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2070 SAB 80: Application of S-X 3-05 in Initial Registration Statements (SAB Topic 1J)
us SEC - Financial Reporting Manual
2070.1 Background - S-X 3-05 and S-X 8-04 identify the financial statements of businesses recently acquired and likely to be acquired that must be included in a registration statement. In some cases involving IPOs, strict application of S-X 3-05 or S-X 8-04 can result in provision of financial statements that are clearly not significant. SAB 80 is an interpretation of S-X 3-05 for application in initial registration statements of first-time registrants that have been built by the aggregation of discrete businesses that remain substantially intact after acquisition. First-time registrants that meet the conditions in Section 2070.2 may apply SAB 80 instead of S-X 3-05 or S-X 8-04 in their initial registration statement. If a registrant chooses to use SAB 80 to measure significance of its acquired and likely to be acquired businesses for purposes of its initial registration statement, it must use SAB 80 for all such acquisitions.
2070.2 Conditions Precedent to Applying SAB 80 - A registrant must meet the following conditions in order to apply SAB 80:
- Condition 1: The acquired and likely to be acquired businesses must be discrete and substantially intact after the acquisition. Footnote 2 of SAB 80, which is partially reproduced in the notes below, provides an example to clarify. This condition exists because SAB 80 measures significance using the acquired businesses' post-acquisition assets and post-acquisition pretax income.
- Condition 2: SAB 80 can only be applied by a first-time registrant in its initial registration statement, irrespective of whether that initial registration statement involves a public offering.
NOTES to SECTION 2070.2
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2070.3 Significance under SAB 80 - Basics - SAB 80 permits first-time registrants to consider the significance of each acquired and likely to be acquired business based on pro forma financial statements for the registrant's most recently completed fiscal year. The registrant's pro forma financial statements used for purposes of measuring significance under SAB 80 should give effect to all acquisitions that were probable or completed as of the effective date of the registration statement as if they had been acquired at the beginning of the registrant's most recently completed fiscal year for the income test and at the end of the registrant's most recently completed fiscal year for the asset and investment tests.
2070.4 Significance under SAB 80 - Asset Test - As described in Section 2015, the S-X 3-05 and 1-02(w) asset test requires calculation of the ratio of (A) the registrant's and its other subsidiaries' proportionate interest in the total assets of the acquired or likely to be acquired business to (B) the total assets of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year. As described in Section 2070.3, under SAB 80 this ratio is calculated separately for each acquired or likely to be acquired business using the registrant's pro forma financial statements.
(A) Numerator for the Asset test: Use the pro forma balance sheet for the acquired or likely to be acquired business as of the end of its most recently completed fiscal year that gives effect to any new cost basis arising from acquisition accounting irrespective of whether pushdown accounting is applied. If the fiscal year-end of the acquired or likely to be acquired business differs from the registrant's fiscal year-end by more than 93 days, the acquired or likely to be acquired business's fiscal year-end should be brought up to within 93 days of the registrant's most recent fiscal year-end. [S-X 11-02(c)(3)] (Last updated: 1/12/2015)
(B) Denominator for the Asset test: Use the registrant's pro forma balance sheet as of the end of the most recently completed fiscal year included in the registration statement. The registrant's pro forma balance sheet should give effect to (A) acquisitions completed after the most recent year end and (B) probable acquisitions.
2070.5 Significance under SAB 80 - Investment Test - As described in Section 2015, the S-X 3-05 and 1-02(w) investment test requires calculation of the ratio of (A) the registrant's and its other subsidiaries' investments in and advances to the recently acquired or to be acquired businesses to (B) the total assets of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year. As described in Section 2070.3, under SAB 80 this ratio is calculated separately for each acquired or likely to be acquired business using the registrant's pro forma financial statements.
(A) Numerator for the Investment test: Use same amount as S-X 3-05 investment test.
(B) Denominator for the Investment test: Use the registrant's pro forma balance sheet as of the end of the most recently completed fiscal year included in the registration statement. The registrant's pro forma balance sheet should give effect to (A) acquisitions completed after the most recent year end and (B) probable acquisitions.
2070.6 Significance under SAB 80 - Income Test - As described in Section 2015, the S-X 3-05 and 1-02(w) income test requires calculation of the ratio of (A) the registrant's and its other subsidiaries' equity in the income from continuing operations before income taxes of the recently acquired or to be acquired businesses to (B) such income of the registrant and its subsidiaries consolidated for the most recently completed fiscal year. As described in Section 2070.3, under SAB 80 this ratio is calculated separately for each acquired or likely to be acquired business using the registrant's pro forma financial statements.
