NOTICE: The Center for Audit Quality (CAQ) SEC Regulations Committee meets periodically with the staff of the SEC to discuss emerging financial reporting issues relating to SEC rules and regulations. The purpose of the following highlights is to summarize the issues discussed at the meetings. These highlights have not been considered or acted on by senior technical committees of the AICPA and do not represent an official position of the AICPA or the CAQ. As with all other documents issued by the CAQ, these highlights are not authoritative and users are urged to refer directly to applicable authoritative pronouncements for the text of the technical literature. These highlights do not purport to be applicable or sufficient to the circumstances of any work performed by practitioners. They are not intended to be a substitute for professional judgment applied by practitioners.

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The staff noted that Sarah Lowe and Melissa Rocha have been named Deputy Chief Accountants in the Division of Corporation Finance.

In an effort to facilitate the efficiency of the review process, the staff shared the following observations and suggestions:

The staff observed that its recent Sample Letter to Companies Regarding Climate Change Disclosures, was intended to share comments issued on the topic broadly. They also emphasized that the Sample Letter is separate from the Commission’s current ESG rulemaking initiatives (posted in the SEC Annual Regulatory Agenda). As such, some of what is ultimately included in forthcoming proposed rules may or may not be consistent with what is contained in the Sample Letter. Regarding timing of any proposed rules, Committee members observed that an adequate implementation runway would be necessary, given current reporting deadlines. The Commission encourages the public to weigh-in on proposed rules, including the transition provisions and the economic analysis related to the costs and benefits of the proposed rules.

At the June 2021 meeting, Committee members and staff considered an illustrative scenario in which a calendar year-end public SPAC merged with a calendar year-end private operating company in a transaction that was accounted for as a reverse recapitalization. In a circumstance where the post-merger registrant intends to file a new registration statement on Form S-1, the staff noted that it would not object to a registrant omitting the pre-merger historical financial statements of the SPAC in the Form S-1 if it includes (1) financial statements of the registrant for a post-merger period and (2) historical financial statements of the previously private operating company retrospectively revised, as appropriate, for the impact of the share exchange in a reverse recapitalization.

Committee members and staff discussed the following illustrative scenario which is similar to the scenario discussed in June, except the merger between the SPAC and the operating company was accounted for as a forward acquisition (i.e., the SPAC was determined to be the accounting acquiror): A calendar year-end public SPAC merges with a calendar year-end private operating company on June 5, 2021 in a transaction that is accounted for as a forward acquisition. In September 2021, the registrant intends to file a new registration statement on Form S-1 (e.g., to register the shares of common stock which may be issued upon exercise of warrants to purchase the registrant’s common stock).

Question 1: Regarding Form 10-Q, the Committee asked whether the staff would object if the registrant were to omit the pre-merger historical financial statements of the SPAC from its June 30, 2021 Form 10-Q if it includes (1) historical financial statements of the private operating company through the transaction date (i.e., January 1, 2021 through June 4, 2021 and April 1 through June 4, 2021) and (2) the registrant’s financial statements that includes the post-merger period (i.e., June 5, 2021 through June 30, 2021). Such presentation would include a black line to indicate that any periods presented prior to and including June 4, 2021 (often referred to as the predecessor) are presented on a different basis of accounting than the periods presented on or after June 5, 2021 (often referred to as the successor).

The staff noted that it would not object to registrants applying the following guidance in Financial Reporting Manual (FRM) 1170.2(b) to forward acquisitions as it relates to the post-merger Form 10-Ks and 10-Qs:

Question 2: Regarding Form S-1, the Committee asked whether the staff would object if the registrant were to omit the pre-merger historical financial statements of the SPAC from a Form S-1 filed in September 2021 if it includes (1) audited historical financial statements of the private operating company for the two or three years ended December 31, 2020, and (2) the unaudited predecessor and successor periods included in Question 1.

The staff noted that the FRM does not expressly discuss this circumstance and the requirements for 1933 Act registration statements. Therefore, the rules on what financial statements a registrant is required to provide in S-X Rule 3-02 apply. S-X Rule 3-02 refers to the audited financial statements of the registrant and its predecessors. The financial statements required for a forward acquisition may differ from the requirements when a SPAC-merger is accounted for as a reverse recapitalization.

Question 3: Regarding Form 10-K, the Committee asked whether the staff would object if the registrant were to omit the pre-merger historical financial statements of the SPAC from its 2021 Form 10-K if it includes (1) audited historical financial statements of the private operating company for one or two years ended December 31, 2020 (predecessor), (2) audited financial statements for the period January 1, 2021 through June 4, 2021 (predecessor) and (3) audited financial statements as of December 31, 2021 and for the periods June 5, 2021 through December 31, 2021 (successor).

