On May 3, 2019, the SEC proposed rule amendments to financial information that investors receive regarding the acquisition and disposition of businesses. The SEC’s rules requiring target company and pro forma financial statements are complex. Creating the financial statements often results in significant delay and expense in M&A situations. The SEC’s proposed changes are intended to address these difficulties.
As detailed in the SEC’s press release, the proposed changes would, among other things:
- update the significance tests under these rules by revising the investment test and the income test, expanding the use of pro forma financial information in measuring significance, and conforming the significance threshold and tests for a disposed business;
- reduce the required financial statements of the acquired business from three to two fiscal years;
- permit disclosure of financial statements that omit some expenses for certain acquisitions of a component of an entity;
- clarify when financial statements and pro forma financial information are required;
- permit the use in certain circumstances of, or reconciliation to, International Financial Reporting Standards;
- no longer require separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for a complete fiscal year;
- align the rule for acquisitions of real property assets (Rule 3-14 of Regulation S-X) with the business combination rule (Rule 3-05 of Regulation S-X) where no unique industry considerations exist;
- clarify the rule’s application of rule for acquisitions of real property assets (Rule 3-14) with respect to the determination of significance, the need for interim income statements, special provisions for blind pool offerings, and the scope of the rule’s requirements;
- amend the pro forma financial information requirements to improve the content and relevance of such information; more specifically, these improvements would include disclosure of “Transaction Accounting Adjustments,” reflecting the accounting for the transaction; and “Management’s Adjustments,” reflecting reasonably estimable synergies and transaction effects; and
- make corresponding changes to the smaller reporting company requirements in Article 8 of Regulation S-X.
The proposal will be subject to a 60-day public comment period.