(A) Numerator for the Income test: Use the pro forma statement of comprehensive income for the acquired or likely to be acquired business for its most recently completed fiscal year that gives effect to any new cost basis arising from acquisition accounting irrespective of whether pushdown accounting is applied. If the fiscal year-end of the acquired or likely to be acquired business differs from the registrant's fiscal year-end by more than 93 days, the acquired business's fiscal year-end should be brought up to within 93 days of the registrant's most recent fiscal year-end. See S-X 11-02(c)(3). (Last updated: 1/12/2015)
(B) Denominator for the Income test: Use the registrant's pro forma statement of comprehensive income for the most recent fiscal year included in the registration statement. The registrant's pro forma statement of comprehensive income should give effect to (A) acquisitions completed both during and after the most recent year end and (B) probable acquisitions.
2070.7 Financial Statement Requirements - Initial Registration Statement - SAB 80 is intended to ensure that the registration statement includes:
- at least 33 months of audited financial statements of at least 60% of the constituent businesses that will comprise the registrant on an ongoing basis, and
- at least 21 months of audited financial statements of at least 80% of the constituent businesses that will comprise the registrant on an ongoing basis, and
- at least 9 months of audited financial statements of at least 90% of the constituent businesses that will comprise the registrant on an ongoing basis.
NOTES to SECTION 2070.7
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2070.8 Requirement for Continuous Audited Period - SAB 80 uses a combination of pre-acquisition audited results of the acquired or likely to be acquired business and post-acquisition audited results of the registrant to satisfy the minimum financial statement requirements. Audited financial statements required to be filed to satisfy the requirements of SAB 80 should be for continuous periods, with no gap or overlap between pre-acquisition and post-acquisition audited periods.
2070.9 Interim Financial Statements — Whether interim financial statements of an acquired or to be acquired business measured using SAB 80 need to be audited depends on the acquisition date. If the acquisition date is on or before the registrant's most recent audited balance sheet required to be included in the registration statement, the interim financial statements of the acquired or to be acquired business should be presented and audited through the date of acquisition. If the acquisition date is after registrant's most recent audited balance sheet required to be included in the registration statement, then the interim financial statements of the acquired or to be acquired business should be presented for the same periods as if the acquiree were the registrant and may be unaudited.
2070.10 Determining Number of Pre-Acquisition Historical Financial Statement Periods Required for Completed and Probable Acquisitions:
- Identify for each completed and probable acquisition the highest level of significance resulting from the asset, investment and income test.
- Identify for which completed and probable acquisitions financial statements are required and for what number of months by reference to the chart in Section 2070.11 entitled "Minimum Financial Statement Requirement" and the highest level of significance for each acquisition identified in (A) above.
- As noted in Section 2070.8, SAB 80 uses a combination of pre-acquisition audited results of the acquired or likely to be acquired business and post-acquisition audited results of the registrant to satisfy the minimum financial statement requirements. Determine the number of months of pre-acquisition financial statements needed for each completed and probable acquisition identified in (B) above by subtracting (1) the number of months the acquisition is included in the registrant's post-acquisition audited financial statements from (2) the Minimum Financial Statement Requirement described in Section 2070.11.
- File pre-acquisition audited financial statements for each completed and probable acquisition for at least the number of months that the acquisition is not included in the registrant's audited financial statements with no gap or overlap between pre-acquisition and post-acquisition audited periods.
2070.11 Financial Statement Requirements — Initial Registration Statement
Minimum Financial Statement Requirement
| Minimum Financial Statement Requirement
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Year 1 (most recent fiscal year)
Businesses not included for at least 9 months in the registrant's financial statements: | Year 1 (most recent fiscal year)
May exclude pre-acquisition financial statements to the extent that the sum of their highest significance levels does not exceed 10%. Thus, identify completed and probable acquisitions whose highest level of significance sums to 10% or less. If there is more than one combination of entities whose highest level of significance sums to 10% or less, the registrant may choose one combination. Financial statements for this combination may be omitted.
For all other completed and probable acquisitions, the registrant must present at least 9 months of audited financial statements for each acquisition with no gap or overlap between the acquired business' pre-acquisition audited periods and the registrant's post-acquisition audited periods.
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Year 2 ( preceding fiscal year)
Businesses not included for at least 21 months in the registrant's financial statements: | Year 2 ( preceding fiscal year)
May exclude pre-acquisition financial statements to the extent that the sum of their highest significance levels does not exceed 20%. Add to combination of acquisitions selected by the registrant that had a combined highest level of significance of 10% or less additional completed and probable acquisitions such that the combined highest level of significance sums to 20% or less.
For all other completed and probable acquisitions that were not included in the registrant's combination of completed and probable acquisitions whose highest level of significance sums to 20% or less, present at least 21 months of audited financial statements for each acquisition with no gap or overlap between the acquired business' pre-acquisition audited periods and the registrant's post-acquisition audited periods.
