December 5, 2021

Volume XI, Number 339


December 03, 2021

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SEC-Proposed Amendments to Financial Disclosures for Acquisitions and Dispositions of Businesses

As a result of the Securities and Exchange Commission’s 2015 request for comments on Regulation S-X, the SEC recently proposed amendments (the Proposal) to improve the financial disclosures provided to investors concerning an acquisition or disposition of a business. The Proposal is designed to reduce complexity and compliance costs and facilitate more timely access to capital for those complying with such rules.

The following are some key elements of the Proposal:

  • Updates to the Significance Tests. Requirements in Rules 3-05 and 1-02(w) of Regulation S-X would be amended to modify the investment and income tests used to determine the significance of a business acquisition or disposition.
    • The investment test currently requires a comparison of an acquiring company’s investment in an acquired business to the acquiring company’s total assets. The Proposal would instead require a comparison of an acquiring company’s investment in an acquired business to “the aggregate worldwide market value of the [acquiring company]’s voting and non-voting common equity.” The market value would be determined on the last business day of the acquiring company’s most recent fiscal year prior to the acquisition. If such market value were not available, the current test based upon the acquiring company’s total assets would apply.
    • The income test currently requires a comparison of an acquiring company’s and acquired business’ income from continuing operations before income taxes. The Proposal would instead use income from continuing operations after income taxes and add a comparison of an acquiring company’s and acquired business’ consolidated total revenue. Where an acquiring company with its consolidated subsidiaries and the tested subsidiary both have recurring annual revenue, both tests would have to be met to establish significance. If there were no recurring annual revenue for either company, only the income test would apply.
    • The SEC additionally proposed further changes intended to simplify and clarify the investment and income tests.
  • Updates to Financial Statement Requirements. Rule 3-05 of Regulation S-X would be amended to limit the number of years of separate audited annual and unaudited interim pre-acquisition financial statements of a business (Financial Statements) required to be disclosed and to clarify when Financial Statements are required.
    • Rule 3-05 of Regulation S-X currently requires the disclosure of up to three fiscal years of audited Financial Statements based on the relative significance of a transaction. The Proposal would reduce this requirement to a maximum of two fiscal years.
    • Rule 3-05 of Regulation S-X currently requires an acquiring company to file Financial Statements for the acquisition of a component of an entity, such as a product line contained in more than one subsidiary (referred to as a carve-out transaction). The Proposal would allow an acquiring company to provide audited financial statements of acquired assets and assumed liabilities, and statements of revenues and expenses (excluding corporate overhead, interest and income tax) if the acquired business meets specified requirements including that “the business constitutes less than substantially all of the assets and liabilities of the seller and was not a separate entity, subsidiary, segment, or division during the periods for which the acquired business financial statements would be required.”
    • Rule 3-05 of Regulation S-X currently requires the disclosure of Financial Statements when they have not been previously filed, even if included in post-acquisition audited results, or when the acquired business is of “major significance” to the acquiring company. The Proposal would no longer require disclosure of Financial Statements for an acquired business in registration statements and proxy statements once post-acquisition financial statements reflect the acquired business for a complete fiscal year; and it would eliminate the “major significance” exception.
    • Under Rule 3-05 of Regulation S-X, if the aggregate impact of “individually insignificant businesses” exceeds 50 percent, acquiring companies are currently required to provide 1) audited historical pre-acquisition financial statements covering at least the substantial majority of acquired businesses; and 2) related pro forma financial information. The Proposal would instead require acquiring companies to provide pro forma financial information “depicting the aggregate effects of all such businesses in all material respects” and historical pre-acquisition financial statements only for businesses whose individual significance exceeds 20 percent but for which financial statements are not yet required.
  • Updates to Pro Forma Financial Statement Requirements. Requirements in Article 11 of Regulation S-X would be amended to adjust the criteria and presentation rules.
    • For the presentation of pro forma condensed statements of comprehensive income, Rule 11-02 of Regulation S-X currently only allows adjustments that are 1) directly attributable to the transaction; 2) expected to have a continuing impact on the acquiring company; and 3) factually supportable. The Proposal would replace the existing pro forma adjustment criteria for both the statement of comprehensive income and balance sheet with simpler requirements to exhibit, in separate columns, the following:
      • adjustments for transaction accounting; and
      • adjustments for synergies and other transaction effects that are reasonably estimable “such as closing facilities, discontinuing product lines, terminating employees and executing new or modifying existing agreements.”
    • The Proposal would also mandate further explanatory notes concerning the new adjustment criteria.
    • Rule 11-01(b) of Regulation S-X currently requires pro forma financial information if the disposition of a business meets a 10percent significance threshold rather than the 20 percent threshold used for business acquisitions under Rules 3-05 and 11-01(b). The Proposal would raise the Rule 11-01(b) threshold to 20 percent and conform the tests used to determine the significance of a disposed business to those used for an acquired business.
    • Rules 3-05 and 3-14 of Regulation S-X currently do not allow a company completing a disposition or filing an initial registration statement to determine the significance of a transaction using pro forma, rather than historical, financial information. However, this is permitted for an acquiring company which completed an acquisition subsequent to the latest fiscal year-end and filed Financial Statements and pro forma financial information on Form 8-K. The Proposal would permit companies to measure significance using filed pro forma financial information that only includes significant acquisitions and dispositions completed after the end of the latest fiscal year-end for all filings requiring 3-05 or 3-14 Financial Statements, subject to listed filing requirements.
  • Updates Based on IFRS-IASB Accounting Standards. Regulation S-X does not currently permit the financial statements of an acquired business, which is not a “foreign business,” to be prepared using International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS-IASB). The Proposal would permit the application of IFRS-IASB without US Generally Accepted Accounting Principles (GAAP) reconciliation if the acquired business would qualify to use the standards as an SEC registrant. Additionally, foreign private issuers could reconcile using IFRS-IASB accounting standards rather than US GAAP for Financial Statements prepared using home country GAAP.
  • Updates for Significant Oil- and Gas-Producing Activities. Rule 3-05 of Regulation S-X does not currently detail industry-specific disclosures for a significant acquired business that includes “significant oil- and gas-producing activities.” The Proposal would codify the reporting practices in the Financial Accounting Standards Board supplemental disclosures and allow for audited statements of revenues and expenses (excluding depletion, depreciation, amortization, corporate overhead, income taxes and interest expense not comparable to proposed future operations) rather than Financial Statements.
  • Other Updates. The Proposal also includes further updates for small reporting companies, real estate operations and investment companies under Regulation S-X.

