, 2023 through September 30, 2023.
Company P (Predecessor)
- Unaudited balance sheet as of December 31, 2022. The September 30, 2023 balance sheet of Company P on a standalone basis is not required because Company S's September 30, 2023 balance sheet includes Company P.
- Unaudited statements of comprehensive income and changes in stockholders' equity for the periods January 1, 2023 through September 6, 2023, and July 1, 2023 through September 6, 2023, and for the three- and nine-month periods ended September 30, 2022.
- Unaudited statements of cash flows for the period January 1, 2023 through September 6, 2023 and for the nine-month period ended September 30, 2022.
Company S's annual report on Form 10-K for the year ended December 31, 2023 should include the following financial statements:
Company S (Successor)
- Audited balance sheets as of December 31, 2023 (which includes Company P) and December 31, 2022 (which would not include Company P).
- Audited statements of comprehensive income, changes in stockholders' equity, and cash flows for the years ended December 31, 2023, 2022 and 2021. The statements of comprehensive income, stockholders' equity, and cash flows for the year ended December 31, 2023 include Company P from September 7, 2023 through December 31, 2023.
Company P (Predecessor)
- Audited balance sheet as of December 31, 2022.
- Audited statements of comprehensive income, changes in stockholders' equity, and cash flows for the period from January 1, 2023 through September 6, 2023 and for the years ended December 31, 2022 and 2021.
[Editor's note: See SEC FRM 2025.10-11 regarding financial statements used to measure significance in connection with certain predecessor/successor fact patterns.]
.6 Waiver requests
Occasionally, a registrant may conclude the financial statements required by S-X 3-05 are not necessary for investor protection or it is impractical to provide the requisite audited financial statements for significant business acquisitions. In those instances, the registrant may request a waiver from the SEC staff. These requests are normally directed to the Chief Accountant of the Division of Corporation Finance, which can be accessed on the SEC’s website (https://www.sec.gov/forms/corp_fin_noaction).
[Editor’s note: We understand that the SEC staff expects that a registrant’s waiver request includes the calculations for each of the applicable significance tests even if the outcome of one or two of the tests is lower than the threshold outlined in S-X 3-05. Additionally, we understand that the SEC staff expects that the registrant’s request also includes an analysis of the information that will be omitted and its assessment of the materiality of the omitted information if the registrant’s request is granted. See Topic III.B.4 from the March 2021 CAQ SEC Regulations Committee Meetings Highlights.]
.7 Alternative model for complying with S-X 3-05 by certain first-time registrants (Staff accounting bulletin no. 80)
The SEC staff recognizes that strict application of S-X 3-05 in some IPOs may result in a requirement to provide financial statements for acquired and to be acquired businesses that may not be significant as a result of the registrant’s recent substantial growth in assets and earnings. In response to this possibility, the SEC staff issued Staff Accounting Bulletin No. 80 (SAB Topic 1-J) (SAB 80) to provide its views on how a first-time registrant that has been built by the aggregation of discrete businesses that remain substantially intact after the acquisition can comply with S-X 3-05 in its initial registration statement. See SEC FRM 2070 for additional information.
[Editor’s note: SAB 80 has not been updated for the issuance of SEC Release 33-10786. Registrants that elect to apply SAB 80 should be mindful of consummated acquisitions and probable acquisitions that occur during the registration process because the significance calculations must be continually updated through the effective date of the registration statement, and financial statement requirements may change.]
.9 Frequently asked questions
.901 Are financial statements required pursuant to S-X 3-05 when a registrant begins to consolidate an equity investee as a result of events other than transactions?
This is a complex area with little authoritative or interpretive guidance. Accordingly, the application of the SEC’s reporting requirements (e.g., Item 2.01 of Form 8-K, S-X 3-05, and S-X Article 11) to this type of fact pattern may need to be discussed in advance with the SEC staff. See Topic 5 of Discussion Document A from the highlights of the April 2008 meeting of the CAQ SEC Regulations Committee.
.902 Which financial statements should a registrant use to evaluate significance for transactions that closed early in its fiscal year?
S-X 11-01(b)(3)(i) 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.”
For a company undertaking an IPO:
Assume that a calendar year-end company files its initial registration statement in 2023 which includes audited financial statements for the fiscal years ended December 31, 2022 and 2021 and also consummated an acquisition that is 45% significant on February 4, 2022. The SEC staff has indicated that the registrant would be required to assess significance on the basis of its December 31, 2021 financial statements. This is true even though its December 31, 2021 financial statements were not “required to be filed” at or prior to the date of the acquisition.