See response to Question 1 as it applies to both a post-merger Form 10-Q and Form 10-K.

The Committee and staff discussed two issues regarding the use of pro forma financial information for purposes of testing significance for S-X Rule 3-05 in a registration statement:

S-X Rule 11-01(b)(3) permits registrants to measure significance using filed pro forma financial information that only depicts significant business acquisitions and dispositions consummated after the latest fiscal year-end (FYE) for which the registrant’s financial statements are required to be filed. While there is consistent understanding that a company conducting an IPO can use pro forma financial information to test significance, the Committee believes there is less clarity on whether the registrant can use the pro forma financial information reflecting certain acquisitions for which separate financial statements have been filed when multiple acquisitions have closed since the latest FYE and prior to initial submission of the draft registration statement.

To illustrate, the following example was discussed: Registrant A is a calendar year-end EGC preparing for an IPO and has completed 2 acquisitions since its latest FYE. Key assumptions and dates include:

The Form S-1 includes Registrant A’s audited financial statements for the two years ended 12/31/2X20 and unaudited interim financial statements for period ended 3/31/2X21 and 3/31/2X20.

The Committee asked whether in this scenario, it would be permissible for the registrant to use pro forma financial information that reflects an acquisition consummated after the latest FYE for purposes of testing other acquisitions that also have been consummated after latest FYE. In this example, if Registrant A includes in the DRS (and ultimately the public filing) the S-X Rule 3-05 financial statements and pro forma financial information for Target X, can Registrant A use the pro forma financial information in the DRS to test the significance of Target Y, or would the registrant be precluded from using pro forma financial information and only be able to use pro forma financial information for testing significance of transactions occurring or becoming probable after the first public filing date?

The staff stated that the requirements of S-X Rule 11-01(b)(3)(i)(B) must be met to use pro forma financial information to test significance of a consummated acquisition. If, as the example fact pattern indicates, the required Target X financial statements and associated pro forma financial information will be included in both the DRS and the publicly-filed Form S-1, it appears application of S-X Rule 11-01(b)(3) to the DRS would be acceptable as it would yield the same result as applying S-X Rule 11-01(b)(3) to the filing.

FRM 2025.10 indicates that, when a registrant that is a successor to a predecessor company and does not have a full year of statement of comprehensive income information available to use as the denominator in the calculation of the income test, the calculation should only use the results of operations of the successor period. The registrant may use pro forma financial information for purposes of testing significance as if the predecessor had been acquired (or change in control transaction occurred) at the beginning of the fiscal year only with staff permission.

Again considering the above example, the Committee and staff discussed a scenario in which Registrant A has a change in control in 2X20 and has a black line presentation in its 2X20 results of operations required to be reflected in the pro forma financial information as of the beginning of the most recent year. The Committee asked the staff whether Registrant A could test significance of Target Y using the pro forma financial information that give effect to the acquisition of the predecessor entity (or change in control) and the acquisition of Target X. In addition, if Registrant A is unable to use the pro forma financial information reflecting the 2020 change in control transaction, the Committee asked the staff for its position regarding the appropriate way to apply the S-X Rule 11-01(b)(3) (i.e., is the registrant precluded from using Rule 11-01(b)(3) or does it need to derive alternative pro forma financial information?).

The staff noted that in the described fact pattern, a company would need to write-in and request to measure significance using pro forma financial information. S-X Rule 11-01(b)(3)(i)(B) refers to the use of pro forma financial information that only depicts significant business acquisitions and dispositions consummated after the latest fiscal year for which the registrant’s financial statements are required to be filed. Additionally, as noted in FRM 2025.10, Registrant A should preclear with the staff before using pro forma financial information that gives effect to registrant’s acquisition of predecessor as if it had occurred on January 1, 2020 for purposes of calculating significance.

The Committee members asked the staff whether the revenue component of the income test applies when testing the significance of an investee under S-X Rule 3-09 when the investee is accounted for using the fair value option. The staff indicated that they are continuing to consider whether the revenue component of the income test is applicable in these circumstances and registrants that believe it would be appropriate to apply the revenue test are encouraged to talk to the staff.

Regarding the income component, FRM 2435.2 continues to apply, and states that when testing significance of an investment accounted for using the fair value option, “the income test should be computed using as the numerator the change in the fair value reflected in the registrant’s statement of comprehensive income….”