On May 3, 2019, the Securities and Exchange Commission (SEC) announced proposed amendments related to financial statement disclosure requirements applicable to acquisitions and dispositions of businesses, including real estate operations. Proposed changes include:
- creating a new method for presenting pro forma financial information, using “Transaction Accounting Adjustments” to reflect the accounting for the transaction and “Management’s Adjustments” to reflect reasonable estimable synergies and transaction effects, such as closing facilities, discontinuing product lines, terminating employees, and executing new or modifying existing agreements;
- changing the investment test used to determine significance to compare a company’s investment in the target to the “aggregate worldwide market value” of the company’s equity (rather than total assets);
- changing the income test used to determine significance to add a revenue component to compare the target’s revenue to the company’s revenue and allowing the company to use the lower of the revenue and net income components to measure significance;
- changing the income test to revise the net income component calculation so that it is based on income or loss from continuing operations after income taxes;
- increasing the significance threshold for dispositions from 10% to 20%;
- requiring only two (instead of three) years of historical financial statements for an acquired business, including for acquisitions that exceed 50% significance;
- permitting companies that acquire a target that is not a “foreign business” to prepare financial statements in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB) rather than U.S. GAAP, if the target would qualify to use IFRS-IASB if it were a SEC registrant;
- permitting the reconciliation to IFRS-IASB, rather than U.S. GAAP of a target’s financial statements prepared in home country GAAP, if the acquirer is a “foreign private issuer” that prepares IFRS-IASB financial statements;
- removing the requirement to include historical financial statements for at least the “substantial majority” of “individually insignificant businesses”;
- allowing companies to use pro forma financial statements depicting significant dispositions to measure significance;
- directing smaller reporting companies to Rule 3-05 for requirements relating to financial statements of businesses acquired or to be acquired; and
- aligning the financial statement requirements for acquisition of real estate operations under Rule 3-14 to 3-05 (where no unique industry considerations exist), including, among other things, to increase the significance threshold from 10% to 20%.
Appendix A (available here) summarizes the more significant proposed changes.
The proposed changes would primarily impact Rule 3-05, Rule 3-14, Article 11 of Regulation S-X, and related rules and forms. The release also proposes new Rule 6-11 of Regulation S-X and amendments to Form N-14 to specifically govern financial reporting for acquisitions involving investment companies. The proposal results from the SEC’s ongoing Disclosure Effectiveness Initiative and considered comments received as part of the SEC’s Request for Comment on the Effectiveness of Financial Disclosures about Entities Other Than the Registrant, issued in September 2015, available here. The formal proposing release for the proposed amendments is available here. The proposal will have a 60-day public comment period following its publication in the federal register.