For an existing registrant:
Assume that a calendar year-end registrant files its annual report on Form 10-K for the fiscal year ended December 31, 2022 on January 31, 2023 and subsequently consummated an acquisition on February 3, 2023. The SEC staff has indicated that the registrant would have the option to use either its December 31, 2021 or December 31, 2022 financial statements to assess significance since the Form 10-K was filed prior to its due date and the acquisition date. See Topic III.B.3 from the March 2021 CAQ SEC Regulations Committee Meeting Highlights.
.903 Is the temporary grace period described in SEC 4550.222 (S-X 3-05(b)(4)(i)) the same as the grace period provided by Item 9.01 of Form 8-K?
The temporary grace period provided in S-X 3-05(b)(4)(i) (i.e., not more than 74 calendar days after completion of the acquisition) is similar to, but different from, the grace period provided by Item 9.01 of Form 8-K (i.e., 71 calendar days after the 4th business day following completion of the acquisition). However, the SEC staff has historically indicated that they would consider the Item 9.01 Form 8-K grace period to be substantially equivalent to the S-X 3-05(b)(4)(i) grace period for a not-yet-effective registration statement or a not-yet-effective post-effective amendment. See SEC FRM Note to Section 2050.1.
For example, assume Company Y acquired Business B (25% significant) on May 19, 2023. An Item 2.01 Form 8-K initially reporting the acquisition must be filed no later than May 25, 2023 (the 4th business day after completion of the acquisition). Based on the requirements of Item 9.01(a)(4) of Form 8-K, Company Y must file Business B's financial statements (and the associated pro forma financial information) by an amendment to the initial Form 8-K no later than August 4, 2023 (the 71st calendar day after the initial Form 8-K was required to be filed). Notwithstanding the deadline for filing Business B’s financial statements (and the associated pro forma financial information) in an amended Form 8-K, under a plain reading of S-X 3-05(b)(4)(i), Company Y could not file a new registration statement on Form S-3 after August 1, 2023 (the 74th calendar day after the completion of the acquisition) without providing Business B's financial statements (and the associated pro forma financial information). However, under the guidance provided by the SEC staff in the note to SEC FRM 2050.1, Company Y could file a new Form S-3 on August 2 or 3, 2023 without providing Business B’s financial statements (and the associated pro forma financial information), even though the instructions to Form S-3 require inclusion/incorporation by reference of financial statements required by S-X 3-05. See SEC FRM 2045.17 for information regarding the SEC staff’s historical practice with respect to determining the age of the financial statements to be included in the subsequently filed Item 9.01 Form 8-K.
.904 Is a well-known seasoned issuer filing an automatic shelf registration statement required to comply with the SEC's age of financial statements requirements relating to acquired or to be acquired businesses?
Yes. Automatic shelf registration statements and post-effective amendments of a well-known seasoned issuer (defined in Securities Act Rule 405) become effective immediately upon filing. Immediate effectiveness does not exempt a well-known seasoned issuer from the requirement to comply with the age of financial statement requirements with respect to itself and all completed and probable acquired businesses at the time of effectiveness. See SEC FRM 2045.4.
.905 Can the registrant use alternative significance tests in unusual circumstances without SEC staff preclearance?
The SEC staff has indicated that registrants must use only those significance tests specified in the specific rules and that alternative significance tests are not appropriate (e.g., adjusting historical income amounts to exclude nonrecurring items). If the registrant believes that the prescribed significance tests yield anomalous results, the registrant should contact the SEC staff to discuss their specific facts and circumstances. See SEC FRM 2020.1. When discussing the matter with the SEC staff, registrants frequently refer to alternative significance tests to support an assertion that an acquisition is not significant to require the financial statements specified under the rules. See SEC 4550.6]
.906 Does S-X 3-05 contain any specific disclosure requirements relating to an acquired or to be acquired business that includes significant oil- and gas-producing activities?
Yes. An acquired or to be acquired business that includes significant oil- and gas-producing activities (as defined in the FASB ASC Master Glossary) must provide the disclosures in ASC 932, Extractive Activities – Oil and Gas, 932-235-50-3 through 50-11 and 932-235-50-29 through 50-36 for each full year of operations presented. These disclosures may be presented as unaudited supplemental information. If prior year reserve studies were not made, registrants may develop these disclosures computing the changes backward, based on a reserve study of the most recent year. The method of computation must be disclosed in a footnote. See S-X 3-05(f)(1).
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