The SEC is soliciting comments on the Proposal for a period of 60 days after publication in the Federal Register.

The Proposal is available here.


©2021 Katten Muchin Rosenman LLPNational Law Review, Volume IX, Number 130

About this Author

Farzad F. Damania, Capital markets and securities lawyer, Katten Law Firm

Farzad F. Damania focuses his practice on capital markets and securities law, mergers and acquisitions, and general corporate law. He is regularly engaged on capital markets transactions, including initial public offerings, follow-on offerings, tender offers, and high yield debt transactions as well as direct investments by private equity acquirers, sellers and co-investors. He also represents public companies on corporate governance issues, securities law compliance and stock exchange regulations.

Farzad counsels US public companies and foreign...

Mark D. Wood, corporate securities lawyer Katten Muchin Chicago Law firm

Mark D. Wood is head of Katten's Securities practice and concentrates in corporate and securities law. Mark represents public companies, issuers and investment banks in initial public offerings (IPOs) and other public offerings, private investment in public equity (PIPE) transactions, debt securities and other securities matters.

Mark also represents clients in complex corporate transactions, including tender offers, mergers, acquisitions, dispositions, going-private transactions, private equity investments, joint ventures and...


Shelby Klose concentrates her practice in corporate matters, with an emphasis on mergers and acquisitions, private equity transactions and securities transactions. Shelby also advises companies on a broad range of general corporate and corporate governance matters. She has represented strategic and financial buyers and sellers in M&A transactions spanning diverse industries and through all stages of a transaction. In addition, she also maintains an active pro bono practice and advises nonprofit organizations on board governance and filing requirements.

During law school, Shelby...