On May 21, 2020, the U.S. Securities and Exchange Commission adopted final rules amending disclosure requirements for financial reporting for acquisitions and dispositions of businesses. The final rules will become effective on January 1, 2021, although voluntary early compliance is permitted so long as the rules are applied in their entirety from the date of early compliance. The reforms are intended to improve financial information about acquired and disposed businesses, facilitate more timely access to capital and reduce the complexity and cost to prepare the required disclosures. 

The amendments are the result of the SEC’s ongoing comprehensive evaluation of disclosure requirements and primarily cover financial disclosure requirements in Rule 3-05 and Article 11 of Regulation S-X relating to registration statements and Exchange Act reports.¹ The final rules that have been adopted are largely consistent with the SEC’s May 2019 proposing release, which we discussed here.

Background

When a registrant acquires a significant business, Rule 3-05 of Regulation S-X requires disclosure of separate audited annual and unaudited interim pre-acquisition financial statements of that business. The number of years of audited financial statements that must be provided depends on the relative significance of the acquired business to the registrant. In addition, Article 11 of Regulation S-X requires registrants to file unaudited pro forma financial information relating to certain significant acquisitions and dispositions. 

Whether a transaction is significant, and therefore what historical financial statements and pro forma financial information are required to be provided in connection with that transaction, is determined by applying three tests set forth in Rule 1-02(w) of Regulation S-X: the investment test, the income test and the asset test.    

This alert covers the following amendments:

• updates to the investment test and the income test;
  
  
• expansion of the use of pro forma financial information in measuring significance;
  
  
• changes to required financial statements at various significance levels;
  
  
• changes to the significance threshold and tests for a disposed business;
  
  
• updates to financial statements required in carve-out transactions;
  
  
• when financial statements not previously filed or those relating to an acquisition of major significance may be omitted;
  
  
• changes to the treatment of individually insignificant acquisitions;
  
  
• revisions to adjustments that may be made to pro forma financial information; and
  
  
• codification of historical reporting practices for financial statements of oil and gas producers.

 To read the full update, click here.

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