Corp Fin recently revised some of the guidance in its Financial Reporting Manual related to adoption of new accounting standards. One revision relates to the adoption of a new accounting standard in the context of a significant acquisition, and the second relates to transition period accommodations for EGCs. This new guidance could take on particular significance in the context of the new revenue recognition standard.
Revised guidance related to the pro forma impact of adopting new accounting standards
- If a company has acquired a significant business and that acquired business has adopted a new accounting standard as of a different date and/or using a different transition method, the acquired company’s date and method must be conformed to the company’s in its pro forma financial information. Note, however, that the guidance indicates that the staff will consider requests for relief from this requirement. (Section 3250.1(m))
At the 2017 PLI Securities Regulation Institute, Corp Fin Chief Accountant Mark Kronforst discussed the recent effort by Chair Clayton and others encouraging the use of the Reg S-X Rule 3-13 waiver process. In the event that mandated disclosures are burdensome to generate, but may not be material to the total mix of information available to investors, companies can seek waivers under Rule 3-13 of Reg S-X to modify their financial reporting requirements. (See this PubCo post and this PubCo post.) Apparently, the process is not often used, but relief is almost always granted, he said. However, that may be because companies have been guided in their submissions by the experience of audit firms as to what will fly. Kronforst noted that the companies can also streamline their request letters to focus on key issues. There’s no harm in asking, and companies should first speak with the experts identified in the Corp Fin Financial Reporting Manual to get a feel for what will work. Expedited turnaround time is around five days. (See this PubCo post.)
- A company that retrospectively adopts a new accounting standard on January 1, 2018 makes a significant acquisition in September 2018 and files an 8-K to report the acquisition. The company does not need to apply the new accounting standard to the pro forma financial information for periods prior to adoption of the new standard by the company until it has reflected the new standard in its historical financial statements for those periods. That is, the new standard must be reflected only in the 2018 pro forma information, but not the 2017 pro forma information. However, if the impact of the new standard on 2017 historical information is believed to be material, the company should “make appropriate disclosure to that effect in the notes to the pro forma financial information.” (Section 3250.1(n))
Accounting Standards Transition Period Accommodation
An EGC may elect to defer compliance with new or revised financial accounting standards until a company that is not an “issuer” as defined under SOX would be required to comply with those standards, if those standards apply to non-issuers. (Under SOX, an “issuer” is an entity with securities registered under section 12 of the Exchange Act or that is required to file reports under section 15(d), or that files or has filed a registration statement that has not yet become effective under the Securities Act, and that it has not withdrawn.) The term new or revised financial accounting standards refers to any update issued by the FASB to its Accounting Standards Codification after April 5, 2012, the date of enactment of the JOBS Act. (Section 10230.1; see Section 10300 for companies filing under IFRS as issued by the IASB.)
- An EGC must decide whether to take advantage of the “extended transition period” for EGCs or to comply with the new or revised accounting standards at the time the company is first required to file a registration statement, periodic report or other report and must notify the SEC of its choice.
In 2012 guidance, the staff advised that EGCs should notify the review staff of their choices in their initial confidential submissions (although not technically required because the submission is not “filed”), as those choices will inform the staff’s review.
- A company must comply with the transition provisions for all new or revised accounting standards “in the same manner”; it may not apply some new or revised financial accounting standards when a non-EGC is required to comply, but defer the adoption of other standards.
Note that this approach is in contrast to the approach for “scaled disclosure,” which allows EGCs to elect to follow some of the scaled disclosure provisions and some of the regular disclosure requirements.
- If the EGC chooses not to take advantage of the “extended transition period” for EGCs and decides instead to comply with the requirements for non-EGCs, that decision is irrevocable.
- By contrast, if an EGC chooses to take advantage of the extended transition period, the EGC can later opt in to using the new financial accounting standard effective dates applicable to non-EGCs, so long as it complies with the requirement (in Sections 107(b)(2) and (3) of the JOBS Act), that it not pick and choose to comply with some new standards and not others. Once the company opts in though, that decision is irrevocable: it must continue to comply with the non-EGC standards to the same extent as a non-EGC as long as the company remains an EGC. The company should disclose its decision in this regard in the first periodic report or registration statement following the company’s decision.
- However, “early adoption” of a new or revised standard is treated differently. An EGC that has elected to take advantage of the extended transition period provision may “early adopt” a new or revised accounting standard, if permitted by the standard, without being deemed to have “opted in” for purposes of subsequent new or revised financial accounting standards.
- Corp Fin is encouraging EGCs to discuss with the staff any issues EGCs see in their plans for post-EGC transitioning. Generally, if an EGC loses EGC status after it would have had to adopt a standard absent the extended transition, the company should adopt that standard in its next filing after losing EGC status; however, “depending on the facts and circumstances, the staff may not object to other alternatives.”