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Year 3 (second preceding fiscal year)
Businesses not included for at least 33 months in the registrant's financial statements: | Year 3 (second preceding fiscal year)
May exclude pre-acquisition financial statements to the extent that the sum of their highest significance levels does not exceed 40% Add to the registrant's combination of acquisitions that had a combined highest level of significance of 20% or less additional completed and probable acquisitions such that the combined highest level of significance sums to 40% or less.
For all other completed and probable acquisitions that were not included in the registrant's combination of completed and probable acquisitions whose highest level of significance sums to 40% or less, present at least 33 months of audited financial statements for each acquisition with no gap or overlap between the acquired business' pre-acquisition audited periods and the registrant's post-acquisition audited periods.
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2070.12 Age of Financial Statements - Subsequent registration statements - The updating requirements of S-X 3-05 (and S-X 8-04 for a smaller reporting company) should be followed in subsequent registration statements. No updating is required for 1934 Act periodic reporting. Consider the following example.
Example:
Example Facts - A calendar year-end registrant has an IPO Form S-1 registration statement which will be effective February 1, 2008 that includes the registrant's audited financial statements for the three years ended December 31, 2006 and the registrant's unaudited interim financial statements for the nine months ended September 30, 2007 and September 30, 2006. The registrant acquired the businesses identified in the chart below during 2006 and 2007. Registrant chose to evaluate the need to include historical financial statements for the businesses it acquired using SAB 80 and appropriately concluded that the following annual and interim period financial statements of the acquired businesses must be included in the IPO Form S-1 at the February 1, 2008 effective date:
Entity | Fiscal Year End | Date Acquired | Audited Annual Financial Statements | Unaudited Interim Financial Statements | Audited Interim Financial Statements |
Registrant | 12/31 | N/A | 12/31/2006 | 1/1/2007 — 9/30/2007 | N/A |
Target A | 6/30 | 12/15/2006 | 6/30/2006 | N/A | 7/1/2006 - 12/14/2006 |
Target B | 6/30 | 1/31/2007 | 6/30/2006 | 7/1/2006 - 1/30/2007 | N/A |
Target C | 12/31 | 3/1/2007 | 12/31/2006 | N/A | N/A |
Target D | 1/31 | 2/8/2008 | 1/31/2007 | 2/1/2007 - 10/31/2007 | N/A |
Example Analysis - In a subsequent registration statement declared effective June 16, 2008, the following financial statements related to the same entities would be required for the most recent fiscal year and interim period:
Entity | Fiscal Year End | Date Acquired | Audited Annual Financial Statements | Unaudited Interim Financial Statements | Audited Interim Financial Statements |
Registrant | 12/31 | N/A | 12/31/2007 | 1/1/2008 - 3/31/2008 | N/A |
Target A | 6/30 | 12/15/2006 | 6/30/2006 | N/A | 7/1/2006 - 12/14/2006 |
Target B | 6/30 | 1/31/2007 | 6/30/2006 | N/A | 7/1/2006 - 1/30/2007 |
Target C | 12/31 | 3/1/2007 | 12/31/2006 | N/A | 1/1/2007 - 2/28/2007 |
Target D | 1/31 | 2/8/2008 | 1/31/2008 | N/A | N/A |
2070.13 Tests of Significance After an Initial Registration Statement in which SAB 80 was Applied — SAB 80 can only be used in an initial registration statement of a first-time registrant. It is not used to evaluate significance for acquisitions that occur after the effective date of the initial registration statement. However, if the provisions of SAB 80 were used in an initial registration statement to obtain relief from the reporting requirements of S-X 3-05, the staff would allow that registrant to separately evaluate the significance of each acquisition that occurs after the effective date of the initial registration statement using the pro forma financial statements that were used to evaluate significance under SAB 80 in the initial registration statement. However, those pro forma financial statements should be adjusted to eliminate:
- pro forma effects of acquisitions for which no audited financial statements are presented in the initial registration statement,
- the pro forma effects of acquisitions that were probable at the time the initial registration statement was declared effective but which have yet to be consummated, and
- pro forma adjustments not directly attributable to the acquisitions.
Once the registrant files audited annual financial statements (either in a Securities Act or Exchange Act filing) for the fiscal year following the audited fiscal year presented in the initial registration statement on which pro forma financial statements were based, the registrant should measure significance of acquisitions using the audited financial statements of the registrant as required by S-X 3-05. Upon written request, the staff will consider whether relief from the literal application of S-X 3-05 is appropriate.
Financial statements of an individually insignificant business acquired subsequent to the effective date of an initial registration statement (but prior to filing audited annual financial statements for the fiscal year following the audited fiscal year presented in the initial registration statement) may also be required in a subsequent registration statement if the significance of that acquisition, plus other acquisitions for which no audited financial statements were provided in the initial registration statements, aggregate 50% or more of adjusted pro forma financial statements described above. See Section 2035 which describes how to measure aggregate significance for individually insignificant businesses.
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